Today's General Counsel (Formerly Executive Counsel), V9 N5, October/November 2012

OCT/ NOV 2012 VOLUME 9 / NUMBER 5 E X ECUTI V ECOUNSEL.INFO

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M A G A Z I N E

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G E N E R A L

LE D G W O KN CONOM E E E Y H

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INTELLECTUAL PROPERT Y

The Fast Track for Patents Patent Case Juries IP Theft E-DISCOVERY

Custodian Interviews Predictive Coding Technology and the Human Element HUMAN RESOURCES

How Not to Poach GOVERNANCE

Lessons from the Say-on-Pay Votes CANADA/ CROSS-BORDER

Ways Attorneys Waste Money Email Notification of Class Actions Chinese Investment Insurance Coverage for FCPA Investigations

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oct/ nov 2012 E X ECUTIV E COUNSEL

Editor’s Desk

This issue of Executive Counsel comes as the election campaign is ending, with job creation as a major issue. One of the little-noticed achievements of this Congress was the America Invents Act of 2011. Not much was made of it, probably because polarized rancor was so pervasive that legislators preferred to downplay a rare bipartisan effort, but if history is any guide, the patenting process that the Act addresses will actually create jobs in the future. John K. McDonald and Michael Schiff discuss one of the Act’s most important features, a fast-track examination program. The program is meeting its goal of granting or denying a patent application within one year. The average pendency of an application is about three years.

Patent-seekers are sometimes displeased with the performance of the Patent and Trademark Office, but ordinary citizens who serve on juries have a high opinion of it.

Intellectual property litigants would do well to keep that in mind, according to an article

by Kevin Boully and Karen Lisko. The authors specialize in small group dynamics and jury selection. They’ve found that the PTO ranks as the most credible of all federal agencies among jurors, an attitude that makes them more likely to vote for the plaintiff in an infringement suit. Boully and Lisko explain why, and their observations of a recent high-profile patent case pitting Apple against Samsung should be of interest to anyone who expects to be litigating an intellectual property issue in the future.

Most companies that run afoul of the Foreign Corrupt Practices Act rely on their D&O insurance to cover their defense costs, but as David Killalea points out, general counsel who have not studied their policies may be surprised. Read his article

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to find out why, and what can be done about it.

Executive Counsel initiated a design update a few months ago, and we are proud to announce that we have just been declared a winner in the annual design competition sponsored by Graphic Design USA (GDUSA). Thanks to our design team at MPower Ideation for making us an award winning publication.

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Features

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WAYS ATTORNEYS WASTE MONEY

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JURY STILL OUT ON EMAIL NOTIFICATION

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Patrick Lamb Hold that motion.

Aideen Gaffney and Andrew Shimek Don’t get caught in the spam filter.

ONE WAY TO MANAGE RISK WHEN CONTRACTING FOR IT SERVICE WORKERS George Kostakos Getting industry-standard insurance through the intermediary.

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A PRIMER FOR CHINESE INVESTMENT IN AMERICA

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INSURANCE COVERAGE FOR FCPA INVESTIGATIONS

J. F. Karch Stay under the radar.

David B. Killalea Mind the exclusions, and negotiate now.

Page 46

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oct/ nov 2012 E X ECUTIV E COUNSEL

Departments

Governance

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Editor’s Desk Executive Summaries

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32 | Burgeoning Intellectual Property Theft Often an Inside Job

e-DIscovery

18 | A Systematic Approach to Custodian Interviews

26 | Minimizing Information-Related Risk

Danuta Panich and Bob Rohlf A list, a map, and a form.

Marilyn Bier Record keeping by the book.

21 | Courts Are Testing and Accepting Technology-Assisted Review 6

Michele C.S. Lange Not perfect, but better and less expensive.

24 | “Competent Representation” Must Include E-Discovery Joe Looby It wasn’t covered in law school.

27 | Predictive Coding is Not a Magic Wand Gavin W. Manes and Tom O’Connor Technology and the human interface.

Ronald T. Williams and Todd Stefan Preventive measures should address employees and contractors.

34 | How to Look at Patent Case Juries Kevin Boully and Karen Lisko Unique psychology at work in patent cases.

human resources

36 | Minimizing Risk When Hiring a Competitor’s Executive Jonathan Parritz Pay attention to non-competes.

38 | New Protections For Transgender Status Louis L. Chodoff and Amy L. Bashore EEOC decision changes employment and workplace rules.

Intellec tual ProPert y

29 | A Fast Track For Your Patent Portfolio John K. McDonald and Michael Schiff Save up to four years.

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40 | What to Expect in the 2013 Say-On-Pay Season Eric Hosken and Kelly Malafis A common shareholder misperception about financials needs to be addressed. canaDa / cross-BorDer

43 | Canada Seeing Influx of Retailers Claire M.C. Kennedy and Darrel H. Pearson Choose the right business vehicle.

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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

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Amy L. Bashore Marilyn Bier Kevin Boully Louis L. Chodoff Aideen Gaffney Eric Hosken J. F. Karch Claire M.C. Kennedy George Kostakos David B. Killalea Patrick Lamb Michele C.S. Lange Karen Lisko

Joseph H. Looby Kelly Malafis Gavin W. Manes John McDonald Tom O’Connor Danuta Panich Jonathan S. Parritz Darrel H. Pearson Bob Rohlf Michael Schiff Andrew Shimek Todd Stefan Ronald T. Williams

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OCT/ NOV 2012 E X ECUTIV E COUNSEL

Executive Summaries E-DISCOVERY PAGE 18

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A Systematic Approach to Custodian Interviews

Courts are Testing and Accepting Technology-Assisted Review

Competent Representation Must Include E-Discovery Competence

By Michele C.S. Lange Kroll Ontrack Inc.

By Joe Looby FTI Consulting Inc.

Technology-Assisted Review (TAR) promises to reduce the time and money it takes to produce responsive materials, using a blend of attorney analysis and computer intelligence. Through the TAR process, experienced attorneys use classifiers to train a computer system to sort millions of documents, eliminating the costly process of physically analyzing each document.

Opponents of the technology note that it replaces attorneys, thus raising questions about defensibility. The author notes that there will always be a role for skilled attorney analysis to guide the technology, and perhaps a new role for attorneys who have a keen understanding of statistics and linguistics.

Four pending cases that address critical issues concerning TAR are summarized. In Da Silva Moore v.

Publicis Groupe, an employment discrimination case from the Southern District of New York, Judge Andrew Peck explored the defensibility of technology assisted review. The issue in this case was not whether, but rather how TAR should be used. At a status conference in February of this year, the parties disagreed about various aspects of the methodology by which they would conduct technology assisted review of a large amount of ESI. In response, Judge Peck reminded them that TAR “works better than most of the alternatives, if not all of the [present] alternatives. So the idea is not to make this perfect, it’s not going to be perfect. The idea is to make it significantly better than the alternatives without nearly as much cost.”

The American Bar Association’s Model Rules of Professional Conduct say that a lawyer shall provide competent representation to a client. Competent representation includes legal knowledge and skill, but what constitutes legal knowledge and skill evolves as times change. Now, because e-discovery has become such a large part of the overall discovery process, it has become a core element of competent representation, the author says.

He cites a recent case, Play Visions v. Dollar Stores, Inc., in which counsel deferred to custodians to identify and collect responsive documents.

Hundreds of boxes of unsorted documents were submitted, and numerous discovery addendums were sent after deadlines. It was later established that the executives had no idea where to search for electronic materials. Sanctions were ordered because of counsel’s failure to search for electronic records in a timely fashion, but also for failure to assist and guide the client’s production of discovery material.

The author suggests reasonable steps an attorney should take to assure a proper e-discovery process.

First, suspend the routine document retention/destruction policy. This might necessitate suspending the function on many email systems that auto-deletes materials after a certain time period, not withstanding the fact that procedure helps reduce storage costs and over-preservation.

Second, put in place a litigation hold to ensure relevant documents are preserved. The author outlines the steps involved in this multi-step process, noting that it it involves far more than just the issuance of a boilerplate litigation-hold letter.

By Danuta Panich Ogletree Deakins and Bob Rohlf Exterro Inc.

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Electronically stored information is ephemeral by nature, so the duty to preserve makes the identification of potentially relevant ESI a task of primary urgency in all forms of litigation. Interviews with employees who have custody of information are an essential step in meeting preservation and discovery obligations. Legal teams must approach these interviews in a systematic way that takes into account both the intrinsic value and limitations of custodial knowledge.

The best method of carrying out this task is direct communication, in order to identify and understand the parameters of potentially responsive ESI in the custodian’s control, as well as to identify other sources. To accomplish both purposes, the custodial interview begins with questions about the custodian’s background, exploring the custodian’s habits with regard to generating and storing ESI, along with details about the types of ESI the custodian currently uses or has historically dealt with. Attorneys should use the interview to derive keywords and important time lines.

Working with an organization’s IT department is essential throughout the interview process. This provides the attorneys with an understanding of the company’s data infrastructure, information flows and data retention policies. It also enables attorneys to alert IT whenever IT needs to step in to prevent the loss of ESI identified as potentially relevant during a custodian interview.

Attorneys must explain the concept of “privilege” to custodians. They can then can flag potentially privileged information for review. Attorneys make the final determination.

OCT/ NOV 2012 E X ECUTIV E COUNSEL

Executive Summaries E-DISCOVERY PAGE 26

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Using “GARP” to Minimize Risk

Predictive Coding is not a Magic Wand

A Fast Track for Your Patent Portfolio

By Gavin W. Manes and Tom O’Connor Avansic

By John K. McDonald and Michael Schiff Kilpatrick Townsend & Stockton LLP

Predictive coding is a process by which attorneys review a small sample of a large volume of documents, according to their specifications. Their review pattern is then applied to the larger document set using a “content clustering” or “find-similar” calculation.

This allows a large number of documents to be reviewed without attorneys having to spend thousands of hours looking at each page. Predictive coding is used as a supplement to traditional e-discovery filtering methods, such as keyword searching.

The variables in this process include the selection of documents for the sample set, the user response to the sample set and the computer algorithms that are applied. In a project where predictive coding is used, it’s true that processing costs will increase, but there will be substantial savings in the review phase – assuming that the project was well-planned and managed from the outset, and that the process and technology were used appropriately.

At its core, predictive coding is about workflow. The thought behind predictive coding – that technology can help reduce the cost of e-discovery – is solid, but figuring out what technology to apply at what point in the workflow is not always easy. Having other attorneys or consultants who are seasoned in e-discovery analyze your workflow or case (particularly for large projects) can save much time and money.

Ultimately, predictive coding is not just about using technology, but about using it well and using it at the right time.

New programs have emerged recently that permit companies to accelerate patent prosecution world-wide.

As part of the America Invents Act, Congress gave the U.S. Patent and Trademark Office (USPTO) a mandate to create a special fast-track examination program. The goal is disposal of the application within one year, and the program seems to be meeting its objectives.

The PACE program in the European Patent Office allows an applicant to request an expedited search and expedited examination. The EPO aims to produce exam results in three months.

In Canada, an applicant can request that an application be advanced out-of-turn as a matter of right, for a $500 fee. In Japan, processing can be expedited if an applicant is using or selling the invention in Japan. Over 10,000 petitions for accelerated examination are filed in Japan every year.

IP Australia and the U.K. Patent Office both have tracks for expedited examination. The fast track in Australia and the U.K. can lead to a granted patent within 12 months of filing.

China recently announced its own prioritized examination program.

With all these programs available, companies can opt for a dual patenting strategy: Obtain specific and rapid protection in key manufacturing and marketing areas, then overlay this with a broader range of protection of later issuing patents.

However, expedited examination is not for everyone. A company may not have the resources to pay up-front costs, translation fees and attorney charges early in prosecution.

By Marilyn Bier ARMA International

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INTELLEC TUAL PROPERT Y

Generally Accepted Record-Keeping Principles (GARP ) constitute a broad framework that organizations of any size or industry can use to establish and monitor an effective information governance program and minimize information-related risk. The principles were developed with the assistance of records and information management, legal and IT professionals.

Complying with the eight GARP principles assures that information will be protected against loss; that critical records will be backed up, protected and accessible in case of disaster; and that orderly systems will be in place for decision making, transacting business and, when required, responding to litigation. GARP compliance assures that information will be retained as required and disposed of when no longer required, and it facilitates external investigations and all legal obligations.

The principles mandate that organizations assign a senior executive to oversee their record keeping program. The program should be designed so that information managed by the organization has a reasonable guarantee of authenticity and reliability. Procedures should be clearly documented and available to appropriate parties, while confidential and privileged records are protected. Procedures should comply with applicable laws, all binding authorities and the organization’s policies. Records should be maintained to ensure timely, efficient, and accurate information retrieval and for an appropriate amount of time, taking into account legal, regulatory, fiscal, operational and historical requirements. There also should be secure and appropriate disposition of records that are no longer required to be maintained by applicable laws or the organization’s policies.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2012

Executive Summaries

INTELLEC TUAL PROPERT Y

HUMAN RESOURCES

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PAGE 36

Burgeoning Intellectual Property Theft Often an Inside Job

How to Look at Patent Case Juries

Minimizing Risk When Hiring a Competitor’s Executive

By Ronald T. Williams and Todd Stefan Talon Companies

By Kevin Boully and Karen Lisko Persuasion Strategies, a service of Holland & Hart

By Jon Parritz Maslon Edelman Borman & Brand LLP

Figures released by the Department of Justice and various private sector institutions show an increase in computer security incidents. Many incidents are not reported, out of concern for company reputations, so the true extent of the damage, especially as it impacts intellectual property, could be staggering. Typically, the authors note, the value of IP for U.S. companies surpasses the value of physical assets.

Nonetheless, more than a third of surveyed Fortune 2000 and middlemarket companies have no formal program for safeguarding intellectual property, and they spend less than five percent of their budgets on security.

The fact that intellectual property is now commonly stored in the form of data that can be transmitted by way of the Internet has changed the fundamental requirements that underlie any attempt to secure intellectual property and prevent theft.

Previously accepted best practices can no longer be relied on. Companies are now obliged to leverage an array of information security controls, at the same time they continue to adhere to proven principles of physical security.

Many companies fortify their networks against external attacks without realizing the more serious threat comes from employees, former employees and contractors. Statistics cited by the authors indicate more than three out of four cases of IP theft are perpetrated by insiders or contractors. The authors provide guidelines to minimize the risk of employee theft, and suggestions about how to marshal a response if and when IP theft occurs.

The number of words in the description section of a patent has increased exponentially over the past 20 years.

Patent disputes often boil down to a fact finder’s interpretation of a minuscule subset of the patent’s highly technical language.

But the authors find that no matter how many or few the disputed terms, the typical patent jury looks beyond the language to decide issues of infringement and invalidity. They rely in part on the claims terms and can be expected to work hard to do so, but they also rely on context to understand meaning and broaden their understanding, by paying attention to the parties’ behavior as portrayed by advocates.

Patent case jury selection is unique.

In most civil litigation, jurors who tend to defer to authority will defer to regulatory bodies like the FDA, typically meaning they tend to favor the defendant.

But those “authoritarian” jurors might flip their allegiance in a way that favors the plaintiff on a patent case. The patent holder was awarded approval by the Patent and Trademark Office when the examiner allowed the plaintiff’s patent to issue.

The authors’ research of the national jury-eligible population found that the PTO is ranked as the most credible of all federal agencies.

Their research also found that judges and jurors have similar views on the patent system. Most mock jurors said they agreed that the patent process “helps competition,” as did 70 percent of surveyed federal judges.

Hiring a competitor’s employees entails risks that must be managed, particularly when the employees are executives. Contractual arrangements between a company and its executives often include limits on the ability of the executive to work for a competitor following termination, and forbid an executive from using or disclosing confidential information or helping to recruit former colleagues.

Most states enforce contracts with reasonable restrictions on an executive’s freedom to work for a competitor or to solicit former colleagues. State trade secret laws also prohibit an executive and the new employer from using or disclosing valuable proprietary non-public information belonging to a competitor.

