Today's General Counsel, V11 N2, April/May 2014

APR/ MAY 2014 VOLUME 1 1 / NUMBER 2 TODAYSGENER A LCOUNSEL.COM

THIRD PLAYER CONTROLLING TECHNOLOGY E-Discovery Meets Moravec’s Paradox Good Data Management ➔ Lower E-Discovery Costs Using Your Own ‘Big Data’ IP Law and Sound Business Practice Five Best Practices for Corporate Counsel Defining the New Law Department Library DO LAW DEPARTMENTS NEED A PROJECT MANAGER?

A Today’s General Counsel Survey The Halliburton Decision “Independence” in the Board Room Cartel Enforcement in China Are Trolls Really The Problem?

Litigating The Fear of Cancer Setting Up a Disaster Non-Profit Self-Audits as Roadmap for Regulators Myths about Arbitration

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apr/ may 2014 toDay’s gEnEr al counsEl

Editor’s Desk

Few areas of law have generated as much controversy as securities class action law suits.

For years plaintiffs attorneys operated by citing sudden drops in stock price as evidence of fraud. Every so often they were right, but not often enough according to Congress and the courts. Starting with the Securities Litigation Reform Act of 1995, state and federal legislation and court decisions have made it harder to pursue these suits. In this issue of Today’s General Counsel, Mitchell Lowenthal and Lewis Liman discuss a case before the U.S. Supreme Court, Haliburton v Erica P. John Fund, which some say will put an end to securities class actions. Probably not, according to the writers, but if the Court rules as expected they say it will be significantly harder to certify a class.

The American Invents Act and several executive orders that followed have made life more difficult for so-called “patent trolls,” but as Marla Butler points out in our intellectual property section, nothing in the Patent Act limits the right of patent enforcement to operating companies. That’s a good thing in Butler’s opinion. She notes that Chapter 11 proceedings could have left the creditors and shareholders of Nortel Networks with next to nothing, but instead a consortium of Google’s competitors paid $4.5 billion for the company’s patents. Those patents would have been worthless if they couldn’t be used to pester Google.

Fay Zhou and Clara Ingen-Housz write about cartel enforcement in China, which has become more vigorous recently and combines the features of an enlightened antitrust protocol with an enforcement regimen Western companies might find daunting. They advise assessing risk carefully in light of the unique features of cartel enforcement in China, and to monitor developments closely.

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Finally, I’d like to welcome two new members to our editorial advisory board, Jeffery Cross, a partner at Freeborn & Peters and an antitrust specialist, and Mark A. Carter, who chairs the Labor Practice Group at Dinsmore & Shohl. We look forward to working with them.

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

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apr/ may 2014 today’s gener al counsel

Features

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CARTEL ENFORCEMENT RAMPS UP IN CHINA

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DOES THE MODERN ARBITRATION CLAUSE MEAN THE DEATH OF THE CLASS ACTION?

Fay Zhou and Clara Ingen-Housz Trade associations beware.

Fletcher W. Paddison Contracts can immunize companies against class actions.

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LAW AND THE FEAR OF CANCER

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DEFINING THE NEW LAW DEPARTMENT LIBRARY

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FIVE BEST PRACTICES FOR CORPORATE COUNSEL

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THE FIRST QUESTION: TO ARBITRATE OR NOT TO ARBITRATE

Phil Cha and Dan Farino Competing public interests when plaintiffs claim emotional distress.

Kris Martin Lawyers spend more time on research now than they did before the PC revolution.

Bob D. Rowe What gets measured gets managed.

Mark C. Zebrowski There is an upside and a downside to everything.

COLUMNS

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36 Indexing Makes Data On Varying Scales Manageable

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apr/ may 2014 toDay’s gener al counsel

Departments Editor’s Desk

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Executive Summaries

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GovErnancE

E-DIScovEry

14 Halliburton Decision Could Change the Game, But Won’t End It

20 In Legal Disputes, Make the Most of Your Own ‘Big Data’

Mitchell A. Lowenthal and Lewis J. Liman Does an efficient market reflect false claims?

Larry Kanter Press your IT wizard about the data dictionary.

Marla R. Butler When a patent is sold, the right to sue transfers as well.

22 Early and Routine Data Management Key to Lower E-Discovery Costs

26 IP Law and Sound Business Practice

16 The Evolving Meaning of “Independence” in the Board Room Robert J. Gavigan and Jonathan H. Hofer Different entities, different definitions.

Dave Canfield and John Connell E-discovery needs should be addressed before litigation threatens.

IntELLEc tuaL propErt y

L abor & EmpLoymEnt

24 Claims Without Merit Are the Problem, Not Trolls

28 Safety and Health Audits Can Be Roadmap for Regulators

Christopher V. Carani, Herbert D. Hart III and George Wheeler This is the dawning of the age of the design patent.

