Today's General Counsel, December 2020

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contents

DECEMBER 2020 Volume 17/ Number 5

4 EDITOR’S DESK E-DISCOVERY

7 DIGITAL COLLABORATION AND CLOUD APPLICATIONS ARE UPENDING E-DISCOVERY Disparate platforms challenge the review model.

By Tim Anderson COMPLIANCE

10 THE CASE FOR TRADITIONAL CORPORATE INVESTIGATION Grassroots knowledge and gut feelings may trump AI.

By Benjamin Kunde COLUMN THE ANTITRUST LITIGATOR

12 HOW THE COURTS ARE ENFORCING PROPORTIONALITY IN DISCOVERY Relevance no longer the main issue.

By Jeffery M. Cross

18 FEATURES

14 SUPREME COURT WILL FINALLY DECIDE “GATEWAY” ISSUES OF ARBITRABILITY Beware of subject matter carve-outs.

By Kevin O’Brien 18 THE FOURTH INDUSTRIAL REVOLUTION Laws and regulations weren’t written with blockchain in mind.

By Louis Lehot

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EDITOR’S DESK

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here are many problems vexing this country and its legal system, but disinformation might be the most serious because it complicates every other problem. The digital

universe has been very good at spawning methods of spreading disinformation. Has it finally evolved a way to create trust founded on verifiable facts? In this issue of Today’s General Counsel, Louis Lehot explains why a blockchain can be trusted as a source of truth. He also discusses some legal problems that stakeholders in blockchain solutions will encounter.

Also, in this issue, Benjamin Kunde takes stock of the many inroads AI is making into corporate investigations and makes the case for old-school detective work. Jeffery Cross discusses the concept of proportionality in discovery, something that judges are tuned in to. Kevin O’Brien writes about a gateway arbitration issue that the Supreme Court may finally decide after nine years of litigation, and Tim Anderson examines the ways that new tools for digital collaboration have complicated e-discovery.

Bob Nienhouse, Editor-In-Chief bnienhouse@TodaysGC.com

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Today’s General Counsel (ISSN 2326-5000) is published quarterly by Nienhouse Group Inc., 30 S. Wacker Drive, Suite 2200, Chicago, Illinois 60606 Image source: iStockphoto | Copyright © 2020 Nienhouse Group Inc. Email submissions to editor@todaysgc.com or go to our website www.todaysgeneralcounsel.com for more information.

E-DISCOVERY

Digital Collaboration and Cloud Applications Are Upending E-Discovery

By TIM ANDERSON

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oday’s collaboration data landscape is almost unrecognizable from what it was in the recent past.

About 83 percent of enterprise workloads live in the cloud; app usage has grown by 68 percent over the last four years; and a Harvard Business Review study found that 89 percent of enterprises use some form of collaboration platform for internal communications. As tools like Slack, Zoom and Microsoft Teams gain momentum — significantly accelerated this year by work from BACK TO CONTENTS

home — the corporate data landscape will become increasingly dispersed.

From an e-discovery perspective, this explosion in adoption of new cloud, chat and collaboration tools has created two pressing issues: (1) accessing data residing in disparate platforms and (2) what to do with it once we have it. Beyond those challenges, digital collaboration data is upending the way we approach and conduct e-discovery. In many ways, it is challenging certain aspects of the Electronic Discovery Reference

Model and the way we think about traditional document review. As Slack and collaboration app data continue to proliferate, this will grow more complex. E-discovery teams must be prepared to flex their conventional orientation to data review and learn new ways of incorporating emerging data types into workflows.

Before we dig into exactly how to navigate cloud and collaboration data in e-discovery, it’s important to have a solid footing on how the current tools are impacting the creation and flow

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of information. Many applications provide users with persistent chat functionality, the ability to split users among public and private channels, and integration with other platforms. They may be used for communications, file sharing, project management, storage and connectivity between organizations. Legal and compliance

efficient workflows for finding key information within these shortform messages.

Data collection methods for Slack and other cloud applications are often dependent on the version in use. Access and export options can vary widely, and in most cases technical expertise is required to extract the files and

Legal and compliance teams should establish a bridge with IT to understand the universe of applications in use within the organization. teams should establish a bridge with IT to understand the universe of applications in use within the organization; what versions of Slack, Teams or other platforms are deployed; and the existing rules and how they are managed.