Companies should ensure their employees who are trying to recruit former colleagues from their former employer are not contractually barred from doing so. If they are, the author says, then by permitting new hires to steer their former colleagues to the firm, companies can be held responsible for wrongfully interfering with the former employer’s contractual rights.

The author advises no communication with a prospective hire during regular working hours. Employees usually are prohibited from using an employer’s email, telephone and other services for personal use, which would includ seeking employment elsewhere. If a new hire is subject to valid non-compete obligations, consider “walling off” this person from meetings at which prohibited accounts or products are discussed.

Make sure that the hire’s evaluations and compensation are not structured to reward or encourage violations of any non-competition, confidentiality or trade secret protection obligations.

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OCT/ NOV 2012 E X ECUTIV E COUNSEL

Executive Summaries HUMAN RESOURCES

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GOVERNANCE

CANADA /CROSS-BORDER

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New Protections for Transgender Status

What to Expect in the 2013 Say-On-Pay Season

Canada Seeing Influx of Retailers

By Louis L. Chodoff and Amy L. Bashore Ballard Spahr LLP

By Eric Hosken and Kelly Malafis Compensation Advisory Partners LLC

By Claire M.C. Kennedy and Darrel H. Pearson Bennett Jones LLP

The Equal Employment Opportunity Commission has reversed its own precedent and extended the anti-discrimination protections of Title VII of the Civil Rights Act of 1964 to discrimination based on gender identity, change of sex and/or trans-gender status.

In Macy v. Holder (decided April 2012), the complainant, Mia Macy, a transgender woman, applied for an open position at the Bureau of Alcohol, Tobacco, Firearms and Explosives while still known as a male. Presenting as a man, she was told the job was hers contingent on a standard background check. She later informed the Bureau that she was changing sex, and someone else was hired for the position.

Macy filed a Charge of Discrimination with the EEOC, alleging that she had been discriminated against because of “sex, gender identity (transgender woman) and … sex stereotyping.”

Initially the EEOC rejected the claim, but on appeal unanimously agreed that the claim is subject to Title VII’s ban on discrimination because of sex.

Although equal employment opportunity policies likely need not be revised, employers may need to update other policies, such as leave and benefit policies. They should update their anti-discrimination training to notify supervisors and other employees of the expanded anti-discrimination and anti-harassment coverage. Co-worker concerns should be addressed through open discussions.

Employers should take care to maintain confidentiality and employee privacy. For example, any medical information, including any medical information concerning an employee’s sex/gender transition, needs to be kept confidential.

The introduction of mandatory say-onpay pressured companies and compensation committees to ensure that pay programs were aligned with company performance and strong governance practices. Where companies have failed to convince stockholders that executive pay is fair and warranted, one of two conditions has typically been present: (1) poor total shareholder return (TSR) without an accompanying significant adverse impact on compensation or (2) egregious or problematic pay practices.

Of these two issues, the author expects the most important for the 2013 proxy season will be poor TSR without a significant adverse impact on compensation. Compensation committees have been largely responsive to the critiques of problematic pay practices by major shareholder advisors, such as Institutional Shareholder Services (ISS) and Glass-Lewis.

While improved financial performance will typically translate into improved stock price performance over the long-term, there is no guarantee that financial performance will lead to shareholder returns near-term. As a result, a company may find that its annual salary plus actual bonus is not sensitive to changes in TSR. The relationship between pay and performance will be a key driver in 2013 say-on-pay voting. Shareholder advisory groups will continue to focus on the relationship between TSR and company pay levels, relying largely on the summary compensation table. Where there may be a disconnect between disclosed compensation levels and company performance, companies may benefit from supplemental disclosures that help illustrate the relationship between actual realized or realizable pay and company performance.

Many retailers are establishing subsidiary operations in Canada because the economic situation there is better than in most countries, and retail spending remains relatively robust. But there are legal issues that must be addressed in connection with Canadian market entry, and they are not confined to the obvious ones of store leasing and employment. Sound planning for customs, tax and transfer pricing is key to a smooth and successful cross-border business launch.

The typical choice of business vehicle for Canadian retailers is a Canadian incorporated subsidiary, or Canco, an entity that can be established either under the federal laws of Canada or the laws of its provinces or territories. In some jurisdictions, there is a minimum Canadian resident director requirement.

In certain situations, U.S. tax advantages may be gained by establishing the Canadian subsidiary as an unlimited liability company, a corporation for Canadian tax purposes that is fiscally transparent for U.S. tax purposes.

Establishing a Canadian subsidiary retail operation supplied with products purchased or sourced through a foreign parent gives rises to Canadian tax and customs transfer pricing issues. Many multi-nationals fail to co-ordinate the tax/finance and customs/logistics functions, which may have different reporting lines within the organization. As a result they miss the opportunity for a unified approach to tax and customs transfer pricing that improves compliance and reduces exposure. Retailers are advised to adopt an approach to transfer pricing that meets both tax and customs transfer pricing requirements.

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IN THE SECTION OF INTERNATIONAL LAW IN THE SECTION OF INTERNATIONAL LAW

www.americanbar.org/intlaw

OCT/ NOV 2012 E X ECUTIV E COUNSEL

Executive Summaries PAGE 46

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Ways Attorneys Waste Money

Jury Still Out on Email Notification of a Class Action

One Way to Manage Risk When Contracting for IT Service Workers

By Patrick Lamb Valorem Law Group

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In order to trim legal bills, attorneys have to look for creative ways to keep overhead low while still ensuring the quality of their work.

The author identifies some common practices that inflate attorney costs.

Motions, for example, are often unnecessary, serving no strategic purpose and having no effect on the case outcome. Since most attorneys charge by the hour, needless motions increase the bill significantly.

Other practices that can dramatically increase costs include sending two lawyers to court or deposition when one will do, and having young lawyers draft documents that senior attorneys will re-draft. The truth is that two lawyers are seldom necessary.

When looking to cut costs and provide expert legal advice, less is often more. Most cases turn on a very small number of facts and a limited number of documents. The desire to know all that is knowable about a case is understandable, but it’s an indulgence.

Lawyers love to hone their skills by fighting about the order in which things will happen, where meetings will occur or what information will be shared. While it’s sometimes crucial to play hardball, often these issues are simply not worth the debate.

When that’s the case, the author advises making a deal. No one, he says, likes to appear weak (especially lawyers), but it’s important to remember that smart attorneys settle cases early, before running up costs.

They put a client’s interest ahead of their ego.

By Aideen Gaffney and Andrew Shimek Epiq Systems Inc.

Under Rule 23, individual notice in class action cases has been required as the best notice practicable under the circumstances since 1974. Although notice has been traditionally made via first-class mail, email notification is becoming increasingly common as a secondary notification method.

Courts remain conflicted about it, but tend to agree that, when possible, direct mail should be used.

However, when physical addresses are not available or when other casespecific circumstances warrant, email has been upheld as a defensible alternative when carried out correctly. In most cases, email is a lower-cost option, but it’s necessary to choose the most effective notification method or combination of methods to reach the largest number of potential class members.

Email notice presents unique challenges. Data files typically contain large numbers of records that cannot be sent because of incomplete or obviously fabricated addresses. Careful attention must be paid to how the email is formatted in order to avoid rejection as spam. Important dates and deadlines should be bolded in the body text, and the subject line should be short and clear. The notice should feature a prominent link to the settlement website.

Notify Internet service providers in advance of any mass emailing. This lets providers review the email content in advance and configure their filters to not reject it. Even then, the emails will likely need to be sent on a rolling basis over several days or even weeks to avoid the spam tag.

By George Kostakos OnForce Inc.

Service providers are increasingly using contingent workers, mostly independent contractors, to handle on-site IT service work. This strategy enables the fulfillment of work on demand and helps service companies lower costs. Use of independent contractors in this capacity has spurred development of “Variable Labor Management Platforms.” A VLMP is a web or cloud-based service that lets companies access, procure and manage contingent labor.

VLMPs raise a concern among the three parties involved in service projects – the VLMP, the service companies and the independent contractors – regarding risks that come with engaging and managing independent workers. These include failure to deliver high-quality service, the potential for mis-classification of the independent contractor as an employee, and the risk of loss for personal injury or property damage related to the service event.

The author examines various scenarios and contractual relationships, and maintains that what he terms a “general contractor VLMP” model solves the risk assumption problems, because it shifts many risks squarely to the VLMP rather than the service company. A general contractor VLMP offers broad protection for the service company by providing industry-standard insurance coverage for workers’ compensation, general liability and errors and omissions claims. It handles claims when property damage or personal injury matters arise and engages in efforts to resolve claims. It bears the responsibility for investigating losses and interacting with the insurance carrier and the independent technician.

These benefits enable the service company to focus on running its business.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2012

Executive Summaries

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A Primer for Chinese Investment in America

Insurance Coverage for FCPA Investigations

By J. F. Karch WHGC PLC

By David B. Killalea Manatt, Phelps & Phillips LLP

Chinese investors seeking to establish business in the United States should initially invest in minority shares of non-threatening industries that are remote from national security considerations. This strategy of picking ripe “low hanging fruit” by staying under the radar avoids traditional protectionist and security arguments against foreign investment, the author says. Challenges on those grounds are a distinct possibility in industries such as electronics-manufacturing and government contracted aerospace or weaponry, particularly sensitive software platform development programs, valuable natural resources and contracted security enforcement companies.

Investment can be exchanged for ownership, generally represented by an instrument or “security.” Hybrid securities involve combinations of equity and debt, such as stock with a warrant for options to purchase additional shares.

The most common forms of business are a corporation, a limited liability company (LLC) and a partnership.

These come under the corporate or business laws of the state in which they are formed. Each such entity in itself has certain rights, obligations and liabilities based on those laws. Equity is stock in a corporation, membership interest in a LLC, or partnership interest in a partnership.

It is important to understand that the character of income (active from operations, or passive from rents, royalties, interest, etc.) triggers different tax consequences. Also, there are a variety of hidden taxes for gifts of property, and for property present in the United States for deceased alien investors, whether, for example, resident or non-resident, married or unmarried.

Many companies faced with an FCPA investigation will have to rely on their Directors and Officers liability coverage. Other policies (e.g., Errors and Omissions) also could apply, depending on policy language. In general, D&O policies cover defense costs and civil damages arising from alleged “wrongful acts.” When a company’s policy contains restrictive language, substantial portions of FCPA-related losses that could be covered may go uncovered, in some cases amounting to tens of millions of dollars.

Many D&O policies define the “Insured” to include all directors, officers and employees, while others are more restrictive, even failing to capture a company’s general counsel. Review all policies carefully and obtain an expansive definition of “Insured.”

Even with broad coverage terms, D&O insurers limit their exposure through exclusions. Variations in exclusionary language operate in much the same way as definitions of the insured and can substantially impact coverage.

D&O policies typically exclude coverage for intentionally fraudulent, dishonest or criminal acts or omissions. Insurers argue that FCPA claims involve purposeful misconduct and such exclusions thus apply.

Companies should accept only policies providing that the dishonest conduct of one employee is not imputed to other insureds. Such “severability provisions” also should include language providing that one person’s mistake or misrepresentation in the application does not provide a defense with regard to other officers, directors or employees. In addition, a policy should include the even broader protection of a non-rescission provision.

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“Your problems have a legal precedent.”

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OCT/ NOV 2012 E X ECUTIV E COUNSEL

E-Discovery

A Systematic Approach to Custodian Interviews

By Danuta Panich and Bob Rohlf

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s corporate information has become digital, dispersed and voluminous, employee – that is, “custodian” – interviews have become an essential step in meeting preservation and discovery obligations in all forms of litigation. Without direct contact with individual custodians, identifying the available data storage locations and which locations may contain relevant materials would be impossible.

At the same time, relying on an employee to implement preservation and collection strategies without direct guidance creates risk. Legal teams must approach custodian interviews in a systematic way that takes into account both the intrinsic value and the limitations of custodial knowledge.

The duty to preserve potentially responsive and relevant electron-

ically stored information (ESI) attaches as soon as litigation can be “reasonably anticipated” (Zubulake v. UBS Warburg LLC). This means that the preservation obligation arises, at the latest, when litigation commences. ESI is ephemeral by nature, so the duty to preserve makes the identification of potentially relevant ESI a task of primary urgency.

The best method of carrying out that task is direct communication, in order to understand the parameters of potentially responsive ESI in the custodian’s control as well as to identify other sources. To accomplish both purposes, the custodial interview begins with questions about the custodian’s background, exploring the custodian’s habits with regard to generating and storing ESI, along with details about the types of ESI the custodian currently uses or has dealt with previously.

Information regarding any changes to, or problems with, the equipment and

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E-Discovery

media used by the custodian is gathered.

Inquiries encompass the custodian’s knowledge of and interactions with structured data, and the identification of predecessors, successors and colleagues who perform similar functions.

Finally, the interviewer explores and carefully documents the locations of any potentially relevant ESI controlled by the custodian.

Asking custodians to recall that information without guidance is usually ineffective. It is unrealistic to expect employees to remember exactly what electronic documents may have been involved, let alone whether they still exist and where.

Attorneys can improve custodian recall by presenting them with a list of data sources where responsive ESI might be stored.

Attorneys must also consider technical nuances. It is not uncommon, for instance, for a custodian to think an email or document has been deleted, when in fact it is simply hidden from view.

Having a detailed list can make it easier for IT to track down the identified ESI. It should be noted that working hand-in-hand with an IT department is essential in preparing for custodian interviews, and throughout the course of the interview process. This partnership gives the attorneys an understanding of the company’s data infrastructure, information flows and data retention policies, and it helps attorneys focus on ESI that may still be retrievable. It also enables attorneys to alert IT whenever IT needs to step in to prevent the loss of information identified as potentially relevant during a custodian interview.

STANDARDIZED PROCESS

To ensure that all of the above information is systematically collected, a well-structured and standardized interview form can be indispensable.

The information gathered will provide the most comprehensive reflection of the company’s data system, and it will enable collection, preservation and, if necessary, defense of the processes.

Additionally, having a standardized interview process can prove useful outside the e-discovery context. It can, for example, be used to gather information for business purposes, such as creating

a company-wide data map to improve how ESI is managed.

Once potentially responsive ESI has been located and preserved, custodian interviews continue to play a role.

Most important, they can be very useful in pointing lawyers to the critical documents to review and produce.

Almost all legal matters involve ESI from a specific date range. However, it is often necessary to adjust the date restrictions to ensure full compliance with a production request. Via interviews, the attorney can zero in on applicable date ranges. By incorporating custodian inputs, legal teams gain defensible refinements of date parameters.

Attorneys have a variety of available technical tools specifically designed to hunt down relevant materials. At the root of all these systems is a basic set of key terms. But the seemingly simple

as whether there were any conventions for naming or storing files.

GUARDING PRIVILEGE

Inadvertent production of privileged documents is among the most common e-discovery mishaps, and it may result in the waiver of privilege. Most nonattorneys do not understand the difference between discoverable and privileged ESI. It is up to the legal teams to carefully explain privilege, and how it may apply to electronic documents.

However, it is not the job of a custodian to identify privileged documents.

Rather, once custodians understand the concept, their role is to help identify potentially privileged materials. Those materials can be flagged and become subject to special privilege review by an attorney who fully understands the nuances of the law.

Attorneys can improve custodian recall by presenting them with a list of data sources.

process of identifying keywords for an ESI search is complicated by the fact that employees across an organization often use different terminology to describe the same thing, or the same terminology to describe different things.

For example, a defective product at the center of a potential class action lawsuit may go by dozens of names within the same company. For such reasons, as the court said in a Southern District of New York case, “where counsel are using keyword searches for retrieval of ESI, they at a minimum must carefully craft the appropriate keywords, with input from the ESI’s custodians as to the words and abbreviations they use….” (William A. Gross Constr. Assocs. v. Am. Mfrs.

Mut. Ins. Co.).

Thus, the custodian interview should include questions regarding what words, acronyms, nicknames or abbreviations were used to describe a subject, as well

Some aspects of a custodian interview are best handled with face-to-face interaction between a member of the legal team and the custodian. However, automation can and should be used to speed and effectuate the process in several ways. In complex cases, it is not always clear what information is relevant or who might have it. Manually tracking down and interviewing dozens of employees just to find out they are not custodians of relevant information is wasted effort that can be avoided through a survey.