Charles Palmer Lawyer involvement doesn’t create attorneyclient privilege.

30 Providing Disaster or Hardship Assistance to Employees Glenn Adams Employer sponsored charities must be structured carefully for tax purposes.

tGc SurvE yS

38 Cautious Endorsement of Legal Project Management Savings in time and money must be demonstrated for CFO buy in.

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Lewis Liman Mitchell Lowenthal Kris Martin Rees Morrison Fletcher W. Paddison Charles Palmer Bob D. Rowe Michael Simon George Wheeler Mark C. Zebrowski Fay Zhou

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today’s gener al counsel apr/ may 2014

Executive Summaries governance

e-Discovery

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Halliburton Decision Could Change the Game, But Won’t End It

The Evolving Meaning of “Independence” in the Board Room

In Legal Disputes, Make the Most of Your Own ‘Big Data’

By Mitchell A. Lowenthal and Lewis J. Liman Cleary Gottlieb Steen & Hamilton LLP

Since 1996, more than 40 percent of corporations listed on major stock exchanges have been targeted by a securities class action suit. U.S. companies were 83 percent more likely to be the target of a securities class action in 2013 than from 1996-2000, despite significant legislation designed to reduce such suits and decisions of the U.S. Supreme Court making them harder to bring. The Supreme Court’s agreement to hear a case presenting the primary basis for securities class actions - the so-called fraud-on-the-market doctrine may be a watershed.

The fraud-on-the-market doctrine is what permits most securities cases to be brought on a class basis. It presumes that the market absorbs all material facts both true and false. Hence, anyone buying or selling securities that trade in an efficient market can show “reliance,” because the trading price by definition reflects allegedly misleading disclosures.

Therefore, proof that the securities traded in an efficient market permits plaintiffs to satisfy the reliance requirement on a class basis.

Late last year, the Court agreed to hear Haliburton v Erica P. John Fund, which will permit revisiting the ruling that allows plaintiffs to show reliance.

Many believe it will be reversed.

The authors say that if it is reversed, class actions may be replaced by actions filed by institutional investors singly or in groups, which will represent exposure of some magnitude to defendants.

Accordingly, however Halliburton is decided, companies will not be able to reduce D&O coverage.

By Robert J. Gavigan and Jonathan H. Hofer Cohen & Gresser LLP

The SEC and the stock exchanges have rules requiring minimum levels of independence for board members in respect to certain acts of governance. There are state rules as well, and proxy advisory firms maintain their own guidelines.

Although the NASDAQ and NYSE independence standards vary, there are a few common themes. The NYSE asks whether a director has a material relationship with the listed company. The NASDAQ asks a similar question. Both offer a list of factors, with substantial overlap, that automatically makes a director not independent. Although the thresholds differ, both exchanges also inquire into as to whether a director or a member of the director’s family has a relationship with a company that had a material relationship with the registrant corporation. Both exchanges generally require that boards be majority independent, and that the audit, nominating and compensation committees be made up solely of independent directors.

The most important state law is Delaware’s, which is built around the idea that judges ordinarily should not second guess the good faith business judgment of business people. Its courts are not, however, solicitous of judgments where there is conflict of interest.

Proxy advisors like ISS and Glass Lewis maintain their own standards of evaluation. They do not have a common standard, but both advisors have propounded tighter requirements than the NASDAQ and NYSE mandates, including with respect to business transactions with the registered company and past employment with the company or related entities.

By Larry Kanter Kanter Financial Forensics LLC

Corporations are sometimes faced with lawsuits whose allegations look plausible. The general counsel knows they are not true, but the legal team needs to prove it. The author, using a hypothetical, explains that this often can be done with data maintained in business computer systems in the form of what is known as “structured data.”

Structured data is stored in fields that are defined in an exacting way by the software. To effectively search structured data, one needs to understand where it’s found. This information can be gleaned by way of a kind of inventory of the data, referred to

by IT experts as a “data dictionary,” which includes critical information that describes the name of each field in the software package, its size, its layout, a description of what should be found in it, its location, and the meaning of its codes and abbreviations.

Using contemporaneously collected data as a basis for addressing litigation issues is always more convincing than trying to “model” data. Most organizations collect significantly more data than even their most technically proficient IT people realize. The most accurate way of determining what relevant data is actually collected is by locating and analyzing the data dictionary.

Once the universe of data is understood, data relevant to the ligation can be extracted from the systems within the organization and “joined” into one database that will allow for the complete examination and, hopefully, resolution of the litigation.