Our team’s first in-depth e-discovery matter with an unconventional cloud data source was about five years ago in an IP theft litigation that involved key evidence within our client’s internal Slack channels. A team of developers had left our client’s organization and started a competitive company with a remarkably similar product offering. We were tasked with identifying their dealings with and conversations about the client’s IP in Slack. We learned a lot about the nuances of working with collaboration apps during that matter and were able to help the client piece together key information for the case.

As the tools have evolved, so have the ways in which they are showing up in e-discovery. Over recent years, our team has developed expertise in collecting data from emerging cloud sources, rendering it for compatibility in e-discovery tools, and creating

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load them into the e-discovery platform. Some tools offer additional capabilities and application programming interfaces for interfacing and integrating with app data.

Additional challenges arise after app data has been collected and extracted. Rendering messages and files into a format compatible with e-discovery that can be analyzed and reviewed outside of its source application is tricky. Looking at a single chat message in isolation doesn’t offer context or relevance to a broader matter. At the same time, individually reviewing tens of thousands of messages in a collaboration channel is a disproportionate use of time, budget and resources.

To uphold the truest representation of a Slack message (or data from other collaboration and cloud applications), teams must understand that these new formats are not necessarily suited to existing discovery tools, processes and workflows. Instead of treating them like conventional data, teams must lean on experts with an understanding of the nuances in new data formats to create efficient, custom review workflows

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that can zero in on relevant data.

This also makes it possible for the legal team to see beyond the content from cloud applications and tie it together with messages from other sources. Conversations about a single topic or issue may start in one app, later move to email, and continue via text messages. The ability to group these related conversations together in a single view is critical to helping legal teams understand their data and build their case.

The environment in which e-discovery and investigations take place has shifted in a profound way. Our approaches to data collection, review and analysis must shift too. We can look at data and analyze information in place and make decisions about it before we move it. We can prepare visual analysis of key content across a massive data universe. We can skip or simplify steps that are obsolete for new types of data and gain faster access to the information we need. Collaboration apps undoubtedly add new, complicated layers to the e-discovery process. But by shifting conventional viewpoints and opening up to new workflows, legal teams will find dealing with new data types far less daunting.

Tim Anderson is a Managing Director in the FTI Technology segment based in San Francisco. He has more than 15 years’ experience in legal technology. He specializes in developing strategies for the preservation, collection, analysis, review and production of electronically stored information (ESI) in enterprise data sources ranging from traditional repositories such as email and document management systems, to cloud-based systems like Slack, Box and Google Apps. tim.anderson@fticonsulting.com

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COMPLIANCE

The Case for Traditional Corporate Investigation

By BENJAMIN KUNDE • Investigative companies are offering more AI-driven services.

In response to client demand, corporate intelligence firms are increasingly implementing new technologies. But is AI the savior of corporate investigations? Or is it pushing the trade to rely on products that could quickly become commodified?

AI IN CORPORATE INVESTIGATIONS

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oday, general counsel rely on corporate intelligence companies for investigative due diligence, asset identification, litigation support and cyber investigations. Because the pandemic is permanently changing how we do business, it is important to start a conversation on the role of advanced technology in those investigations.

Looking at the prospects of corporate investigations amid the rise of AI will help corporate counsel gear up for trends involving risk mitigation, fraud prevention and other sensitive corporate affairs.

Corporate intelligence craft still has an undercurrent of shadowy business practices used for industrial espionage and tracing hidden assets in exotic locales. However, in recent decades, it has evolved from cloak-and-dagger tradecraft

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into a multi-billion-dollar endeavor. Key players range from private investigators and database providers to multinational consulting houses, all of which are increasingly implementing new technologies amid a competitive market and cost-conscious clients.

Talks (increasingly via Zoom) at recent legal conferences from New York to Singapore underscore three hot topics of growing importance across legal and corporate intelligence communities: • Fraud is becoming digital and borderless, often in the form of cyber threats.

• Enterprises that operate worldwide demand reliable, costeffective and pandemic-proof investigative due diligence solutions to screen potential business partners.

TODAYSGENERALCOUNSEL.COM DECEMBER 202 0

In the face of evolving scams and industry competition, corporate investigative firms are being shaped by the evolution of new technology. For example, internet-based databases almost eradicated the need for court runners to hand pull records.