Some level of automated inquiry also yields aggregated information that may provide valuable insights. For instance, the first stage of the interview process might involve an email survey sent to 100 custodians asking them to evaluate on a scale of 1 to 10 their perceived involvement in a given matter. Results of these surveys can be consequential. Should 75 of 100 custodians surveyed indicate that they are highly involved, legal teams can

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E-Discovery

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draw inferences regarding data volumes and costs with respect to the case.

This intelligence may be useful in presenting proportionality arguments to opposing counsel or a judge. At the same time, the survey results allow for minimizing the involvement of certain custodians or eliminating them entirely.

Automation also may enhance standardization and consistency. Mature technology applications allow users to create dynamic templates that streamline creation of the interview form and processing of the custodial information once it is gathered. Notifications, reminders and escalation notices for non-responsive custodians can also be triggered automatically, freeing discovery teams to focus on more substantive discovery issues.

Finally, an automation-enhanced interview process creates a defensible record of events. Challenges to e-discovery processes are not uncommon. In these instances, it is advan-

Danuta Panich, a

Bob Rohlf

shareholder at Ogletree Deakins, chairs the firm’s records retention and e-discovery practice group.

She helps professional services firms and companies plan for litigation by developing programs for records management, e-discovery and legacy data remediation, and serving as a resource on e-discovery issues, particularly in complex litigation. danuta.panich@ogletreedeakins.com

tageous to present the court with verifiable reports, activity logs and audit trails that detail the process and methodologies used. Even if potentially responsive ESI slips through the cracks, judges are typically more forgiving to parties who can present organized and detailed documentation of their efforts.

serves as e-discovery counsel and director of e-discovery strategies for Exterro, an e-discovery software company based in Portland, Oregon. An expert on discovery issues and e-discovery delivery systems, he advises Exterro’s development team on product functionality. bob.rohlf@exterro.com

The e-discovery process is made up of many moving parts. While it’s easy to view each of them as another item on a seemingly endless e-discovery checklist, custodian interviews can have tremendous value in controlling discovery costs, bolstering defensibility and even improving case strategies. ■

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THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2012

E-Discovery

Courts are Testing and Accepting Technology-Assisted Review

By Michele C.S. Lange

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T

he promise of TechnologyAssisted Review (TAR) is to reduce the time and money it takes to produce responsive materials, using a blend of attorney analysis and computer intelligence. Through the TAR process, experienced attorneys use

classifiers to train a computer system to quickly sort millions of documents, eliminating the costly process of physically analyzing each document.

Machine learning can, given sufficient training data, produce predictive models that are more effective than

those produced by expert searchers.

Today, training the machine to manage the complexities of language in documents is more efficient than training a group of attorneys.

Opponents of the technology note that it replaces attorneys and that

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E-Discovery

in doing so it raises questions about defensibility. But there will always be a role for skilled attorney analysis to guide the technology, and perhaps even a new role for attorneys who have a keen understanding of statistics and linguistics. In fact, as the benefits of TAR

“What the Bar should take away from this Opinion,” he said, “is that computer-assisted review is an available tool and should be seriously considered for use in large-data-volume cases where it may save the producing party (or both parties) significant

There will always be a role for skilled attorney analysis to guide the technology, and perhaps even a new role for attorneys who have a keen understanding of statistics and linguistics.

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become apparent, the weaknesses inherent in reliance on familiar methods using humans in document review raise their own questions about defensibility.

Given the profound impact of TAR on the legal process, it is no surprise that TAR is currently being tested in state and federal courts around the country. Four pending cases address some of the critical issues.

In Da Silva Moore v. Publicis Groupe, an employment discrimination case out of the Southern District of New York, Judge Andrew Peck explicitely explored the defensibility of technology assisted review. The issue in this ongoing case is not whether, but rather how TAR should be used. At a status conference in early February of this year, the parties disagreed about various aspects of the methodology by which they would conduct technology assisted review of a large amount of ESI. In response, Judge Peck reminded them that TAR “works better than most of the alternatives, if not all of the [present] alternatives. So the idea is not to make this perfect, it’s not going to be perfect. The idea is to make it significantly better than the alternatives without nearly as much cost.”

Notably, in an order dated February 24, 2012, Judge Peck found TAR appropriate for this matter, but he also concluded that the opinion was not a blanket endorsement of any particular technology.

amounts of legal fees in document review.

Counsel no longer have to worry about being the ‘first’ or ‘guinea pig’ for judicial acceptance of computer-assisted review.”

Following that opinion, however, the plaintiffs objected, arguing that the order was contrary to law. They asked the district court to overturn it. But U.S. District Court Judge Andrew L. Carter, Jr. upheld Judge Peck’s order and opinion, finding his ruling was “well reasoned” in its consideration of the potential advantages and weaknesses of TAR. Soon after Da Silva Moore came Kleen Products, LLC, et. al. v. Packaging Corporation of America, a federal antitrust case out of the Northern District of Illinois. In this case, the plaintiffs are challenging the defendants’ discovery methods because they did not use technology assisted review before their production of over three million documents. The plaintiffs are asking Judge Nan Nolan for a “redo” on production, given that the “defendants should have used [technology assisted review] to avoid the limitations of keyword search tools.”

In a nod to Sedona Principle 6, which supports the right of parties to choose their own e-discovery method, Judge Nolan has asked the parties to develop a mutually agreeable e-discovery strategy, thus taking the focus off the debate about whether one search and review methodology would produce better results than the other.

The first major state court case to take on the issue of TAR is Global Aerospace, Inc. v. Landow Aviation, L.P., which deals with the collapse of three airplane hangars during a snowstorm at Dulles airport in Virginia. The defendants filed a motion for a protective order approving the use of TAR in processing and producing their own documents. In their memorandum supporting the order, they claimed they had over 250 gigabytes of reviewable information, and they estimated it would cost over two million dollars for the 20,000 hours needed to manually review it.

In a one-paragraph order, the Loudon County circuit judge granted the motion, allowing the defendants to use TAR, subject to any objections the plaintiffs might raise following production.

The latest case leveraging the use of technology assisted review is In re Actos (Pioglitazone) Products Liability Litigation, out of the Western District of Louisiana. In this case, Judge Rebecca Doherty instructed the parties to “agree to meet and confer regarding the use of advanced analytics” as a “document identification mechanism for the review and production of ... data.”

The parties were required to meet and confer to select four key custodians whose e-mail will be used to create an initial sample set, after which three experts will train the TAR system to score every document based on relevance. ■

Michele C.S. Lange is a Director at Kroll Ontrack Inc. for the Ontrack Discovery and Ontrack Forensics products lines, and counsel to clients on integrating electronic discovery into case strategy. She is co-author of the American Bar Association book, “Electronic Evidence and Discovery: What Every Lawyer Should Know.” mlange@krollontrack.com Alicia J. Smith, law clerk at Kroll Ontrack, assisted with this article.

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OCT/ NOV 2012 E X ECUTIV E COUNSEL

E-Discovery

“Competent Representation” Must Include E-discovery

By Joe Looby

“A

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lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.”

So begins the American Bar Association’s Model Rules of Professional Conduct, a document that broadly outlines the professional responsibilities of attorneys. It is a fitting example of how the rules can provide clear expectations for the industry, yet sometimes lack specific guidelines on how to practically apply these rules in everyday situations. This is especially true in the area of e-discovery.

The idea of competence with respect to e-discovery has been a point of

ongoing debate within the industry.

Some lawyers contend they do not need to understand e-discovery because they did not go to law school to learn about computers and technology. However, because e-discovery is such a large part of the overall discovery process, it is increasingly clear that e-discovery knowledge is a core element of competent representation.

In fact, the bar and case law have clearly stated that, yes, lawyers do need to know about e-discovery because it can have significant consequences for the case. To take one recent example, in Play Visions v.

Dollar Stores, Inc., counsel deferred to two key custodians, the CEO and CFO, to identify and collect all

Counsel must take affirmative steps to monitor compliance, so that all sources of discoverable information are identified and searched.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2012

E-Discovery

responsive documents. Hundreds of boxes of unsorted documents were submitted as the production, and numerous discovery addendums were sent after deadlines.

It was later established that the executives had no idea where to search for electronic materials, and that no one ever contacted the company’s IT executive about identifying and collecting potentially relevant electronic records. Sanctions were ordered not only for counsel’s failure to search for electronic records in a timely fashion, but also for failure to assist and guide the client’s production of discovery responses (because counsel did not take an active role during the process).

If a lawyer has to sign a document stating he or she conducted discovery and is reasonably sure all relevant documents are being produced, that lawyer has to understand e-discovery – or hire someone who does – to be able to provide competent legal representation.

To meet this obligation, if legal action appears probable, or as otherwise required, counsel should consider case law, applicable rules, and – at a minimum – the following procedures as a baseline of activity at the outset of a case: First, suspend the routine document retention/destruction policy. This might include, for example, suspending the function on many email systems that autodeletes materials after a certain time period. Although this procedure can help reduce storage costs and overpreservation, it needs to be suspended to ensure that potentially relevant materials are preserved.

Put in place a “litigation hold” to ensure relevant documents are preserved. This is a multi-step process and not just the issuance of a boilerplate litigation-hold letter. To do this properly, legal teams should: • Interview IT, legal, and key records custodians. This starts the process of identifying all of the key players and ensuring that

their electronic and paper records are preserved.

• Inventory the electronically stored information (ESI) and IT systems, ideally with a data map. A data map can be used later as evidence of a defensible and thorough process. It can also help save time and money for any future matters.

• Preserve the records of former employees.

• Preserve backup tapes when they are the sole source of relevant informa-

tion or when they are the most accessible records for key players.

• Issue a detailed, tailored and factbased litigation hold and document retention instructions to all persons who might have possessed potentially relevant data.

It is important to remember that counsel must take affirmative steps to monitor compliance, so that all sources of discoverable information are identified and searched. IT and other parties should be notified immediately of any new or changed litigation hold.

In addition to monitoring activities, counsel should work with IT to conduct a gap analysis that compares the list of potential sources with the data map used to collect materials.

The duty to preserve discoverable information persists throughout the discovery process, and a litigant must ensure that all potentially relevant evidence is retained.

It should also be noted that, per the model rules, a lawyer is encouraged to consider the economics of the client’s situation when conducting discovery.

It may be appropriate to consider a cost/benefit analysis.

While the ABA Model Rules of Professional Conduct are broad, the above steps should provide a workable framework for applying these rules to the competent preservation of ESI, and help counsel begin to meet e-discovery obligations. ■

Joe Looby is a Senior Managing Director with FTI Consulting, Inc. An attorney and certified fraud examiner (CFE), he is a consultant to law firms and corporations and speaker and author on e-discovery issues, litigation technology and computer forensics. He is a former U.S. Navy JAG Lieutenant and a published software developer. joe.looby@fticonsulting.com

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OCT/ NOV 2012 E X ECUTIV E COUNSEL

E-Discovery

Using “GARP” to Minimize Risk Generally Accepted Record-Keeping Principles

By Marilyn Bier

O

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rganizations depend on information to manage day-to-day operations, comply with regulations, gauge financial performance and monitor strategic initiatives. This critical information resides in the business records, which are a key resource in the operation of any organization. Records must be created, organized, secured, maintained and used effectively to facilitate operations, budgeting and planning, and compliance.

Increasingly, organizations must defend their record-keeping practices to regulatory and other oversight bodies. They must also respond to discovery demands. Numerous court rulings have established that records simply must be kept in accordance with legal requirements and be accurate.

The risks associated with too little or incomplete information are significant.

Excessive discovery costs for records that should have been disposed of, regulatory sanctions against organizations that cannot produce required documentation, or poor business decisions based on incorrect or incomplete information are all risks that can be managed by effective information governance processes.

Like all critical business processes, information governance processes should be defined, endorsed by executive management, communicated throughout the organization and regularly assessed.

“Compliance measurement is a critical component we find missing from many records and information management programs,” says Mark Lagodinski, a certified records manager in Ernst & Young’s Strategic Records Management Practice. “Without periodic measurement, a company has no mechanism to assess the organization’s level of records management compliance. Records management, like any compliance function, should have defined controls, effectiveness criteria, and test plans developed for each provision of the policy.”

Generally Accepted Record Keeping Principles (GARP ) are broadly applicable frameworks that organizations of any size and industry can use to establish and monitor an effective information governance program.

Complying with GARP principles assures that information will be protected against loss and critical records will be backed up, protected and easily accessible in case of a disaster. If GARP is implemented, there will be systems and processes for decision-making, transacting business and responding to litigation.

GARP assures that information will be retained as required and disposed of when no longer required, and it aids in external investigation and litigation obligations.

The GARP principles were created with the assistance of records and information management, legal and IT professionals. They reviewed and distilled global best practice resources, including the international records management standard, American National Standards and case law. The principles were vetted through a public call for comment, involving the professional records and information management community.

The eight GARP principles are: 1) Principle of Accountability: An organization shall assign a senior executive who will oversee a record keeping program and delegate responsibility to appropriate individuals, adopt policies and procedures to guide personnel, and ensure auditability.

2) Principle of Transparency: The processes and activities of an organization’s record keeping program shall be documented in an understandable manner and be available to all personnel and appropriate interested parties.

3) Principle of Integrity: A record keeping program shall be constructed so the records and information gener-

ated or managed by or for the organization have a reasonable and suitable guarantee of authenticity and reliability.

4) Principle of Protection: A record keeping program shall be constructed to ensure a reasonable level of protection to records and information that are private, confidential, privileged, secret, or essential to business continuity.

5) Principle of Compliance: The record keeping program shall be constructed to comply with applicable laws and other binding authorities, as well as the organization’s policies.

6) Principle of Availability: An organization shall maintain records in a manner that ensures timely, efficient, and accurate retrieval of needed information.

7) Principle of Retention: An organization shall maintain its records and information for an appropriate time, taking into account legal, regulatory, fiscal, operational, and historical requirements.

8) Principle of Disposition: An organization shall provide secure and appropriate disposition for records that are no longer required to be maintained by applicable laws and the organization’s policies.

Additional context for each of the GARP principles is available at www. arma.org/garp. ■

Marilyn Bier is the Executive Director of ARMA International, a not-for-profit professional association and authority on managing records and information.

ARMA provides education, publications, and information about efficient maintenance, retrieval and preservation of vital information created in public and private organizations in all sectors of the economy. marilyn.bier@armaintl.org

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2012

E-Discovery

Predictive Coding is Not a Magic Wand

By Gavin W. Manes and Tom O’Connor

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P

redictive coding has been much discussed in e-discovery circles during the past year. Earlier this year, for example, The Wall Street Journal published an article on the subject. It’s title: “Why Hire a Lawyer?

Computers are Cheaper.”

What exactly is predictive coding?

Essentially, here is how it works: Given a large set of documents, attorneys review a small sample set to their specifications.

Their review pattern is then applied to the larger document set using a “content clustering” or “find-similar” calculation. This

allows a large volume of documents to be reviewed without attorneys having to spend thousands of hours looking at each page. Predictive coding is used as a supplement to traditional e-discovery filtering methods, such as keyword searching.

The variables in this process include the selection of documents for the sample set, the user response to the sample set and the computer algorithms that are applied.

These algorithms may learn “on the fly” or they may be pre-calculated, depending on the software and the process. In either case, poor user input

will result in poor sample set results, which would then be propagated to the remainder of the document set.

A user can be led through a set of documents in predictive coding in several ways, sometimes designated as “choose your own adventure,” “spokes on a wheel,” “purely random” and “secret black box.”

In “choose your own adventure,” the computer algorithm adjusts to your responses on the fly, changing the next document that might appear based on previous input.

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E-Discovery

“Spokes on a wheel” is a pre-defined set that covers all document clusters.

Users can dive deep into whatever interests them.

“Purely random” selection, while statistically relevant, does not generate the most useful set.

With “secret black box,” only the developer of the computer algorithm knows what functions are being performed.

duce the number of documents that attorneys need to review. This is increasingly necessary as document sets grow, concurrent with client unwillingness to pay for review.