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Executive Summaries e-Discovery Page 22

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Early and Routine Data Management Will Lower E-Discovery Costs

Claims Without Merit are the Problem, Not Trolls

IP Law and Sound Business Practice

By Marla R. Butler Robins, Kaplan, Miller & Ciresi LLP

By Christopher V. Carani, Herbert D. Hart III and George Wheeler McAndrews, Held & Malloy, Ltd.

The effort to curb non-practicing entities takes place within a statutory framework that grants inventors the right to transfer a patent, and grants the transferee the right to enforce that patent. Nothing in the Patent Act limits the right of enforcement to operating companies.

The right of a purchaser to enforce a patent is as important to the original patentee as it is to the purchaser. Nortel Networks once dominated the Toronto Stock Exchange, but the company spiraled into irrelevance. Among its last remaining assets were 6000-plus patents and patent applications, which it sold to a consortium of Google’s competitors that outbid Google. The consortium hopes to earn, through its enforcement measures, multiples of its investment, and it hopes to squeeze that money from competitors like Google.

Nortel’s creditors and shareholders received $4.5 billion from the sale.

There are indeed activities that harm our patent system. Mass mailing of letters threatening to sue, communicating false information to potential licensors and knowingly filing a lawsuit that is without merit in hopes of a settlement are all conduct that warrants redress.

In response, individual states have started to look for ways to protect individuals and small businesses from baseless assertions of patent infringement.

In 2013 the Vermont legislature made it illegal to make a bad faith assertion of patent infringement. Vermont has also sued a patent owner under its existing Consumer Protection Act. Nebraska’s Attorney General introduced an almost identical piece of legislation.

This article summarizes some major developments in patent law and their implications for IP practice and business strategy.

The 2011 Leahy-Smith America Invents Act profoundly changed U.S. patent law. In many situations, counsel should obtain separate pre-AIA U.S. patents under pre-AIA law and postAIA patents under the AIA. Any individual patent is either all pre-AIA or all post-AIA, and cannot be some of each.

The 2012 jury verdict awarding Apple $1.05 billion dollars for Samsung’s infringement of its design patent stirred interest in this kind of patent.

In addition to protecting the overall aesthetic design of a product, design patents can be used to protect the aesthetic design of portions of a product.

This strategy is an effective means to secure significant and broad coverage.

Design patents can be acquired quickly and inexpensively. On average, it takes about 12 to 14 months for design patents to issue once filed, and an attorney can typically file an application for $2,000-$3,000.

There is an an abundance of misinformation surrounding post-grant trials at the Patent Trial and Appeal Board. For example, it is commonly assumed that the practitioner’s experience with district court litigation is directly applicable, but The Federal Rules of Civil Procedure are not used in a PTAB trial, though the Federal Rules of Evidence are. “Discovery” is not discovery in the ordinary sense, and a “deposition” is not a Rule 26 discovery deposition. Rather, it is cross-examination subject to restrictive guidelines.

By Dave Canfield and John Connell UnitedLex

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intellec tual ProPert y

There are fundamental differences between litigation support and data management, and if the latter is done intelligently and well, the former becomes become less expensive and more effective.

Traditionally, vendors and law firms have been rewarded with increased revenue by focusing on processing, hosting and review of ever-expanding volumes of data. Per-gigabyte costs for these operations have come down, but the total volume of data associated with each new matter increases at a rate that outpaces the savings achieved via reduced unit pricing.

CLOs should ask vendors how they can help reduce overall spending. Reducing unit prices doesn’t work if data and document volumes continue to increase exponentially. Large chunks of non-responsive data must be eliminated before spending begins on processing, long term hosting storage and attorney review.

Data management takes a step back from the familiar activities associated with the e-discovery cycle as they apply to individual matters, and instead it looks at what’s happening with data before it ever becomes the subject of a discovery request.

Organizations that typically have files that are large in terms of gigabytes but fewer in number may seek vendors offering lower per-document costs.

Organizations with relatively few cases per year involving very large numbers of documents – many of which are likely non-responsive – may cultivate relationships with vendors that can cull and then address document review costs via reduction in rates and/or increases in throughput.

today’s gener al counsel apr/ may 2014

Executive Summaries l abor & emPloymenT

TGC Surve yS

PaGe 28

PaGe 30

PaGe 38

Safety and Health Audits Can be Roadmap for Regulators

Providing Disaster or Hardship Assistance to Employees

Cautious Endorsement of Legal Project Management

By Charles Palmer Michael Best & Friedrich LLP

By Glenn A. Adams Holland & Knight

A Survey of Legal Departments

While a safety audit improves safety and reduces liability risk, it also creates evidence. In the event of an accident or investigation by government regulators, safety audits are relevant to the question of whether the company knew about the hazard and failed to take reasonable steps to correct it. OSHA may allege a willful violation, and uncorrected hazards identified on the company’s audit may support the case. A willful violation can result in penalties up to ten times what they would be otherwise. The evidence is especially compelling to OSHA where an employee has been injured or killed.