Now, investigative companies are switching to machine learning and automated technologies, particularly when it comes to due diligence and anti-money laundering (AML) investigations.

Startups like Checkr and document verification services like Onfido aim to give established background check companies a run for their money in the low-end segment of mass due diligence. In addition, IBM’s Watson offers corporations anti-fraud programs rooted in AI and mass data analytics.

Unaffected by travel restrictions and social distancing measures, AI-driven investigative products BACK TO CONTENTS

seem attractive, particularly for uninterrupted assistance with due diligence, fraud detection, asset identification and internal investigations. AI can also help speed up data filtering and sorting, lay the track for analysts, and, in some cases, ease the data crunching workload of in-house counsel, attorneys and compliance professionals.

Even so, AI does not come without limitations. AI-based background checks lead to a false sense of security due to a reliance on aggregate risk scores. This confidence allows perpetrators to exploit loopholes, potentially increasing risk.

And while cyber defense can use patterns to detect and prevent some levels of fraud, criminals are continually creating new ways to swindle businesses.

In one of the newest schemes, criminals used AI to generate a voice replicating a CEO and gave instructions for an accountant to wire funds. This deception represents a new generation of phishing that will be hard to detect by simple algorithms, as they have been specifically designed to exploit human weaknesses.

Similarly, deceit tactics utilizing human authority bias (e.g., a scammer pretending to be an FBI agent to swindle employees out of company funds by claiming identity fraud) may only be possible to counter by human intervention.

There are also several other problems preventing a complete embrace of AI in investigations: • Cost. Unless AI applications are scalable for repetitive work procedures, it may not be costeffective to hire an AI engineer to replace a good researcher, investigator or analyst.

• Data Access. Public records BACK TO CONTENTS

and proprietary sources cannot easily be crawled by AI. • Accuracy. AI cannot yet distinguish between persons and companies with common names, providing only 96 percent accuracy.

OLD SCHOOL DETECTION AI cannot yet replace most oldschool investigative methods, nor can it replicate humanbased investigative creativity and curiosity, particularly when investigating complex or confusing matters. Even seemingly straightforward due diligence checks on executive hires, potential joint venture partners or acquisition targets may backfire when they do not include human-powered reputation inquiries and research.

Wire transfers to offshore accounts may be machine-made and cloaked behind corporate shells, but humans initiate the transaction. It takes the human element to combat fraud because machines do not commit fraud, humans do.

Corporate investigators must have extensive knowledge of research techniques, surveillance methods, industry-specific equipment and interviewing techniques to tackle the menace created by con artists. By building local relationships and acquiring grassroots knowledge, researchers can use content memory or gut feelings to make or break a case.

In the current climate of lockdown and quarantine, private intelligence operatives continue to conduct interviews via secure video chat services. It’s the old face-to-face interview done online. Tools like this need to be applied carefully amid the privacy laws and cyber threats that govern corporate investigation, but they will replace in-person interviews

and meetings at an increased rate. Conducting investigations remotely presents a significant opportunity to save money and speed up the investigative process.

Nevertheless, local knowledge and nurtured relationships are essential. So is the in-depth understanding that only human intelligence can bring to bear on fraudsters’ methods.

Balancing new technology with human intelligence will be the key to survival in the corporate intelligence world. The human touch is still necessary to crack not only the biggest and most complex of legal cases but also simple background checks. All algorithms have limits.

Investigative challenges facing corporate counsel are complex.

While AI can cast a wide net in a short time, high-stake matters still rely on human intelligence.

Because of this, corporate intelligence is seeing a strong resurgence in retrospective techniques and initiatives. While AI continues to gain popularity, human intelligence remains the only truly reliable way to obtain and evaluate crucial intelligence, build a case, mount a defense or close a transaction. Human intelligence is more art than science, something with which AI cannot yet compete.

Benjamin Kunde is Executive Vice President of Investigations at the New York headquarters of Interfor International, a corporate intelligence firm. He oversees complex due diligence, litigation support, and high-profile asset recovery matters. Ben.Kunde@interforinc.com

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THE ANTITRUST LITIGATOR

How the Courts Are Enforcing Proportionality in Discovery

By JEFFERY M. CROSS

I

n December 2015, Congress and the Supreme Court introduced amendments to the Federal Rules of Civil Procedure designed to control the costs of litigation, particularly discovery.