One of the attractions of predictive coding is the ability to streamline first pass review. The processes listed above, in combination with the efficient use of technology, gives similar results to those

Predictive coding is a process that includes a combination of humans and technology.

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The Wall Street Journal article highlights one of the main problems that arises when predictive coding is discussed: It is presented as a product.

But predictive coding isn’t just a piece of software that can be layered over other e-discovery processes. Rather it is a process that includes a combination of attorneys and technology. At its core, predictive coding is about workflow.

In fact, keyword searches, sampling and early culling could be considered a type of predictive coding, since they help pare down the document set. This is particularly the case in the early stages of e-discovery.

Because predictive coding is a methodology and not a piece of software, it can be an element of any review tool.

Some current software like Xera, iConect, Recommind and Relativity have integrated predictive coding. However, predictive coding can be employed in heritage review tools, like Concordance or Summation, and even in other tools like LAW, CaseLogistix, with the right clustering data and methodology.

A number of predictive coding engines and algorithms are available, and many have been around before being called predictive coding. In fact, near-dupe technology, otherwise known as “find similar,” is heavily used in predictive coding to calculate the logical clusters and groups in the remainder of the set.

What are the benefits? Predictive coding can be an excellent way to re-

described in predictive coding. Attorneys are a critical part of this equation, along with use of the right technology.

In a project where predictive coding is used, it’s true that processing costs will increase, but there will be substantial savings in the review phase – assuming that the project was wellplanned and managed from the outset, and that the process and technology were used appropriately.

Of course, predictive coding can become more expensive than necessary if the sample sets are poorly developed, if the data set includes documents that do not have natural language (graphics), or if the pricing model includes per-month gigabyte charges for hosting. In a predictive coding set, there will always be more data hosted in a review platform than in a keyword-based review.

Project management of predictive coding is critical, since it is a process and not just an “easy button.” Several run-throughs of the sample set may be necessary in order to achieve the desired results, so it is important to set appropriate expectations.

There is a substantial cost difference based on whether the data is processed in advance or on-the-fly. Processing and clustering in advance results in lower costs and a fixed error rate, but requires multiple passes at the sample set. Allowing the adjustment of the error rate or heuristic (the problem-solving technique) in real time requires a large amount of processing

power and a more complex algorithm.

This results in higher costs and requires “middleware” between review technology and the predictive coding engine.

The thought behind predictive coding – that technology can help reduce the cost of e-discovery – is solid, but figuring out what technology to apply at what point in the workflow is not always easy.

Having other attorneys or consultants who are seasoned in e-discovery analyze your workflow or case (particularly for large projects) can save much time and money. Ultimately, predictive coding is not just about using technology, but about using it well and using it at the right time. ■

Gavin W. Manes, Ph.D., is president and CEO of Avansic, a Tulsa-based company that provides ESI processing, e-discovery and digital forensics services to law firms and companies nation-wide.

He has published more than 50 papers on computer security and digital forensics and has briefed the White House, Department of the Interior, the National Security Council and the Pentagon on computer security and forensics issues. gavin.manes@avansic.com

Tom O’Connor is an attorney and director of professional services at Avansic. He counsels firms and corporate counsel on e-discovery issues, including retention policies, litigation holds and document exchange protocols. Among the high-profile matters he has worked on are the Keating case, the Enron and BP litigations, tobacco litigation on behalf of the Attorney General of Texas, California class actions against crematoriums, and asbestos litigation. He is based in New Orleans. tom.oconnor@avansic.com

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2012

Intellectual Property

A Fast Track for Your Patent Portfolio

By John K. McDonald and Michael Schiff

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D

o you wonder when all those dollars your company invests in its patent portfolio will mature into issued patents? Are you frustrated that the patent applications protecting key technology take so long to issue, especially in view of budgetary pressures? You are not alone. Many corporate executives feel that their expensive patent portfolios have vanished past the event horizon at patent offices in the United States and abroad, never to be seen again.

The long maturation time results from the procedures by which the patent office in each country examines an

application for patentability. The dialog between an applicant and the patent office is meticulous and slow. According to recent data from the U.S. Patent and Trademark Office (USPTO), the typical pendency of a patent application is 3½ years, with a backlog of over 600,000 unexamined applications.

There are many circumstances in which companies would benefit from having their patents issue faster. When technology evolves rapidly, products may have a short life cycle, in which case early patent protection would help raise the product profile and block

competitors. If infringing products are in the market, the company may need an issued patent to assert against the infringer. Issued patents help a company validate its technology, which can attract investment capital or licensing revenue.

Recently, new programs have emerged that permit companies to accelerate patent prosecution around the world, and thereby save company resources and add value to the bottom line. This article provides strategies for utilizing these programs and achieving these goals, in accordance with business needs.

OCT/ nOv 2012 E X ECUTIV E COUNSEL

Intellectual Property PRIORITIZED EXAMS IN THE U.S.

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As part of the America Invents Act passed in 2011, Congress gave the USPTO a mandate to create a special fast-track examination program.

Applications in the prioritized track undergo essentially the same examination procedures as they would normally, but at a more rapid pace. The goal of the program is disposal of the application within one year. If the application is finally rejected, options are to appeal or request continued examination. But if your invention has merit and you have presented the Office with claims having reasonable scope, you may well obtain an issued patent before the year is over.

The fast-track program at the USPTO seems to be meeting its objectives. More than 500 applications filed since September of 2011 have received notices of allowance. The Office has a computerized docketing system that rank-orders the cases for each examiner. Prioritized applications are advanced earlier in the queue at each step of the process and office actions are produced quickly.

The biggest surprise about the fasttrack program is how little it is being used. The program has a quota of 10,000 slots per fiscal year, but between September 2011 and June 2012, only about 3,500 requests for prioritized examination were filed. The fee premium for entering the prioritized track is $4,800 (or $2,400 if the owner qualifies as a small entity), in addition to standard fees for examination and publication. This is not a trivial amount, but in reality the extra fee is only a minor fraction of the budget for obtaining a U.S. Patent, which typically is in the low to mid five-figures.

In view of the value of obtaining a patent early, many attorneys in the patent bar expected the program to exceed its quota in the first week. But slots remain open, and the quota was renewed in September of 2012.

PROGRAMS ELSEWHERE

The United States is not the only market in which companies are clamoring for faster patent examination. Patent counsel can pick and choose among fast-track programs in a number of key jurisdictions.

The PACE program in the European Patent Office (EPO) allows applicants to request both an expedited search and expedited examination, subject to the capacity of the EPO in the relevant technical area. The EPO will generate a search “as soon as possible,” and aims to produce exam results in three months.

In Canada, an applicant can request that an application be advanced out-ofturn as a matter of right, upon payment of a $500 fee. In Japan, processing can be expedited if an applicant or licensee of the application is using or selling the invention in Japan. The Japanese Patent Office plans to produce examination reports in three months, provided the applicant responds promptly. Over 10,000 petitions for accelerated examination are filed in Japan every year.

IP Australia and the U.K. Patent Office both have tracks for expedited examination. A reason must be provided, but it is often enough to say that the applicant needs an early patent to develop or commercialize the invention.

The fast track in Australia and the U.K. can lead to a granted patent within 12 months of filing the request.

Not to be left behind, China recently announced its own prioritized examination program. It began on August 1 of this year. The program is available for patent applications in energy conservation, information technology, biology and other fields, providing that the Chinese Patent Office thinks the application is “important,” according to unspecified criteria. The applicant must obtain and file its own prior art search.

Upon acceptance into the program, the Office aims to send a first Office Action within 30 days.

With all these programs available, companies can opt for a dual patenting strategy: obtain specific and rapid protection in key manufacturing and marketing areas, then overlay this with a broader range of protection of later issuing patents to keep competitors out of the field.

PATENT PROSECUTION HIGHWAY

Patent offices around the world have realized that since they have growing application backlogs, they could work

collaboratively to enhance efficiency.

Different jurisdictions have somewhat different criteria for what constitutes patent-eligible subject matter and what makes an invention obvious. However, all major patent offices perform a prior art search and require that claims be clear and have adequate basis in the patent disclosure.

About six years ago, the patent offices from several countries met and established the Patent Prosecution Highway (PPH) program, in which one country relies at least initially on an examination done elsewhere. The United States now has bilateral PPH agreements with 22 different jurisdictions. Commercially important partners include the EPO, Japan, China, Korea, Canada, Mexico, and Australia.

The PPH works this way: Once a patent has been allowed in a first country, the applicant files corresponding claims in a second country and petitions to enter the PPH. The patent office in the second country may then allow the application, after ensuring that the claimed invention complies with local patent laws and perhaps performing a supplemental search.

The applicant is constrained in the second country to the scope of allowed claims obtained in the first country. However, there is often no fee, and the application is put on the fast track to a final determination.

A recent enhancement to the PPH program is elimination of the officeof-first-filing rule between the United States and eight of its partners. This means an applicant can expedite foreign cases on the basis of a U.S. allowance. Alternatively, it can expedite a U.S. case based on an allowance in another participating country.

STRATEGIC CONSIDERATIONS

To take full advantage of the options for accelerating examination, patent counsel should understand the nuances of how to accelerate examination in different jurisdictions, and should have well established relationships with foreign counsel who are familiar with acceleration techniques and the PPH in their own countries.

By way of example, we utilized the

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2012

Intellectual Property

PPH in connection with a client preparing to launch a product in Japan. The company wanted an issued Japanese patent so that the price could be set at a premium. After obtaining an allowance of claims in the United States by aggressively interviewing the application, we filed a petition in Japan to enter the PPH with the allowed U.S. claims. A patent was obtained in three months, enabling the company to set its target price and execute its sales strategy.

For that same client, we obtained a quick allowance in Europe by using the PACE program and interviewing the application at the EPO. We then filed a petition to enter the PPH in Japan with the allowed European claims.

In three weeks, the Japanese patent was allowed. The company saved two to four years of patent prosecution and $30,000 to $60,000 in fees in each case.

Expedited examination is not for everyone. A company may not have the resources to pay up-front costs,

translation fees and attorney charges early in prosecution. A pharmaceutical company may require more time to do research before selecting a particular molecule for patenting from a general structure. However, once a molecule is selected as the lead candidate, accelerating examination could save resources and confer protection earlier in the product life-cycle.

Every company has a unique market situation, and each patent application covers different technology.

A thoughtful global patent strategy should take into account concerns about marketing channels, manufacturing locations, product launch, potentially infringing products, as well as the patent budget. With a comprehensive understanding of corporate objectives, patent counsel can accelerate examination wherever it is appropriate to optimize commercial value of key inventions and decrease the time and cost of obtaining patents. ■

John McDonald, Ph.D. is a partner in Kilpatrick Townsend & Stockton LLP’s Health, Life Sciences & Chemistry Group. He advises pharmaceutical, chemistry and biotechnology clients on international patent strategy.

Jmcdonald@kilpatricktownsend.com

Michael Schiff is an associate at Kilpatrick Townsend & Stockton LLP. He works with clients in the pharmaceutical, medical devices and high technology industries, tailoring world-wide IP strategy to fit the client’s corporate objectives.

MSchiff@kilpatricktownsend.com

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OCT/ nOv 2012 E X ECUTIV E COUNSEL

Intellectual Property

Burgeoning Intellectual Property Theft Often an Inside Job

By Ronald T. Williams and Todd Stefan

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F

igures released by the FBI, the Department of Justice and various private sector institutions reveal a dramatic increase in computer security incidents and the harm caused by them. Out of concern for company reputations and shareholder interests, many computer security incidents are not reported, so the true extent of the damage – in particular damage that impacts what for most companies are their crown jewels, their intellectual property – could be staggering. Typically, the value of intellectual property

for U.S. companies now surpasses the value of physical corporate assets.

Nonetheless, a dangerous trend has emerged, as illustrated by recent studies from the American Society of Industrial Security (ASIS) and the FBI: More than a third of surveyed Fortune 2000 and middle-market companies have no formal program for safeguarding intellectual property and spend less than five percent of their budgets on security.

With the increase in the frequency and seriousness of intellectual property theft, protection of IP and information

assets has become a critical issue and a significant challenge. Today information can be shared globally in seconds. That has changed the way companies create, identify and maintain intellectual property, and thus how they must safeguard and protect it. The fact that intellectual property is now commonly stored in the form of data and transmitted invisibly through the Internet has changed the fundamental requirements that underlie any attempt to secure intellectual property and prevent theft. Previously accepted best practices can no longer be relied on.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2012

Intellectual Property

When IP theft does occur, responding, investigating and prosecuting involves encapsulating electronic information that, by its very nature, is volatile and difficult to thoroughly capture. To respond to as well as prevent IP theft, companies must leverage an array of information security controls.

At the same time, they must continue to adhere to the proven principles and discipline of physical security. Both types of security should be integrated into one clear and comprehensive risk management program.

network to carry out IP theft, but the following summary guidelines can be employed to minimize this risk: • Ensure that access privileges, such as passwords, are disabled immediately following the resignation or termination of an employee.

• Don’t let employees share a single authorized account that is used to gain access to network resources or physical assets.

• Inform all employees that their use of network resources and interaction

People on the inside understand best which is the most critical IP for the business, where it's located and how it is protected.

To prevent hackers from stealing their intellectual property, many companies struggle to fortify their networks against external attacks, without realizing the real threat comes from employees and former employees. It’s people on the inside who understand best which is the most critical IP for the business, where it’s located and how it is protected. More than three out of four cases of IP theft are perpetrated by inside employees or contractors, according to studies from ASIS and the FBI. Anyone who has physical or electronic access to information assets, including contract workers, temporary workers, visitors, interns and support and maintenance workers, has the opportunity to access unlocked computer workstations, computer servers, paper files, and passwords or other sensitive data that has been left unprotected. In most cases the weakest link of an IP security program involves this human element.

•

•

•

•

with information assets will be monitored and audited.

Track the inventory of portable computing devices, such as laptops and portable hard drives, to ensure no systems that may contain intellectual property go missing or remain in the possession of exemployees.

Implement console locking mechanisms on computer workstations so that systems left unattended will automatically log off and become password protected.

Assign access privileges to employees based on their specific function and their need to access intellectual property, so that employees who do not require access to sensitive information assets do not have it.

Instill a corporate culture in which safeguarding intellectual property is a high priority and each employee understands his or her responsibility for adhering to security practices, policies, and controls.

Prevention

Even with robust IT security controls, all it takes is one careless, uninformed, or disgruntled person with access to the physical office space or enterprise

reSPonSe

Even with the best of preventive measures in place, one hundred percent certainty is impossible. Companies there-

fore have the obligation to establish thoughtful response guidelines that will ensure electronic evidence is preserved and that a sustainable posture for internal or legal action is established.

At the core of a company’s response to the theft of intellectual property is the initiation of computer forensics and an enterprise investigation to identify, gather, analyze, and preserve electronic evidence.

These investigations are complex. They require experienced and certified professionals, dedicated forensic investigative tools, and a thorough understanding of technology and legal systems.

Today, intellectual property constitutes the crown jewels for most companies. They need to act decisively to safeguard those crown jewels and be prepared to react swiftly, with a thorough investigation, if a theft should occur. Failure to act risks potentially devastating loss, and becoming one more firm publically exposed as deficient in meeting its obligations. n

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Ronald T. Williams, a retired U.S. Secret Service Agent, is CEO of Talon Companies, which he founded in 1994 as a protective services and security consulting firm for corporations and executives. Talon Cyber Tec was founded in 2005 to address the increasing threat of cyber crime. rwilliams@talonexec.com

Todd Stefan serves as the Director of Information Security Services for Talon Executive Services and its Talon Cyber Tec business unit. His work entails solving corporate cyber crimes and implementing proactive systems to prevent cyber disruptions. tstefan@taloncyber.com

OCT/ NOV 2012 E X ECUTIV E COUNSEL

Intellectual Property

How to Look at Patent Case Juries

By Kevin Boully and Karen Lisko

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Jurors cannot begin to understand this complexity. How on earth do we teach them something so involved?

in general and a recent newsworthy jury case, Apple v. Samsung, in particular.

T

(1) The jurors make sense of the patent infringement issues by focusing on behavior as much as on the claim terms.

Jurors have to decide if a defendant’s product or process infringes the patent holder’s patent. To make that judgment, they need to rely on the claim terms. For the most part, jurors work hard at that requirement.

But like all learners, they also rely on context to understand meaning.

Often jurors broaden their understanding by paying attention to the parties’ behavior. In Apple v.

Samsung, for example, the jury paid particular attention to internal memos that contained cautions to Samsung to be careful with Apple’s designs.

The more we talk to actual and

his sentiment is understandable, considering that the number of words in just the description section of a patent has increased exponentially over the past 20 years. Many of those words are technical and second nature only to someone with “ordinary skill in the art” (a phrase that itself needs a definition). A patent disputes often boil down to a fact finder’s interpretation of some of those words, a miniscule subset of the patent’s universe of language.

But no matter how few the disputed terms may be, the typical patent jury looks far beyond the language within the four corners of a patent to decide issues of infringement and invalidity. Here are three essential truths about patent case juries

mock jurors, the more we see how hard they try to get the facts right. We have no doubt the Apple v. Samsung jury did its best to consider the patent language. However, they set the language within the context of the parties’ motives and behaviors.

(2) Jury selection in patent litigation is like none other.

In most civil litigation, a line of demarcation exists between pro-plaintiff jurors and pro-defense jurors. Authoritarian jurors (those who defer to authority) in products cases, for example, defer to the authority of regulatory bodies like the Food and Drug Administration (FDA) or the Consumer Products Safety Commission (CPSC). If the FDA or the CPSC has, in effect, “blessed” the corporate defendant by allowing it to put its product on the market, these authority-loving,

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2012

Intellectual Property

rule-following jurors are liable to be sound defense jurors.

However, put those “steady eddie” pro-defense, authoritarian jurors on a patent jury and you just might face a “flipped” allegiance that favors the plaintiff. After all, the patent holder was literally awarded the gold seal of approval by Patent and Trademark Office when the examiner allowed the plaintiff’s patent to issue, thereby imbuing the inventor with the authority to sue in civil court to enforce its patent rights against alleged infringers. Our research of the national jury-eligible population for many years in a row has found that the Patent and Trademark Office is ranked as the most credible of all federal agencies.

But prepare for that steady defense juror (now turned plaintiff juror in patent litigation) to return to the traditionally pro-defense corner in certain patent cases. Why? Because in every case in which the accused infringer claims the plaintiff’s patent is invalid, authoritarian “rule-following” jurors may be highly critical of the plaintiff if they perceive clear violations in the rules of applying for and receiving the patent. It all depends on the strength of the defendant’s invalidity case in the specific dispute.

If you are confused at this point, you are not alone. Faced with a strongly opinionated, authoritarian juror, even the most experienced trial counsel know they need to get clear about how this potential leader on the jury will lean in their particular case. Make the wrong call and you may have eliminated one of your best advocates in the jury room or kept one of your toughest critics in deliberations.

Did one side or the other go through this necessary analysis of “jury flippers” in the Apple v. Samsung trial? It is hard to say. We might guess that Apple did a great deal of mock jury research to assess the predilections of the authoritarian juror (and other types of jurors) toward their specific set of case facts. But with as much at stake as the companies faced in this bitter fight, you can be certain Samsung also did mock jury research. Perhaps they were dealt a jury pool that required them to use their strikes elsewhere. It happens.

No matter what you face the day of jury selection, you want to be clear about

your high risk jury profile, especially since the authoritarian juror (and many other jury types) can flip based on the relative strength of your infringement/noninfringement or validity/invalidity cases.

(3) The Apple v. Samsung judge may be more similar than not to the jury.

If judge rather than jury had been the finder of fact in this case, would the outcome have been different? Not having been in this judge’s courtroom, we’d be foolish to make a guess, but we do feel comfortable taking a stab at a smaller, critical component of this dispute. One key finding from our national research is germane to this litigation. The world understood that competition was at the heart of this bitter battle between two giants in the mobile device market.

Every time we mock-try a patent case to mock judges or jurors, the word competition comes up among the mock fact finders. Even in the most dense of cases where the patented device or process is not well known, the fact finders understand the key motivator behind the patent dispute is protecting one’s “property” (patent holder plaintiff) or hoping for the right to be part of the market (accused infringer defendant). As a result, it’s critical to understand the fact finder’s views on competition and the patent process.

Here is where an interesting comparison between judge and jury arises. We have found a number of questions regarding the fact finders’ attitudes toward competition to be important factors in patent disputes. Simply put, we always ask mock jurors and mock judges in patent cases whether they agree or disagree that the “patent process helps competition.”

We repeatedly find that most jurors agree. In our 2011 annual survey of juryeligible respondents, 69 percent of respondents agreed. This is where the research gets interesting. When we put this same statement in front of sitting federal judges in 2008, 70 percent of them also agreed with that statement. It was a statistical tie with the jury-eligible respondents.

Knowing the majority of fact finders see the patent process as a positive force in the world of competition, what does one do with that knowledge? We would argue you should not do what Samsung did in

the recent litigation, where they championed a theme of anti-competitive behavior on Apple’s part. While a minority of jurors may have bought it, the tide was against Samsung on this argument from the outset, because the jurors were probably predisposed to believe that the patent process is inherently pro-competitive.

The fascinating part of patent litigation is that many more patterns exist with fact finders than those noted here. Fact finders will deviate from those patterns given a specific set of case facts, but it behooves anyone involved in patent litigation to use this knowledge base as a starting point. ■

Kevin Boully is a Litigation Consultant with Persuasion Strategies, a service of Holland & Hart LLP. His doctorate in legal communication focuses on persuasion, small group influence and jury decision making. He has been associate editor and advisor to the American Society of Trial Consultants’ publication, The Jury Expert. He and Karen Lisko are currently co-authoring a book entitled Patently Persuasive for the ABA Section of Intellectual Property. krboully@persuasionstrategies.com

Karen Lisko is Senior Litigation Consultant with Persuasion Strategies, a service of Holland & Hart LLP. She has more than 25 years of experience strategizing with clients in civil cases about how to present themes and arguments in arbitrations, bench and jury trials. She holds a doctorate in legal communication and is past president of the American Society of Trial Consultants. She recently published a book entitled Proven Jury Arguments & Evidence, and is currently working with Kevin Boully on writing Patently Persuasive for the American Bar Association.

Klisko@persuasionstrategies.com

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OCT/ NOV 2012 E X ECUTIV E COUNSEL

Human Resources

Minimizing Risk when Hiring a Competitor’s Executive

By Jon Parritz

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THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2012

Human Resources

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s the economy slowly perks up, some members of your executive team might be tempted to seek greener pastures. Or maybe you have your eye on a talented executive working for a competitor.

Hiring a competitor’s employees at any level may have its rewards, but it also entails risk that must be managed carefully, particularly when the employees are executives. Contractual arrangements between a company and its executives often include limits on the executive’s ability to (1) work for a competitor following termination, (2) use or disclose confidential information or (3) be involved in recruiting his or her colleagues to leave the company to join a competitor.

In many cases, executives also have valuable incentive compensation agreements which can be forfeited if they engage in prohibited conduct.

With some notable exceptions (including California), most states enforce contracts that contain reasonable restrictions on an executive’s freedom to work for a competitor or to solicit former colleagues. State trade secret laws also prohibit an executive and his new employer from using or disclosing valuable proprietary non-public information belonging to a competitor.

Such laws usually carry stiff monetary penalties and potential liability for the legal costs of enforcement.

So, when contemplating a hire, it is important to determine early on whether an executive recruit is subject to a non-competition restriction. If so, seek legal advice to determine whether it is enforceable. A company can be hit with damages and attorney fees if it is found to have wrongfully interfered with a valid non-competition agreement.

Valid non-compete restrictions must be reasonable both in duration and scope. Duration limits can range from months to several years. The scope of the non-compete can vary depending on the industry, type of position and the managerial position and seniority of the employee. Restrictions might be geographic, product-based, or applicable across a given industry.

In the case of an executive who is near the top of the reporting structure

and privy to a wide range of confidential business information, the former employer will be able to justify a non-compete restriction which is longer in duration and not limited by a geographic territory.

For a company hiring executives from a competitor, there are a few key things to keep in mind during the potentially dangerous period when you are actively recruiting. Make sure that any of your employees who are trying to recruit former colleagues are not themselves contractually barred from recruiting

period, or asking the new employee for confidential information about his or her former company or customers.

When orienting any new employee, make sure that employee understands the duties that he or she owes to a former employer. Prepare and publish policies that prohibit employees from using or disclosing confidential information of a former employer. Have new employees acknowledge in writing their obligation not to take or use any confidential information belonging to a former employer.

A company can be hit with damages and attorney fees if it is found to have wrongfully interfered with a valid non-competition agreement. employees from their former employer. If they are, then by encouraging or permitting them to steer their former colleagues to your firm, you can be held responsible for wrongfully interfering with the former employer’s contractual rights.

You should not communicate with a prospective hire during his or her regular working hours, and you should not communicate with the prospect using the current employer’s email or telephone systems. Employers are entitled to expect undivided loyalty from their employees. Accordingly, employees usually are prohibited from using an employer’s email, telephone, copy and other services for personal use, and that includes seeking employment elsewhere.

For the same reason, do not encourage or allow the recruit to steer business to your firm while still employed by your competitor, or during any valid post-termination non-compete period.

If a new employee is subject to valid non-compete obligations, consider “walling off” the employee from meetings at which prohibited accounts or products are discussed. Instruct the employees’ co-workers to avoid discussing the prohibited subjects with the new employee during the non-compete

Finally, make sure that the executive’s evaluations and compensation are not structured to reward or encourage violations of any non-competition, confidentiality or trade secret protection obligations.

The right of employees to work free from unreasonable restraint and the right of employers to protect valuable confidential information and goodwill are both core values protected by the law. Following these guidelines will help your company compete fairly for the best employees. ■

Jonathan S. Parritz heads the Competitive Practices Litigation Group at Maslon Edelman Borman & Brand LLP in Minneapolis. He handles complex litigation matters for individual and organizational clients in a variety of professions and industries, with a major part of his practice involving executive compensation and benefits, wage and hour law, trade-secret protection, and enforcement of non-competition and confidentiality agreements. jon.parritz@maslon.com

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OCT/ NOV 2012 E X ECUTIV E COUNSEL

Human Resources

New Protections for Transgender Status

By Louis L. Chodoff and Amy L. Bashore

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n a landmark decision, the Equal Employment Opportunity Commission has reversed its own precedent and extended the anti-discrimination protections of Title VII of the Civil Rights Act of 1964 to discrimination based on gender identity, change of sex and/or transgender status.

In Macy v. Holder (decided April, 2012), the complainant, Mia Macy, a transgender woman, applied for an open position at the Bureau of Alcohol, Tobacco, Firearms and Explosives.

Presenting as a man, Ms. Macy discussed the position with the director of the ATF crime laboratory, where the job was located. Macy contends that the director offered her the position contingent on a standard background check. When she checked the status of the position one month later (still presenting as a man), the director again assured her that the job was hers if there were no issues with the background check.

A few months later, Ms. Macy contacted the outside firm responsible for filling the ATF position. She informed the firm that she was in the process of transitioning from male to female and requested that the firm relay this information to the ATF. The outside firm confirmed with Ms. Macy that it had advised the director of the crime laboratory of her change in name and gender.

Five days later, Ms. Macy learned through the outside agency that, due to federal budget restrictions, the position at the ATF was no longer available. Ms. Macy followed up with the ATF and discovered that the position had not been eliminated, but that someone else had been hired for the position.

Ms. Macy filed a Charge of Discrimination with the EEOC, alleging

that she had been discriminated against because of “sex, gender identity (transgender woman) and ... sex stereotyping.” The EEOC responded that claims of “gender identity stereotyping” could not be adjudicated before the EEOC. Ms. Macy appealed the determination of the local EEOC agency, requesting that the Commission adjudicate the claim that she was discriminated against because of sex stereotyping and sex, based on gender transition and gender identity. The EEOC unanimously agreed with Ms. Macy that her claim is subject to Title VII’s ban on sexual discrimination.

The EEOC explained that, under Title VII, the term “sex” encompasses both the biological differences between men and women and “gender,”

which includes the cultural and social aspects associated with masculinity and femininity. As the EEOC noted, the Supreme Court has long held that gender or sex stereotyping, i.e., failing to conform to sex or gender-based expectations, is prohibited by Title VII. In addition, the EEOC noted that several federal circuit and district courts have already concluded that claims of sex discrimination include discrimination against employees who are transgender or transsexual, where there is evidence that the discrimination occurred because of gender non-conformity.

The Macy decision, however, goes beyond sex or gender stereotyping claims. It prohibits discrimination whether motivated by stereotyping, hostility, assumptions, accommodation

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2012

Human Resources of other people’s prejudices, or any other motivation. For example, allegations that an employer made an adverse employment decision because an employee is undergoing a sex change, whether or not there is evidence that the employer harbors animus based on failure to conform to stereotypical gender assumptions, is now sufficient to state a claim under Title VII. The EEOC remanded the matter back to the local agency to determine the merits of Ms. Macy’s claims.

IMPLICATIONS FOR EMPLOYERS

Federal courts give deference to the EEOC’s interpretation of its regulations under Title VII. Therefore, employers should plan for the courts to apply the Macy v. Holder decision to claims under Title VII, including claims for failure to hire as asserted by Ms. Macy, as well as claims based on other differential treatment and harassment.

Although equal employment opportunity policies likely need not be revised, employers may need to update other policies, such as leave and benefit policies, to ensure they adequately cover transgender or transitioning employees.

In addition, employers should inform human resources and benefits staff of the new interpretation under Title VII, as it could affect the operation or implementation of certain policies.

Finally, employers should update their anti-discrimination training to notify supervisors and other employees of the expanded anti-discrimination and anti-harassment coverage.

Notably, Title VII applies only to employers who have 15 or more employees. Some states and localities (although by no means the majority) already offer protection for sexual orientation, gender identity and similar claims. However, these protections refer to separately identified protected classes under state statutes. Because the EEOC’s decision in Macy v. Holder is an extension of the definition of sex discrimination – a protection identified in all state anti-discrimination statutes – state courts may also begin to adopt the EEOC’s reasoning and extend

state statutes already in place to cover gender identity, change of sex and/or transgender status. Such application would reach smaller employers not covered under Title VII. Consequently, cautious employers that are not covered by Title VII or a more protective state statute also may want to reevaluate their policies, practices and training in light of the EEOC’s decision.

GUIDANCE FOR THE WORKPLACE

In general, employers should treat transgender employees, transsexual employees and employees undergoing sex transition the same as other employees. However, the following are some additional guidelines for employers: • Employees should be permitted to present as their chosen sex or gender, including during the time they are transitioning as part of a sex change. It follows that an employee who presents as a female should be asked to follow the dress code for female employees.

• Employers should take care not to allow the feelings of other employees to govern their decisions, practices or actions. For example, some employees may object to sharing a restroom with a transgender or transitioning employee. Nonetheless, the employer should allow the transgender or transitioning employee to use the restroom that corresponds with the sex/gender he/she presents.

• Employers should address co-worker concerns through training and open discussions (while maintaining employee privacy). If this fails, the employer may elect to provide an alternative for the co-worker, such as an alternate restroom.

• Employers should take care to maintain confidentiality and employee privacy. For example, as with other employees, any medical information, should be kept confidential, and that would include any medical information concerning an employee’s sex/ gender transition, • Employers should use their best ef-

forts to ensure that their employees, when referring to a transgender or transitioning employee, use proper pronouns – that is pronouns that correspond to the sex/gender the employee presents. At no time should disrespectful or derogatory names or other comments be permitted.

In addition, employers may need to review or adjust their policies – including leave policies and benefits – to ensure that they adequately cover transgender or transitioning employees.

In addition, staff should be trained on applying the employer policies to transgender or transitioning employees.