Of particular significance was a renewed emphasis on the idea of proportionality in discovery. In my column for the April/May 2016 issue of Today’s General Counsel, I wrote about these amendments, indicating that whether they succeed in reducing discovery costs will depend on whether the courts become actively engaged in accomplishing this goal. Almost five years have passed since the amendments.

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As many magistrate judges handling discovery disputes have noted, the concept of proportionality has been part of the rules since 1983. The significance of the 2015 amendments was to move the requirement of proportionality to the definition of the scope of discovery in Rule 26(b)(1). Currently, the discovery permitted under the rules is “non-privileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case.” The rules explicitly provide factors that the parties and the courts must consider in determining whether the discovery is proportional: “. . . the importance of the issues at

TODAYSGENERALCOUNSEL.COM DECEMBER 202 0

stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.”

The Official Committee Notes to the 2015 Amendments also offer some guidance. The Notes emphasize that “monetary stakes are only one factor, to be balanced against other factors . . . . ” They state that “the rule recognizes that many cases in public policy spheres, such as employment practices, free speech, and other matters, may have importance far beyond the monetary amount involved.”

How have the courts done in interpreting the proportionality amendments to reduce the costs of discovery?

Many courts interpreting the amendments have held that the party seeking discovery must not only address the relevance of the discovery but also establish that it is proportional to the needs of the case. Indeed, several courts have denied discovery requests where the requesting party only addressed relevance but not proportionality. However, many courts have emphasized that the party seeking discovery does not have the sole burden of establishing the proportionality factors.

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The party resisting discovery also has a duty to address proportionality. Indeed, the party resisting discovery may be in a better position to address certain of the factors.

Courts have also emphasized that no single factor is more important than the others and the application of the proportionality factors must be made on a case-by-case basis. In terms of

discovery where it was of little benefit to the issues in the case.

Courts have rejected discovery of “low-probative value information” and discovery only “tangentially related” to the issues in the litigation. One court described this analysis as “focus[ing] on the marginal utility of the discovery sought.” Several courts have considered the amount of discovery already produced in determining

Several courts have addressed the proportionality requirement even when the parties have not raised the issue. the amount in controversy, several courts have denied discovery when the discovery costs exceeded the amount in controversy.

One court allowed a search of the files of only four document custodians out of the eight sought, based on consideration of the amount of money at stake, the size of the enterprise and the value of the custodians’ documents.

Several courts have permitted discovery as proportional when the sought-after information was in the sole possession of the defendant. On the other hand, courts have denied discovery requests that would have minimal probative value, the party with the information was a small, family-owned company, and the time and effort to collect the information was significant.

A number of courts have resolved discovery disputes by considering the importance of discovery to the case. Indeed, some courts have allowed discovery despite the difficulty and expense in responding because the sought-after information was critical to resolving the case.

Conversely, courts have denied BACK TO CONTENTS

whether additional discovery was appropriate.

Many courts have weighed the benefits of the discovery against the cost and burden of producing it. Several courts have rejected discovery when the cost and burden of responding outweighed the likely benefit even though the other proportionality factors were met. Several courts considering this factor have taken into account that many of the documents sought were likely to be privileged, and the responding party would have to incur substantial time and expense to prepare a privilege log.

Although the amendments to the rules clearly indicate that the parties and the court jointly share responsibility to make sure that discovery is proportional to the needs of the case, several courts have addressed the proportionality requirement even when the parties have not raised the issue.

Finally, in my April/May 2016 column, I reported on a trend beginning to be followed by some courts where discovery issues are initially argued in court before full briefing on a discovery motion.

This approach is now being followed by more and more courts.

It does reduce the cost of briefing discovery disputes. And, of course, after hearing arguments, the court can always ask for briefing.

I reported that, after the 2015 amendments were passed, Chief Justice John Roberts felt so strongly about their importance that he made it the focus of his 2015 Year-End Report on the Federal Judiciary. For that report, he noted that the success of the amendments “may require the active involvement of the federal judge . . . to guide decisions regarding the scope of discovery.”