Although the principles underlying the Macy v. Holder decision are universally applicable to other protected classes, employers may want to consult with their legal counsel with respect to any necessary policy changes, training or application of these principles. ■

Louis L. Chodoff is a partner in Ballard Spahr LLP’s litigation department. He concentrates his practice in counseling and litigation on labor and employment law matters, including harassment, discrimination, wage and hour, whistleblower, wrongful discharge and restrictive covenant disputes. chodoffl@ballardspahr.com

Amy L. Bashore is an associate in Ballard Spahr LLP’s litigation department.

Her experience includes litigation of discrimination, wage and hour, and noncompetition cases. She advises clients on issues of employee discipline, reductions in force, terminations, and drafting employment and separation agreements. bashorea@ballardspahr.com

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oct/ nov 2012 E X ECUTIV E COUNSEL

Governance

What to Expect in the 2013 Say-on-Pay Season

By Eric Hosken and Kelly Malafis

A

40

s we approach the end of 2012, many companies are beginning to develop their compensation disclosure for the 2013 proxy season.

Issuers have benefitted from another delay in the implementation of many aspects of the Dodd-Frank legislation, including disclosure of pay-for-performance, CEO pay ratio, hedging policy and the clawback policy requirement.

Still, Dodd-Frank continues to impact issuer proxy disclosures, as 2013 will be the third year of a mandatory non-binding say-on-pay vote for most calendar fiscal year companies. We have seen voting patterns emerge from the first two years of say-on-pay that we expect will carry over into next year.

The introduction of mandatory say-on-pay pressed companies and compensation committees to ensure that pay programs were aligned with company performance and strong governance practices. To date, compensation plans in the overwhelming majority of companies have received favorable votes on say-on-pay.

Where companies have failed say-onpay, one of two conditions has typically been present: (1) poor total shareholder return (TSR) without a significant adverse impact on compensation or (2) egregious or problematic pay practices.

Of these two issues, we expect the most important for the 2013 proxy season will be the former: poor TSR without a significant adverse impact on compensation. In our experience, compensation committees have been responsive to the critiques of problematic pay practices by major shareholder advisors, such as Institutional Shareholder Services (ISS) and Glass-Lewis.

This has been evidenced by a trend away from the following pay practices: perquisites, tax gross-ups on benefits other than relocation, supplemental

retirement plans, discretionary bonuses, single trigger change in control payments, single trigger equity vesting following a change in control and excise tax grossups. Furthermore, companies have gone

Regarding TSR impact, the first table below provides data on the sayon-pay votes in 2011 and 2012, along with the average TSR for 2010 and 2011 in each vote result category.

2011

2012

% of Companies

TSR 12/31/10

% of Companies

TSR 12/31/11

90% - 100%

63%

24.5%

69%

3.6%

80% - 90%

17%

24.1%

14%

-5.8%

70% - 80%

10%

17.3%

6%

-2.3%

50% - 70%

9%

8.0%

8%

-7.6%

0% - 50%

2%

9.6%

3%

-8.4%

% Shareholders Voting in Favor

Avg. 1-year

out of their way to adopt practices viewed positively by shareholder advisory groups, including stock ownership guidelines, post-exercise or post-vesting share retention requirements, anti-hedging policies and clawback policies in advance of the Dodd-Frank rules.

With this in mind, most companies should focus on aligning pay levels with performance outcomes and clearly disclosing this alignment in the Compensation and Discussion Analysis (CD&A) section of the proxy statement. Additionally, companies should consider reaching out to their largest shareholders to ensure that pay programs are well understood and specific concerns are vetted.

TWO-YEAR RESULTS

From an analysis of the last two years of say-on-pay results among the S&P 500, two key relationships emerge: • Say-on-pay vote results are positively correlated with TSR. • An “against” recommendation from ISS can have a substantial negative impact on the say-on-pay vote, although it does not automatically result in a failed vote.

Avg. 1-year

This table shows that companies with higher percentages of favorable say-on-pay votes tended to have higher TSR on average. This is not surprising as we would expect that companies with higher shareholder returns can garner more support for their pay programs.

A related finding is that companies receiving an “against” vote recommendation from ISS have approximately 25 to 30 percent lower levels of support for their say-on-pay proposals than companies receiving a “for” vote recommendation from ISS. Average Shareholder Support ISS Vote Recommendation

2011

2012

For

91%

93%

Against

64%

59%

Digging a little deeper into the data for 2012, we find that all of the S&P 500 companies that failed say-on-pay received “against” recommendations from ISS and that companies with “against” recommendations from ISS had TSR in

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2012

Governance

2011 that was approximately eight percent lower on average than the companies receiving “for” recommendations.

ISS Vote Recommendation

# of Companies with 50%+ Support (Pass)

getting a “for” recommendation from ISS unless pay levels have decreased to a corresponding degree.

# of Companies with less than 50% Support (Fail)

Total

Avg. 1-year TSR 12/31/11

For

354

0

354

1.8%

Against

48

12

60

-5.9%

Total

402

12

414

0.68%

A key determining factor in an ISS vote recommendation is the results of the ISS CEO pay-for-performance analysis. This analysis incorporates three separate tests. Two are heavily influenced by the company’s TSR, on a relative basis and an absolute basis, over a multi-year time frame. If a company has a low TSR in recent years, it likely will face challenges in

Therefore, it is important for companies to understand their shareholder base and its views on compensation best practices, and demonstrate how performance and pay are related in ways these ISS tests do not take into account. While shareholder advisory groups are focusing on TSR in assessing company performance, compensation committees usually employ a

more holistic approach in assessing performance and establishing incentive levels. Target annual and long-term incentive opportunities are generally set to provide for market competitive target pay opportunities. Actual annual incentive payouts typically vary with performance, but the overwhelming majority of companies reward executives for annual financial performance (e.g., Revenue Growth, Earnings per Share, Return on Capital) rather than for changes in the stock price.

While improved financial performance will typically translate into improved stock price performance over the longterm, there is no guarantee that financial performance will lead to shareholder returns in the near-term. As a result, a company may find that its annual salary plus actual bonus is not sensitive to changes in TSR. Further complicating the issue is that when shareholder advisory groups assess

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oct/ nov 2012 E X ECUTIV E COUNSEL

Governance

the relationship between pay levels and TSR performance, they are in most cases looking at the grant date value of longterm incentives (e.g., Black-Scholes value

The most important trigger for a negative say-on-pay vote is likely to be poor TSR (total shareholder return) that does not have a significant adverse impact on compensation.

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of stock options, grant date fair value of restricted stock, target value of performance shares), rather than the actual value realized or the potential value realizable from long-term incentive awards.

This is a major disconnect, as companies typically establish long-term incentive opportunities to attract and motivate executive talent and to be competitive with peers, recognizing that actual financial and TSR performance will determine the ultimate value of longterm incentive compensation.

While TSR is a key measure of company success, we do not recommend adopting compensation practices that solely link annual incentive payouts or long-term incentive grants to TSR. Such an approach could lead to overcompensating executives when TSR increases and undercompensating when TSR declines. Instead, companies should focus on educating shareholders on the existing linkages between pay levels and company performance. The proxy statement’s executive summary in the CD&A is a great communications vehicle to describe the relationship between pay and performance.

Demonstrating the linkage between annual incentive payouts and annual financial performance is relatively straightforward. It can be clearly illustrated through a graph or table providing information on the incentive payout

relative to target and the prior year alongside the company’s financial performance relative to budget and/or the prior year. Through this type of disclosure the company can make its case for how it links annual incentive levels to annual financial performance.

For long-term incentives, demonstrating the linkage between pay and performance is more difficult, but the challenge is not insurmountable. A number of companies have begun to include supplemental disclosure on realized pay or realizable pay as a way to demonstrate how much value is actually realized or could potentially be realized from long-term incentive grants.

Realized pay typically includes annual salary, annual incentive payouts, longterm performance plan payouts (whether in shares or cash), the vesting of restricted stock and any gains realized upon the exercise of stock options. This is close to the W-2 income actually received by an executive and will generally be very different from the value disclosed in the summary compensation table.

Realizable pay typically focuses on long-term incentives and includes the value of unvested restricted stock and performance shares at the current stock price, along with the potential gains upon exercise of vested and unvested

Companies should focus on aligning pay levels with performance outcomes and clearly disclosing this alignment in the CD&A section of the proxy statement. stock options. When looking at pay and performance, companies will often compare the change in realizable pay year over year to TSR. These supplemental disclosures will typically not change the mind of ISS or Glass-Lewis, both of whom employ highly standardized methods to assess

pay and performance. But they can influence the votes of other shareholders who conduct a more thoughtful case-bycase analysis on pay and performance.

The relationship between pay and performance will be a key driver in 2013 say-on-pay voting. Shareholder advisory groups will continue to focus on the relationship between TSR and company pay levels, relying largely on the summary compensation table.

Where there may be a disconnect between disclosed compensation levels and company performance, companies may benefit from supplemental disclosures that help to illustrate the relationship between actual realized or realizable pay and company performance. n

Eric Hosken is a partner with Compensation Advisory Partners LLC in New York. He has more than 15 years executive compensation consulting experience working with senior management and compensation committees on all aspects of executive compensation, including total compensation review, annual and long-term incentive design, performance measurement and director compensation. He is a frequent speaker and writer on executive compensation topics. eric.hosken@capartners.com

Kelly Malafis is a partner with Compensation Advisory Partners in New York.

She has more than 12 years executive compensation consulting experience, working with compensation committees and senior management teams. She has worked with both publicly-traded and privately-held companies in a variety of industries, including in special circumstances such as spin-offs, mergers and acquisitions. kelly.malafis@capartners.com

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2012

Canada/Cross–Border

Canada Seeing Influx of Retailers A Primer On Compliance

By Claire M.C. Kennedy and Darrel H. Pearson

43

M

any household names in U.S. retailing have recently committed to Canada as a destination in which to expand their global market shares. Target, J. Crew, Justice (Tween), Nordstrom, Zumiez, Express, Tanger Outlet Centers, Kohl’s and Marshalls have all established themselves in Canada or announced their intention to do so. Many others are actively exploring Canadian expansion opportunities.

Euro-British retailers Topshop, Ted Baker and AllSaints, as well as companies from France, Germany and Spain, are also entering the Canadian market.

This trend should intensify once the Comprehensive Economic and Trade Agreement, being negotiated between Canada and the European Union (EU), becomes a reality later this year.

For U.S. companies, the case for

Northern expansion is compelling. Canada weathered the financial crisis far better than most countries, including the United States and the EU, and retail spending remains relatively robust. The strong Canadian dollar is also helping to lower the cost of foreign goods in Canada. Moreover, the vast majority of the Canadian population lives within driving distance of the U.S. border, a fact that translates into manageable supply chains and brand aware customers who have shown a penchant for cross-border shopping.

There are, however, legal issues that must be addressed in connection with Canadian market entry. They are not confined to the obvious ones of store leasing and employment. Sound planning for customs, tax and transfer pricing is key to a smooth and successful cross-border business launch.

CHOOSING AND FINANCING THE BUSINESS VEHICLE

The typical choice of business vehicle for Canadian retailers is a Canadian incorporated subsidiary (“Canco”). A Canco can be established quickly and at modest cost either under the federal laws of Canada or the laws of one of its provinces or territories.

Canadian corporate law, both federal and provincial, is similar in most respects to U.S. corporate law. In some Canadian jurisdictions, there is a minimum Canadian resident director requirement. In certain situations, U.S. tax advantages may be gained by establishing the Canadian subsidiary as an unlimited liability company, a corporation for Canadian tax purposes that is fiscally transparent for U.S. tax purposes.

Other business vehicles include a

oct/ nov 2012 E X ECUTIV E COUNSEL

Canada/Cross–Border

44

limited partnership or trust, but these are less common. Similarly, operating directly through a branch (i.e. without a separate entity) is possible, but is usually not recommended. Among other things, it fails to insulate the U.S. company from liability and may increase the base for customs duty purposes. Use of a branch raises allocation issues for income tax purposes, and it will generally result in the American company being subject to Canadian tax on its profits attributable to the Canadian permanent establishment.

The Canco can be capitalized with a mix of equity and debt. Reasonable interest expense on debt incurred for an income earning purpose, such as store expansion or working capital, is deductible for tax purposes. Interest expense on debt owed to a related nonresident is effectively limited by a “thin cap” debt:equity limit of 1.5:1.

Canadian withholding tax is no longer levied on interest payments to arm’s length lenders (excluding participating interest).

In addition, Canadian withholding tax on non-arm’s length, non-participating interest paid to qualifying U.S. treaty residents was recently eliminated. This exemption for non-arm’s length interest is unique among Canadian tax treaties and represents a competitive advantage for qualifying U.S. parent companies versus other foreign enterprises seeking to enter the Canadian market.

Dividends paid by a Canco to a U.S. parent would generally qualify for a

way of return of capital ahead of dividend payments, free of dividend withholding tax. For this reason, it is advantageous to maximize cross-border capital, and if

Canada weathered the financial crisis far better than most countries, and retail spending remains relatively robust. the Canadian expansion involves acquisition of an existing Canadian business, there are opportunities to do so.

CROSS BORDER SUPPLY CHAIN ISSUES

Establishing a Canadian subsidiary retail operation supplied with products purchased or sourced through a foreign parent gives rises to Canadian tax and customs transfer pricing issues. Most multi-national enterprises are familiar with transfer pricing principles and the existence of customs regulations.

However, many fail to co-ordinate the tax/finance and customs/logistics functions, which may have different reporting lines within the organization. As a result they miss the opportunity for a unified approach to tax and customs transfer pricing that improves compliance and reduces exposure. It is recommended that retailers adopt an approach to transfer

Establishing a Canadian subsidiary retail operation supplied with products purchased or sourced through a foreign parent gives rises to Canadian tax and customs transfer pricing issues. five percent dividend withholding tax rate. Where the direct shareholder of the Canco is a limited liability company, care should be taken to avoid any adverse consequences of the anti-hybrid rules in the treaty.

One advantage of Canadian corporate law is that profits can be repatriated by

Incidental to organization of the international commercial transactions under which goods, services and intellectual property benefits flow into Canada

pricing that meets both tax and customs transfer pricing requirements.

Attention should also be paid to documentation of agreements covering the supply of goods, services and/ or intellectual property, including the licensing of trademarks, whether the parties are related or not.

is their sales tax treatment (under the Canadian GST or HST and provincial sales taxes). Management of registration, collection, payment, record keeping and reporting should be addressed in advance of these transactions.

Other customs and regulatory considerations that must be accounted for in supply chain planning are preservation of preferred rates of duty; marking/labeling and product regulation; supply chain security; consumer safety laws; selection of customs brokerage services; and maintenance of a tariff data base and other books and records.

In order to help guide companies though the vagaries of getting goods into Canada, our law firm has developed a Handbook of Canadian Customs Compliance. Intended as a tool to help limit a Canco’s exposure to penalties from the Canadian tax and customs authorities, it points to the growing need for foreign companies to be up to speed regarding compliance in order to avoid reassessments, penalties and challenges from the customs authority. The customs compliance handbook is posted on the firm’s website.

E-COMMERCE

Canada’s broadband penetration and web usage are among the highest in the world, making e-commerce an attractive opportunity for retailers that are physically in Canada and that wish to establish web-based sales parallel to their store-based business, as well as for enterprises testing Canadian demand without taking the plunge of physical expansion. In either case, retailers need to establish a seamless, invisible and cost-competitive cross-border program to deliver goods to the customer’s door.

A corollary of broadband penetration and high web usage in Canada is the spread of technology-based payment methods targeting tech-enabled customers, including mobile wallets. A number of initiatives are underway on this front in Canada. They present an array of legal issues, from technology licensing to privacy requirements for customer data, which may be different than home-country regulations. Hence, local advice is strongly recommended.

These are exciting times in the Canadian retail trade. With some sound cross-border planning, foreign retailers undertaking or considering a Canadian expansion can smooth their entry and enhance their success. ■

Claire M.C. Kennedy is a

Q: Interested in Section 337?

A: Contact the experts with 30 years of success.

corporate tax partner based out of Bennett Jones’ Toronto office, where she provides tax advice on M&A and corporate finance transactions and advises clients on transfer pricing issues in cross-border investments.

She also represents clients during tax and transfer pricing audits and disputes with the Canada Revenue Agency. kennedyc@bennettjones.com.