Five years after the amendments, it does appear that the federal judiciary has, in fact, followed the Chief Justice’s call for active involvement.

Jeffery Cross is a columnist for Today’s General Counsel and a member of the Editorial Advisory Board. He is a partner in the Litigation Practice Group of Freeborn and Peters LLP and a member of the firm’s Antitrust and Trade Regulation Group. jcross@freeborn.com

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FEATURE

Supreme Court Will Finally Decide “Gateway” Issues of Arbitrability

By KEVIN O’BRIEN

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S

ince the enactment of the Federal Arbitration Act (FAA) in 1925, volumes of case law have been generated in connection with disputes over the applicability, scope, validity and enforceability of agreements to arbitrate. But sometimes the controversy is not whether the arbitration clause applies but who has the power to make that determination — the arbitrator or the courts. This “gateway” issue has added complexity to arbitration practice for many years. The courts have yet to establish definitive guidance.

The Supreme Court’s decision to grant certiorari for the second time in Henry Schein, Inc. v. Archer & White Sales, Inc. demon-

laws by conspiring to terminate or restrict Archer & White’s distributorship rights. The complaint sought both money damages and injunctive relief.

Schein moved to stay the litigation and compel arbitration in accordance with the provisions of Section 3 of the FAA. The motion was based on a clause in the relevant distribution agreements incorporating AAA commercial arbitration rules (which provide that gateway questions of arbitrability are to be resolved by the arbitrator) but containing a carve-out provision for “actions seeking injunctive relief.”

Archer & White objected, arguing that the dispute was not arbitrable because the complaint

wholly groundless because the injunctive component of Archer & White’s complaint fell within the carve-out in the arbitration clause, and thus denied Schein’s motion to compel arbitration. The Fifth Circuit affirmed, and the Supreme Court granted Schein’s petition for certiorari.

In its unanimous opinion written by Justice Kavanaugh — the first opinion of his tenure — the Supreme Court overturned the Fifth Circuit, holding that the text of the FAA contains no wholly groundless exception. As a result, assessing even a purportedly groundless claim for arbitration is a matter for the arbitrator if the parties so delegate under the contract. The Court added that parties

The District Court had to address the “gateway” question of whether the court or the arbitrator had the power under the contract to make that decision. strates the challenges presented in assessing two fundamental questions, often intertwined: Did the parties agree to arbitrate, and did the parties agree to have the arbitrator decide whether the parties agreed to arbitrate?

This “chicken-and-egg” question has resulted in eight years of litigation, two decisions by the Fifth Circuit and two proceedings before the Supreme Court. The parties are no closer to resolving the merits than they were in 2012 when the plaintiff filed its lawsuit.

CARVE-OUT PROVISIONS The parties were distributors of dental equipment. Archer & White sued Henry Schein, Inc. in the U.S. District Court for the Eastern District of Texas, alleging that Schein and other distributors violated state and federal antitrust BACK TO CONTENTS

included a request for injunctive relief and, under the terms of the arbitration clause, only the court could hear the case.

Schein contended that the contract’s incorporation of the AAA arbitration rules meant that the arbitrator, not the court, had the power to rule on the “existence, scope, or validity” of the arbitration agreement; and therefore the arbitrator, not the court, should decide the threshold question of whether the carve-out for injunctive relief made the arbitration clause inapplicable.

Citing Fifth Circuit precedent, the district court ruled that where arguments in favor of arbitration were “wholly groundless,” the court, not the arbitrator, would decide the gateway arbitrability question. It reasoned that Schein’s attempt to invoke arbitration was

had the power to delegate gateway arbitrability questions to the arbitrator, so long as that delegation was “clear and unmistakable” in the contract.

One would think that the Supreme Court would have remanded with an order to compel arbitration of the gateway arbitrability question. Unfortunately, the lower courts had not expressly determined whether the contract “clearly and unmistakably” delegated this gateway question to the arbitrator, only that a wholly groundless arbitration claim could be disposed of by the courts in the first instance. The Supreme Court directed the Fifth Circuit to consider whether the contract actually provided for delegation, as well as any other arguments that had been preserved.

Consequently, the parties on

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remand argued whether the parties had in fact agreed to delegate the gateway arbitrability question to the arbitrator. Two competing factors were at play: the contract’s incorporation of AAA Rules delegating such gateway questions to

will make its second ruling until 2021. Thus, it will have taken at least nine years from the filing of the complaint for the courts to determine who has power to rule whether the dispute is arbitrable.

Whether any of the parties recall

practitioners in the arbitration sphere. The litigation until now has conflated the key contractual issues: Does the agreement mandate arbitration of the parties’ dispute, and who decides whether the agreement mandates

It will have taken at least nine years from the filing of the complaint for the courts to determine who has power to rule whether the dispute is arbitrable. the arbitrator and the arbitration clause’s carve-out of requests for injunctive relief.

The Fifth Circuit once again refused to compel arbitration. It concluded that the parties delegated at least some questions of arbitrability to the arbitrator. But it held that because the arbitration agreement included a provision exempting certain claims from arbitration (as relevant here, actions seeking injunctive relief), the agreement did not “clearly and unmistakably” delegate the gateway question to the arbitrator.

The ruling prompted Schein’s second certiorari petition to the Supreme Court. It presented the following question: “Whether a provision in an arbitration provision that exempts certain claims from an arbitration negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator.” The Supreme Court granted Schein’s petition, and argument is set for December 8, 2020.

ANTITHETICAL TO THE FAA’s OBJECTIVE This protracted litigation over the gateway issue of arbitrability is the antithesis of the FAA’s purpose to provide an efficient alternative dispute resolution procedure. It is unlikely that the Supreme Court

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the merits of the original dispute remains to be seen.

Moreover, the status of the law pending the Supreme Court’s second ruling is muddled. Parties drafting arbitration agreements today may attempt to include clear and unmistakable language delegating gateway disputes to the arbitrator over and above relying on incorporation of the AAA Commercial Rules. The Supreme Court has made it clear that an arbitrator has the power to determine the validity of the contract where the parties have clearly and unmistakably delegated that issue.

But where the parties have carved out certain types of disputes as not subject to arbitration, even an express delegation clause is currently subject to challenge on the basis that the parties cannot delegate the gateway decision to the arbitrator with respect to any category of dispute that had been carved out by the parties. Although it may seem like a simple matter to eliminate carveouts in the arbitration clause to avoid this issue, exempting claims for injunctive relief is a commonly desired contractual feature.

Given that carve-outs are likely to remain a feature of arbitration agreements, the Supreme Court’s “second bite” at the Schein case is of critical importance to all

TODAYSGENERALCOUNSEL.COM DECEMBER 202 0

arbitration of that dispute? Ideally, the Supreme Court will isolate the second question and answer it conclusively. In the interim, parties should be aware of the uncertainty surrounding arbitration clauses containing subject matter carve-outs.

Kevin O’Brien is a partner at Porter Wright Morris & Arthur LLP, based in the firm’s Chicago office. He is a commercial litigator whose practice involves high-level counseling on litigation strategy, approaches and problem solving. kobrien@porterwright.com

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FEATURE

The Fourth Industrial Revolution Legal Issues Around Blockchain By  LOUIS LEHOT

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lthough most of blockchain’s success over the past decade has been linked to crypto-currencies, distributed ledger technology is poised to move into mainstream applications. As we adapt to a long-term period of social distancing, the paradigm in which technology evolves has been upended, and every member of society has had to quickly find new technology-based solutions to accomplish tasks previously taken for granted. In the coming decade, technology will shift from automating and replacing manual labor to replacing routine cognitive work, and blockchain is poised to be a key driver of the “fourth industrial revolution.”

The paradigm shift into the “fourth industrial revolution” was first postulated by Klaus Schwab

A mistake can only be corrected by adding another block to the chain. in a 2015 article published by Foreign Affairs. It references evolution in the way we live, work and relate to one another, enabled by extraordinary technology advances. According to Schwab, these advances are merging the physical, digital and biological worlds. The social distancing measures required to respond to the global pandemic has put this fourth industrial revolution into overdrive.

WHAT IS BLOCKCHAIN? Simply put, blockchain involves recording information in a way that creates trust in the data recorded.

Blockchain is proof that you own something digital — whether it is BACK TO CONTENTS

a bitcoin or your personal health records. Blockchain proves you are the owner of whatever digital information you have on the distributed, decentralized public ledger. Estimates suggest that blockchain technology has been adopted by more than one-third of the world’s companies.