45

Darrel H. Pearson, co-chair of Bennett Jones’ international trade and investment practice, is widely recognized for his work in the fields of international trade and customs law. He has represented domestic and international clients in many of the most important customs and trade remedy cases before all relevant Canadian tribunals and courts, including the only two cases involving customs law and international trade remedy law heard by the Supreme Court of Canada in the last 50 years. pearsond@bennettjones.com

© 2010 American Bar Association

www.adduci.com

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THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2012

Ways Attorneys

Waste Money

By Patrick Lamb

A

ttorneys can’t stay relevant or accessible to clients if their operating costs are bloated or their practice methods are inefficient. Effective marketing by highpriced lawyers has created the view that success comes with a price, generally a high one.

Nevertheless, these days keeping the price low is crucial. In order to trim legal bills and pass cost-saving methods down to clients, attorneys have to look for creative ways to keep their overhead low while still ensuring the quality of their work. continued on page 51

47

Jury Still Out on

Email Notification of a Class Action

By Aideen Gaffney and Andrew Shimek

48

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2012

U

nder Rule 23, individual notice in class The first involves the contact information action cases has been required as the for the potential class members. In the majorbest notice practicable under the circum- ity of cases this information is maintained in stances since 1974 and the Eisen v. Carlisle & a computer spreadsheet or database file. The Jacquelin case. This was interpreted by Ohio availability and quality of this data and how it courts, in West v. Carfax Inc. (2009) to reis stored are crucial factors. In an ideal world, quire notice by mail to all class members whose data would have been properly compiled and names and last known addresses are availformatted and could be extracted easily, but able from a defendant’s own business records With that as the context, In many cases, a combination of mail and notice has traditionally been given by first-class email can work well to ensure adequate notification. mail, but email notification for some or all of the individuals in a class action is becoming increasingly comthat is rarely the case. Email files, for example, mon as a secondary notification method. typically contain large numbers of records that Courts remain conflicted but tend to agree cannot be sent because of incomplete or obvithat direct mail should be used when possible. ously fabricated addresses.

However, when physical addresses are not availAnother challenge involves formatting the able or when other case-specific circumstances notice so that it will not be rejected as spam. warrant, email, when carried out correctly, has Careful attention should be paid to determining been upheld as a defensible alternative. the subject line text, the name of the sender and In many cases, a combination will work. the main body text of the email message.

For example, in a recent case the plaintiffs Craft all legal notices that will be sent by email wanted to notify the entire class by both email in text format, using concise plain language. The and postal mail. The class consisted primarily notices should be modeled after the Federal Judicial of bank employees whose physical addresses Center’s illustrative model for publication notices. were on record. The court ruled that the Important dates and deadlines should be bank had to send notice by mail to its current bolded in the body text, and the subject line employees, whereas email as a second mode should be short and clear (e.g., “Class Action of communication in addition to mailed notice Settlement Legal Notice”). The notice should was an acceptable notification method for forfeature a prominent link to the settlement webmer employees whose addresses on file may site and language that encourages recipients to not have been accurate. “click here.”

In most cases, email is a lower-cost option.

Conclude the message with a brief statement But when direct mail is a better way to notify a allowing users to unsubscribe from further class member, the law, in the words of a 2007 transmissions in accordance with CAN-SPAM Eastern District of New York decision (Karvaly regulations. v. eBay, Inc.), “is quite clear that concerns about the financial burdens of such notice cannot SEND EMAILS IN SEGMENTS excuse noncompliance with that requirement.”

Delivering hundreds of thousands or millions This doesn’t mean that email notice cannot be of emails is not just a matter of teeing up and used, simply that notification must be as complete, pressing send. Emails must be staged in order to accurate and defensible as possible, given the par- maximize their delivery potential and miniticular circumstances of a case. Thus it’s important mize the impact of spam filters. Even with the to choose the most effective notification method, most expertly formatted notice, Internet service or combination of methods, to reach the largest providers may reject a large, unexpected mass number of potential class members. emailing. Many Internet service providers recLegal implications of email notice have tendommend sending emails out in blocks of 25,000 ed to receive a good deal of attention, but what per hour. Parties to a settlement must not expect are the practical and logistical issues? Here are a large email notice project to be executed all some of the most common ones. at once.

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oct/ nov 2012 E X ECUTIVE COUNSEL

Aideen Gaffney is an

50

attorney and Director of Litigation Solutions for Epiq Systems. She has 11 years experience in complex litigation, specializing in eDiscovery, settlement administration and data breach consulting. agaffney@ epiqsystems.com

Andrew Shimek is an attorney and Senior Vice President for Epiq Systems Class Action & Claims Solutions, a division of Epiq Systems.

He has 12 years of complex litigation experience, specializing in electronic discovery, settlement administration and data breach consulting. ashimek@ epiqsystems.com

STREAMLINE THE CLAIMS PROCESS Notify the large service providers like Yahoo!, As discussed above, the email notice should AOL and MSN in advance of any mass emailing. contain a link to a dedicated settlement website This practice is known as “whitelisting.” It lets that class members can click to access court providers review the email content in advance and documents, obtain answers to frequently asked configure their filters to not reject it when sent. questions, or even file a claim. The linking and Even then, the emails will likely need to be sent on a rolling basis over several days, or even Even with the most expertly formatted notice, weeks, to avoid the spam tag. Since the emails are Internet service providers may being sent for purposes of legal notice, reach and reject a large, unexpected mass emailing. frequency metrics are vital.

It is imperative that the party sending the emails measures the campaign delivery metrics and has tracking features associated with email notice offer significant advantages in the claims a follow-up notice strategy ready for messages that process. Used properly, email can increase cost cannot be delivered. efficiency in the claims process.

Each message will fall into one of three catIn addition to including a link to the settlement egories after it is sent. website, configure all email notices with a personal identifier that will be recognized once a class mem• A “successful delivery” email is accompanied ber clicks to access the settlement website. This enby a delivery notification indicating the ables the settlement administrator to log how many email was received and confirmed. However, it does not necessarily mean the message was email notice recipients visit the website. If the site delivered to the intended recipient. Email servers is configured to receive claims, as it should be, the identifier also makes it possible for the submitted may provide the “sent” code and then programclaim to be automatically linked to any personal matically discard the email as spam or place the information on record for the class member. email in the recipient’s junk email folder.

This automation, coupled with the infor• A “true undeliverable” email (also known as a “hard bounce”) is accompanied by a return mation that can be tracked through the email notification indicating that the email address is notice and settlement website, greatly decreases invalid. Have a Plan B for true undeliverables. the time it takes to process and approve claims If postal mailing addresses are available, the and can reduce the overall administration costs.

Cost savings, process efficiencies and widesafest option is to follow up with direct mail notice. If postal mailing addresses are not avail- spread use make email notification an attractive able, a well-designed supplemental publication option for class action lawyers. But despite the benefits, the question remains: How do lawyers notice program should be considered.

• An email accompanied by a return notifica- ensure an email notice plan is acceptable? Recent court cases, while avoiding bright-line judicial tion indicating that the message was blocked guidance, have served to further underscore the for some reason other than an invalid address (e.g., full email box, problems with the receiv- importance of experience and caution when it ing server or the receiving server rejected the comes to class notification. Each class is different, and a vetted process is important for defensibility. email), is known as a “server rejected undelivRegarding the legal adequacy issue, much erable,” also called a “soft bounce.” The best remains for the courts to settle, so the best thing to do is try again. “Server rejected undeliverables” warrant second and, if needed, third approach is to proceed with caution. Prepare attempts at delivery. Server and inbox issues in advance for the challenges of electronic communications, and supplement any notice can usually be resolved within a few days. plan involving email with other appropriate It is best to wait several days or a week after notice mechanisms to ensure that notice is the initial attempt before trying again to ensure effective in reaching an adequate percentage of the class. Engage a notice expert and claims the server issues have ended. A good percentage administrator and stay involved in the notice are likely to bounce back again, at which time the procedure outlined for “true undeliv- process, to ensure each issue is addressed well in advance of the notice delivery deadline. n erables” should be followed.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2012

Ways Attorneys Waste Money continued from page 47

Here are some common cost-inflating missteps that attorneys make: Filing needless motions. Motions are the oil that keep the wheels of justice turning, yet there can come a time when motions are unnecessary or over-used. The time involved in writing and filing a motion can be lengthy, particularly as the process generally includes one and frequently two court appearances.

motivates them, not something that needs to be investigated. The desire to know all that is knowable about a case is an indulgence.

When looking to cut costs and provide expert legal advice, less is often more.

Contention with no purpose. There is nothing like achieving a victory, even if it’s over a small matter like a court date or a deposition location. Lawyers love to hone their skills by fighting about process – the order

Why have young lawyers draft something that will be redrafted by a more senior lawyer?

Patrick Lamb is a business litigation attorney with the Valorem Law Group.

He is a Member of the Federal Trial Bar, and he is admitted to bars of the U.S. Supreme Court and Courts of Appeal for the Fourth, Seventh and Eleventh Circuits. patrick.lamb@ valoremlaw.com

These motions sometimes serve no strategic or tactical purpose, and they might have no effect on the outcome of the case. Since most attorneys serve their clients on a by-the-hour basis, this means that their final bill can increase significantly, with no strategic or tactical benefit to show for the investment.

Too many cooks. Why send two lawyers to court, or have two or more attend depositions? Why have young lawyers draft something that will be redrafted by a more senior lawyer? While these are common practices among many law firms, the truth is that they aren’t necessary and can increase costs dramatically. Additionally, they complicate the case. More schedules have to be navigated, more opinions must be taken into account.

These inefficiencies can be easily avoided, but few attorneys make the effort to understand cost-drivers. As a result, they don’t cull their team to the minimum and don’t revise work process to maximize efficiencies.

Needless focus on minutiae. Cases turn on a very small number of facts and a very limited number of documents. Lawyers, like anyone, might wonder why something happened or didn’t, but mostly it’s curiosity that

in which things will happen, where meetings will occur, what information will be shared.

While it’s sometimes crucial to play hardball, more often than not these issues are simply not worth the debate. In those cases, make a deal and move on. Fight the fights that make a material difference to the outcome.

Missing opportunities for resolution. It is important not to put pride ahead of the client’s best interest. Sometimes settlement is the most cost-effective outcome. While no one likes to appear weak (especially lawyers), it’s important to remember that making an overture to settle is not a sign of ineptitude. Smart attorneys settle cases early, before running up costs. They put a client’s interest ahead of their ego.

As the times change and clients’ needs change, attorneys must modify procedural and billing behavior. The key to running a successful business these days is keeping costs low across the board so that the client can receive the best price and the best service possible. In that way, lawyers can ensure that they maintain their integrity and their client base, along with positive word-of-mouth and reputable standing. n

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k s i R e g a n a M o t y a W e On r o f g n i t c a r t n o C When 52

e c i v r e S IT s r e k r o W ostakos

eK

By Georg

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2012

T

o stay competitive, service organizations have increasingly moved from reliance on traditional, long-term employment models to using contingent workers – and in particular, independent contractors – to handle on-site IT service work. Using independent contractors enables the fulfillment of work on demand and helps IT service companies lower costs by reducing overhead, among other benefits.

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The increasing use of independent contractors has helped fuel the development and increased use of Variable Labor Management Platforms (VLMPs) in the area of IT field services. A VLMP is a web or cloud-based service that lets companies access, procure and manage contingent labor to address their variable IT labor needs.

VLMP’s offer three advantages. First, they allow service companies to work directly with independent contractors who have the appropriate technical talent on short-term projects that can be scheduled in less than 24 hours.

This article will focus on the third issue.

No matter how much care is taken to keep job sites safe, accidents do happen, and they can result in personal injury, property damage or other financial losses. The IT service industry is not immune from this reality. The service company working with a VLMP for service delivery needs to be aware, specifically, of the potential for damage to expensive equipment being installed or repaired, property damage to the job site and corruption of intricate IT or financial systems. In addition, there is

There are inherent risks that come with engaging and managing independent workers. These risks include failure to deliver high-quality service, the potential for misclassification of the independent contractor as an employee, and the risk of loss for personal injury or property damage related to the service event.

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George Kostakos is Vice President and General Counsel of OnForce, Inc. He manages company legal matters and counsels executives and the board of directors regarding the company’s strategic direction. OnForce connects service buyers with a network of skilled service technicians in the United States and Canada. george.kostakos@ onforce.com

Second, they insulate IT service companies from the administrative hassles often associated with managing individual contracts and producing Form 1099s. Third, VLMPs typically leverage market competition to obtain lower prices by 30 to 50 percent, which is notably better than more traditional, internally managed contractor networks or other outsourcing models provide.

However, the increased use of independent contractors and VLMPs raises a concern among the parties involved in service events – the VLMPs, the service companies, and the independent contractors – regarding the inherent risks that come with engaging and managing independent workers. These risks include failure to deliver high-quality service, the potential for misclassification of the independent contractor as an employee, and the risk of loss for personal injury or property damage related to the service event.

the risk of personal injury to the independent contractor, especially considering this kind of service frequently involves the use of ladders or power tools. Finally, there is the potential for a security risk.

The question then arises: Who bears the risk of loss for personal injury or property damage in a VLMP scenario, and how can insurance coverage help mitigate the risk?

Some VLMPs provide this insurance and some don’t. The typical marketplace VLMP does not. It is not designed to handle the risks because of the lack of clarity of the relationships among the parties to the service event. In a typical marketplace VLMP, the platform vendor engages in two separate transactions with two separate parties for each work order completed on its platform. In one transaction, the VLMP receives a request for service fulfillment from the service company. In the other, the VLMP identifies an independent contractor to fulfill the buyer’s

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2012

request. These relationships are typically completed without the benefit of contractual terms outside of the limited terms of a work order.

These separate transactions result in a lack of clarity among the parties regarding the respective rights, duties and obligations owed from one to the other, thus exposing the service company to various risks, including loss related to personal injury and property damage.

In contrast, the general contractor VLMP retains the benefits outlined above, but solves the risk assumption problems of the typical marketplace VLMP. By assuming the role of general contractor, it shifts many of the risks arising from service events squarely with the VLMP rather than the service company. As compared to the loose arrangement in the marketplace model, these agreements clearly articulate the parties’ duties, and specifically place the risk associated with personal injury and property loss, and the responsibility for securing insurance coverage to address potential losses squarely with the VLMP. The general contractor VLMP either addresses the risk issue by obtaining its own insurance coverage for the acts of its independent contractors, requires them to carry their own coverage, or both.

In any event, the general contractor VLMP offers broad protection for the service company by providing industry-standard insurance coverage for workers’ compensation, general liability and errors and omissions claims.

Workers Compensation Insurance provides wage protection and medical benefits for workers who are injured in the course of their employment. These benefits replace the worker’s right to sue for recovery of lost wages and expenses incurred as a result of his or her job-related injuries. The benefit to the insured is immunity from a lawsuit by a worker to recover for losses that result from a work-related injury.

General liability insurance protects a business from claims for recovery related to property damage or personal injury arising from the operation of the business. In the world of field service, a general liability policy should cover claims arising from a service event, including, but not limited to damage to items (e.g., furniture) physical structures (e.g., wall, floor, ceiling), and bodily injury to someone other than the independent contractor.

Errors & Omissions insurance covers economic loss caused or arising from the independent contractor’s negligence in performing the service event, including hard drive data loss causing economic harm or point-of-sale device failure causing business loss of revenue.

The benefits to the service company are clear with the general contractor VLMP model. This model retains its flexibility for providing labor for short-term projects in a wide geography, assumes the administrative challenge of managing the independent workforce and can deliver the service event at a lower cost than more traditional service providers.

The service company can take comfort in the fact that the general contractor VLMP stands by the quality of the service event and provides coverage for losses that may arise. It handles claims when property damage or personal injury matters arise. It bears the responsibility for investigating losses, interacting with the insurance carrier and the independent technician, and engaging in efforts to resolve any claims.