A blockchain can be trusted as a source of truth. Suppose certain information (data) was included in the blockchain sometime in the past but may not be correct.

Records on the blockchain are immutable and provide an unalterable trail. A mistake can only be corrected by adding another block to the chain with consent from all participants. A blockchain records tangible and intangible assets among a network of peers that use the same software, algorithms and cryptography to maintain the records.

Currently, there are two types of blockchain: permissionless (public) and permissioned (private). Participants use pseudonyms to protect their identity with permissionless blockchains, and there is no identification of participants. Permissioned blockchains are protected by access privileges. Participants are authenticated, and a super-user may control the network.

Permissionless blockchains are considered more reliable because of the consensus principle.

Blockchain currently enables many uses, including tokenization to protect sensitive data, unalterable timestamping, transfer of assets through a payment channel, and facilitation of smart contracts.

By 2023, the global blockchain market is set to reach $20 billion plus. The most prominent and influential companies worldwide have all turned their attention toward blockchain. Tech giants are

investing billions, and Wall Street wants in, too. What makes blockchain so attractive to business?

First and foremost, it reduces operational costs by obviating the need for a centralized authority.

Removing intermediaries is crucial for business because it reduces costs and points of contact, improving company efficiency and growth. Blockchain’s adoption will reduce costs of personnel, support, operations, IT, data breaches and much more.

In addition to blockchain’s efficiencies and security, it allows for the completion of transactions in seconds rather than days. Transaction speed is especially important in international interchanges.

LEGAL ISSUES Stakeholders in blockchain solutions will need to ensure that their products comply with a legal and regulatory framework that was not conceived with this technology in mind. From a commercial law standpoint, smart contracts must be contemplated for negotiation, execution and administration on a blockchain, and in a legal and compliant fashion. Liability needs to be addressed. What if the contract has been miscoded? What if it does not achieve the parties’ intent? The parties must also agree on applicable law, jurisdiction, proper governance, dispute resolution, privacy and more.

There are public policy concerns that should be taken into account in shaping new laws, rules and regulations. For example, permissionless blockchains can be used for illegal purposes such as money laundering or circumventing competition laws. Also, participants may be exposed to irresponsible actions on the part of the “miners” who create new

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blocks. Unfortunately, there aren’t any current legal remedies for addressing corrupt miners.

As lawyers and technologists ponder these issues, several solutions are being bandied about.

One possible remedy involves a hybrid of permissioned and permissionless blockchains. Some transactions require intervention by a responsible party, such as when Know Your Client (KYC) regulations are in play. All participants in blockchains and smart contracts where data is exchanged are data controllers. This means participants must comply with all data protection requirements.

Another consideration is what goes on the chain and what goes in the smart contract and offchain. Although it is possible to include provisions regarding liability, jurisdiction and other legal aspects in the smart contract, this allows no room for interpretation because it is based on conditions.

A better solution may be to have a real contract stored off the chain

but linked to it with a hash-secure value for added confidence.

The ongoing regulatory push for more data with trends such as controlled free trade, increased border security and accreditation of economic operators leads to higher compliance costs. This means that parties trading globally need higher supply chain visibility and security. Data that is both high quality and secure, and trade compliance systems that can cope with the electronic exchange of data, are requirements.

Global trade involves many parties beyond the buyer and seller — customs and regulatory authorities, financial institutions, shippers, brokers and insurers.

There are multiple exchanges of data among those participants, presenting opportunities for implementing a blockchain to trigger and record invoices, bills of lading and customs compliance.

As blockchain technology matures, global trade supply chains will increasingly use the

technology, with the authorities monitoring transactions and compliance with customs declarations, duty payments and sanctions rules. Further, combining blockchain with the Internet of Things (IoT) will give manufacturers the ability to track products, manage risk in distribution networks and demonstrate good corporate governance.

Although no one can predict the future, it seems clear that blockchain will play an important role.

Louis Lehot is the founder of L2 Counsel, a boutique law firm based in Silicon Valley. He is a corporate, securities and M&A lawyer, and was formerly the co-managing partner of DLA Piper’s Silicon Valley office and co-chair of its venture capital and emerging growth company team. louis.lehot@l2counsel.com

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