These benefits enable the service company to focus on what is most important: running its business. n

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THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2012

A Primer for Chinese Investment in America Pick the Low-Hanging Fruit

By J. F. Karch

F

or Chinese businesses, investors or entrepreneurs seeking to establish business in the United States, certain fundamental considerations are at issue. This article provides an overview of the crucial decisions which must be made and makes a single critical recommendation: Take a low profile approach of initially investing in minority shares of business interests in non-threatening industries that are armslength from possible national security considerations. This strategy of picking ripe “low hanging fruit” by staying under the radar avoids traditional protectionist and security arguments against foreign investment.

Success stories abound. According to an article last year in the New York Times, there are several examples that demonstrate a powerful mutually profitable trend: Solar Power Inc. of Roseville, California received an infusion of $33 million from Chinese solar cell manufacturer LDK Solar, to install solar capacity in Los Angeles Staples Center and 20th Century Fox studios. MVP RV of Riverside, California received investment of approximately $300 million over time, plus order contracts of approximately $1 billion per year over three years, for recreational vehicles from Winston Battery of Shenzhen, China. Synthesis Energy Systems of Houston, Texas received an $84 million investment from Zhongjixuan Investment Management of Beijing, to assist in development of new technology involving proprietary intellectual property coal-burning technology for evolving Chinese companies. And Pansun’s, a California corporation distributing sportswear and fashion apparel, joined with Shanghai Tiqiao Textile

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and Yarn Dyeing to help fund clothing designers and thereby ensure long term economical merchandise supplies to such leading retailers as Saks Fifth Avenue, Bloomingdale’s, Dillard’s and Nordstrom’s department stores.

Much U.S. government policy currently favors foreign investment, in order to foster job creation that enhances the tax base and helps balance deficit budgets.

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John Frederick (Rick) Karch is a partner in the International Corporate Transaction Group at WHGC PLC, an IP and international law firm based in Newport Beach, CA. His practice covers a broad range of complex individual, corporate, financial and tax planning matters arising in connection with domestic and international transactions.

RickKarch@ WHGCLaw.com

The fundamental ways to enter business in the United States are to buy into an existing business outright, merge with an already existing business, joint venture with an existing business or simply start-up a new business from scratch.

Buying or venturing with an existing business is generally termed “Foreign Direct Investment” (FDI), while the start-up of a new business is often referred to as “Greenfield Investment.” In addition to FDI investment, there may also be indirect investment by legally termed “Non-resident Aliens” through off shore investment entities created for specific investment opportunities.

Each form of entry investment has unique characteristics and consequences over time, particularly related to the various tax regimes applied to non-resident aliens by federal, state, and local (county and/or city) authorities in the United States. Properly structured deals can be advantageous, since much U.S. government policy currently favors foreign investment in order to foster job creation that enhances the tax base and helps balance deficit budgets.

Initial considerations for any entity contemplating U.S. investment are: (1) the target business or industry, (2) the type of entity and choice of laws, (3) the amount of capital to be invested and the form of funding, (4) the ownership structure in terms of investor participation and management positions to be held, if any, (5) political and psychological barriers and (6) pertinent

regulation and tax regimes. As examined below, many of these considerations are interrelated.

Potential target businesses or industries are almost unlimited in the United States. However, it’s prudent that foreign investors act with forethought to avoid government challenges, primarily due to a perceived threat to U.S. national security. Such challenges are a distinct possibility in industries such as electronics-manufacturing and government contracted aerospace or weaponry, sensitive software platform development programs, valuable natural resources, and contracted security enforcement service companies.

National security aside, some potential investments may be taboo simply because they are considered sacrosanct. Recall, for example, how Japanese investors sought to purchase Pebble Beach Golf Course in the 1980s, with plans to develop the property’s facilities for resale as condominiums. After they had some initial success, the California Coastal Commission refused to permit property use changes (undoubtedly “protectionism”) of the internationally-famous golfing resort on California’s Monterey Peninsula.

With regard to choice of entity and choice of laws, there are a number of considerations.

Any business may be owned by an individual as a “sole proprietorship,” but the most common formally recognized forms of business are a corporation, a limited liability company (LLC) or a partnership. These are creatures of each state in which the entity is formed under corporate or business laws of that particular state. Each such entity in itself has certain rights, obligations and liabilities, based on those laws.

Accordingly, it is important to make an informed choice regarding both the particular U.S. state for the location of a business and the type of entity to be established. Consider also that if an entity seeks to do business in states other than its state of formation, it is required to register with that state (and to pay state taxes due to that state).

A joint venture is also an option.

When money is invested, it can be exchanged for some form of ownership in the business, generally represented by an instrument or “security,” such as equity, debt or a hybrid.

Equity is stock (common voting, common non-voting or preferred, for example) in a

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2012

corporation; membership interest (managing or non-managing) in an LLC; or partnership interest (general or limited) in a partnership.

Securities and securities transactions are strictly regulated at both state and federal levels, but there are sweeping exceptions that can minimize impacts and implications of the securities laws.

Debt takes the form of an obligation to repay money, most commonly as a loan or bond.

Finally, hybrid securities involve combinations of equity and debt, such as stock with a “warrant” for subsequent options to purchase additional shares, or a “debenture,” which is a loan with a right to convert to equity under particular circumstances.

Each form of ownership has unique characteristics and, as a matter of law, a particular priority in recouping any residual investment in the event of failure of the business. Balanced with the rights associated with each such form of ownership, the amount of investment at risk is, of course, of paramount importance.

As reported by the New York Times and Associated Press, China Investment Corp.

(CIC), controlling some $300 billion of funds (a fraction of Beijing’s huge foreign reserves – on the order of $3 trillion) wisely targets relatively small transactions, such as Visa Inc. ($350 million), Apple Inc. ($6.5 million), Coca-Cola Co. ($9 million) and Goodyear Tire & Rubber Co. ($1.5 million). In general, CIC follows the strategy suggested here: a low profile approach of investing in minority business interests in non-threatening industries.

In contrast to CIC, China’s largest telecommunications network company, Huawei, has been excluded or impeded in a number of its investments because Huawei sought to contract or invest in national security sensitive telecommunications deals with Sprint-Nextel and 3Leaf.

The form of investment will usually dictate where the investor is positioned within the structure of the business and the extent of influence or control that might be exerted on operations. As a general rule, equity holders will appoint directors or managing members or partners to oversee the business. They in turn select officers to conduct day-to-day opera-

tions. Unless otherwise formally modified, a majority vote by percentage of interests held rules. The threshold issue is how much needs to be invested consistent with the degree of control desired by the investor.

The appropriate amount of investment will be determined by the goals of the investors and the overall value of the business. For example, when investing in a corporation with a value of $10 million, would owning a “minority” interest of less than 50 percent (less than $5 million) of the voting common stock be acceptable, or would controlling interests of greater than 50 percent be necessary?

The tax regimes at all levels of U.S. government are complex and arguably onerous, particularly when tax assessments arise after the fact of most transactions. However, there are various tax incentives built-in for foreign investment, and there are a variety of structuring nuances that may be utilized to address tax consequences.

Among them are reduction by credits and other offsets afforded by statute, deferral to later payment (with time value of money advantages), converting ordinary income to capital gains at lower tax rates, or diverting tax exposures to other taxpayers at lower tax rates.

China Investment Corporation follows the strategy suggested here: a low profile approach of investing in minority business interests in non-threatening industries.

It is important to understand that the character of income (active from operations or passive from rents, royalties, interest, etc.) triggers different tax consequences. Also, there are a variety of “hidden” taxes for gifts of property, and for property present in the United States for deceased alien investors, whether resident or non-resident, married or unmarried, and so forth.

In conclusion, it’s clear the low-hanging fruit strategy allows Chinese investors remarkable business opportunities in the US. n

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THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2012

E G A R E V O C E C N A R U INS S N O I T A G I T S E V N I KILLALEA FOR .

B A D I P V A C D F BY

H

ighly-publicized allegations of Foreign and the cost may not be feasible for small to Corrupt Practices Act violations have medium-sized companies. renewed focus on the FCPA and its poMany companies faced with an FCPA intentially severe penalties. Department of Jusvestigation, therefore, will have to rely on their tice enforcement activities have been directed directors and officers liability coverage. Other against public and private entities, as well as policies (e.g. errors and omissions) also could individual officers and employees. apply, depending on policy language, and these The FCPA makes unlawful any payment – policies should be carefully reviewed. or any offer to pay – anything of value (money In general, D&O policies cover defense or gifts, for example) to an officer or employee costs and civil damages arising from alleged of a foreign government, or to an agency or “wrongful acts.” When a company’s policy instrumentality of a foreign government, for contains restrictive policy language, substantial the purpose of obtaining a business benefit. portions of FCPA-related losses that could and FCPA compliance is complicated by the fact should be covered may go uncovered, to the that companies in some countries are partially tune of tens of millions of dollars. government owned and may be deemed a governmental instrumentality for FCPA purSCOPE OF COVERAGE poses. For a helpful description of the FCPA The operative language varies among policies, and links to other useful information, see the so it is critical to review your policy carefully Department of Justice website, http://www. before claims arise. Although insurers generally justice.gov/criminal/fraud/fcpa. issue form policies, they frequently have difResponding to an FCPA investigation can be ferent forms of those policies and will negotiate extremely costly. For example, in its 2011 An- among forms. Moreover, different insurers nual Report, Weatherford International reported use different forms of policy language, some that it had “incurred $123 million for legal and providing coverage that professional fees in conis more expansive than e nection with complying others. Accordingly, d lu policies inc with and conducting” the there is an opportunity Many D&O officers and , rs to FCPA and other investo negotiate, even durc e ir d all er poli- ing a policy term, that th o e tigations. Avon Products il h w , s employee a reported in its 2011 SEC many insureds neglect. n to capture cies fail eve l.

Form 10K that it spent $95 D&O polie s n u o c l nera e g ’s y n a p million relating to an ongocies commonly m co ing FCPA investigation and cover “insureds” for compliance reviews. “loss” arising from “claims” resulting from Given the stakes, any company engaged in “wrongful acts.” Wrongful acts typically are overseas sales should be concerned both with broadly defined to include some combination FCPA compliance and with insurance to cover of “errors,” “misleading statements,” “acts,” the costs of an investigation. Some insurers “misrepresentations,” “omissions,” “neglect” have begun to market FCPA investigation-spe- and “breaches of duties.” cific insurance policies, but they are expensive As to who is insured, D&O policies may

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Several common exclusions are cited by insurers in arguing for no or limited coverage for FCPA or other governmental claims. D&O policies typically exclude coverage for any intentionally fraudulent, dishonest or criminal act or omission. Insurers argue that FCPA claims involve purposeful misconduct that it had d e rt o p re and thus such exclusions apply. l a ssional Internation fe rd ro o p rf e d n th a a l e a Insureds should insist on a form of W r leg 23 million fo h a n d c on it w g policy that narrows the application in ly p “incurred $1 on with com s. ti n c o e ti n a n g o ti c of this exclusion to formal adjudicas e in v fees and other in A P C F ” g tions or admissions of fraudulent, n ducti dishonest or criminal conduct. The unwary, however, have purchased policies where the Some companies have not purchased entity coverage (which covers the organization exclusion is triggered by mere allegations of fraudulent, dishonest or criminal conduct, or directly in addition to its directors and officers) or fail to understand that D&O coverage which arguably require a separate determinacan include the company. In the FCPA context, tion in a coverage proceeding as to whether the underlying conduct was dishonest or crimisuch coverage is critical.

Many D&O policies broadly define “the in- nal. By insisting on clear “final adjudication” language, companies will secure the narrowest sured” to include all directors, officers and employees, while other policies are more restrictive, even possible exclusion.

In the event there is a final adjudication that failing to capture a company’s general counsel. It would trigger an exclusion, most D&O policies is imperative to review carefully each policy and entitle the insurer to a refund. obtain an expansive definition of who is insured.

Contractual liability exclusions typically An issue of particular concern in the conapply only to entity coverage and thus do not text of the FCPA, as well as other government limit coverage or reimbursement for individuinvestigations, is the definition of “claim,” als. FCPA liability is statutory, not based on a which likely will determine the coverage trigbreach of contract, but increasingly insurers are gering event. Expenses incurred in addressing using broad language and arguing that any claim a governmental inquiry that is not a claim, as that even “relates to” a contract or agreement defined, will not be covered. A policy with a is excluded. For example, a creative insurer may narrow definition of claim, such as “a written argue that payments that allegedly are unlawful demand for payment or complaint,” is much under the FCPA were tied to a contract, i.e., a more restrictive than one that includes, for example, “a proceeding or investigation com- payment to influence the award of a contract.

Many courts have taken a jaundiced view menced by the service of a notice of investigaof insurer attempts to vitiate coverage through tion or subpoena or similar document.” an overly broad application of a contractual In the FCPA context, massive defense costs David B. Killalea is a partner in the Litigagenerally are incurred without a written demand liability exclusion. Insureds should seek to tion and Insurance avoid such arguments by insisting on more for payment or complaint, so it is vital to obtain Recovery Groups of narrow contractual liability exclusions that tie coverage with a broad definition of “claim.”

Manatt, Phelps & Philto insurers’ legitimate interests in not guaranlips LLP, in the firm’s teeing contractual performance.

POTENTIAL LIMITATIONS Washington DC office.

Some D&O policies have restrictive definiHe represents corpoEven with broad coverage terms, D&O insurrate policyholders in tions of what constitutes a covered “loss.” ers limit their exposure through exclusions. As analyzing, negotiating Although definitions are not exclusions, the with the affirmative coverage grant, variations and litigating insurin exclusionary language can have a substan- effect of bad language is the same. For example, ance claims. continued on page 64 tial impact on coverage. dkillalea@manatt.com cover not only directors and officers, but also other employees and even the company itself.

D&O policies are available to cover individuals; companies, to reimburse for individuals’ reimbursable losses; and the company itself.

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Insurance Coverage for FCPA Investigations continued from page 62

without favorable policy language, costs incurred in responding to government requests for information may not be covered losses. In part this can be addressed through a broad definition of “claim,” but it also should be addressed with a broad definition of loss. Also, giving prompt notice will support the insured’s claim that a loss resulted from a covered claim.

In addition, a company that receives a request to voluntarily produce information related to a potential FCPA investigation may want to consider

insurance issues in the initial phase of addressing a potential government investigation. Companies nevertheless should strictly follow insurance policy notice provisions, to avoid even the argument that they have forfeited coverage.

Companies should accept only policies which provide that the dishonest conduct of one employee is not imputed to other insureds.

Such “severability provisions” also should include language providing that one person’s

f addressing o e s a h p l ia the init s should nce issues in ra u s in nevertheles f s o ie k n c a a p tr m e e o s lo estigation. C avoid even th v It is easy to in to t , n s e n io m is rn v ove tice pro e. a potential g ce policy no n ra u s in ited coverag e w rf o ll fo fo e v y a tl h ic str at they argument th

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requesting that DOJ issue a formal subpoena, which under many policies and some court decisions constitutes a claim.

OTHER KEY PROVISIONS Providing timely notice of claims generally is a condition to coverage. Providing notice of even circumstances that may lead to a claim will, at minimum, impact what policy period is implicated if a claim arises. It is easy to lose track of

mistake or misrepresentation in the application process does not provide a defense as to other officers, directors or employees. In addition, a policy should include the even broader protection of a non-rescission provision.

FCPA investigations – indeed, many government investigations and whistleblower claims – can impose severe financial burdens. In order to maximize benefits if such an event occurs, focus on your insurance policy in advance and be diligent in pursuing claims. n

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

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Publication Title: Executive Counsel Publication No. 1932-9024 Filing Date: September 30, 2012 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.

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Publication Title: Executive Counsel Issue date for circulation data below: August/September 2012 Extent and nature of circulation:

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Outside county paid/requested mail subscriptions stated on form 3541 (include direct written request from recipient, telemarketing & internet requests from recipient, paid subscriptions including nominal rate subscriptions, advertiser’s proof copies, and exchange copies)

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Average No. Copies Each Issue During Preceding 12 Months

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

24,719

22,058

14,089

9,267

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9,267

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8,182

9,170

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498

95

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117

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8,796

9,265

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22,885

18,532

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1,834

3,526

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24,719

22,058

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

61.6%

50.0%

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).

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