By forcing disclosure, it can be argued that OSHA is undermining its own goal of making workplaces safer.

In spite of this argument, OSHA continues to force disclosure of voluntary selfaudits. Business owners need to weigh the risk against the rewards gained from performing voluntary self-audits.

General counsel and other company attorneys should not assume their involvement in audits will protect the results by way of attorney-client privilege, or be viewed as attorney work-product. However, if the audit can be prepared in connection with litigation, it is more likely to be viewed as attorney work-product.

In recent years, OSHA has created numerous emphasis programs targeting specific employers or industries.

If a company is identified as a target, or likely target for one of these inspections, connecting the purpose of the audit to that targeting program may increase the chances of protecting its content.

The Victims of Terrorism Tax Relief Act of 2001 enables employers to fund relief programs through charitable organizations aimed at helping their employees cope with the consequences of a disaster or other hardship. Special rules apply to these employer-sponsored charities. One is that they should not fulfill a legal obligation of the employer. For example, the program should not be part of a collective bargaining agreement or a written employee benefits plan. Similarly, the organization should not be used by the employer to recruit employees or induce employees to continue their employment, or follow a certain course of action sought by the employer.

The organization should also aim to meet the “public support test,” meaning at least one-third of its total support must come from government agencies, contributions from the general public, and contributions or grants from public charities. The group of individuals that may properly receive assistance is called a “charitable class.” A charitable class must be large enough or sufficiently indefinite so that the community as a whole benefits when a charity provides assistance.

If the organization qualifies as a public charity, then donors who make contributions to the organization generally would be entitled to a charitable deduction. The public charity’s payments to the employer-sponsor’s employees and their family members in response to a disaster or emergency hardship are presumed to be made for charitable purposes, and not to result in taxable compensation to the employees.

Legal project management is a trend slowly catching on in corporate legal departments, according to a recent Today’s General Counsel survey. Departments with fewer than ten attorneys are more likely than larger departments to have at least one project manager on staff. These smaller firms are also more likely to require law firms that submit RFPs to use project managers and/or describe their management techniques, but this remains a relative rarity among departments of all sizes.

Comments from those who took the survey generally indicate cautious endorsement of the project-management concept, along with concerns about cost versus benefit. According to the survey, the tasks most often performed by dedicated legal project managers are managing process improvement, managing risk, managing deadlines and scheduling meetings. Many project management activities – putting retention terms in place, tracking plans, managing budgets, and capturing results – can be handled effectively by someone without legal training, but lawyers involved in the project are still the most likely persons to take on an overall management role.

Among small departments, that lawyer is most likely to be the CLO. In departments larger than ten lawyers, no respondents said that the CLO routinely took on management chores, with the vast majority reporting that it was another attorney from the department.

Microsoft products including Excel, Word and MS Project were the software programs most frequently used to manage legal matters, followed closely by Serengeti and Sharepoint.

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Executive Summaries features

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Cartel Enforcement Ramps up in China

Supreme Court Decisions Make Arbitration Compulsory

Law and the Fear of Cancer

By Fay Zhou and Clara Ingen-Housz Linklaters

By Fletcher W. Paddison Troutman Sanders LLP

Over the past year, cartel enforcement in China has intensified as enforcement agencies have built up capacity, confidence and experience. The result has been a series of high-profile actions against domestic and foreign companies in a broad range of industries. Companies doing business in China cannot afford to overlook this jurisdiction in their global antitrust compliance programs.

Since 2012, Chinese courts have also recognized a cause of action for private cartel enforcement. Investigations proceed very quickly and lack many procedural safeguards provided in more mature jurisdictions. For example, there is no formal right to external counsel or mechanism for limiting the scope of the investigation.

While trade associations always present antitrust risks, enforcement experience shows that they may be of particular concern for multinationals in China.

One reason is their unique historical role in the Chinese economy. Many trade associations in China are former government agencies, evolved into their current status as the result of administrative reforms conducted in the past decades.

Given their previous role in the industry, trade associations have in practice tended to initiate and manage concerted action among their members. Moreover, most trade associations do not yet have antitrust compliance programs.

Vigorous cartel enforcement is likely to become the norm as Chinese enforcement agencies accumulate experience and build up enforcement capacity.

Companies are advised to assess carefully their own risks in light of the unique features of cartel enforcement in China, and to monitor developments closely.

In a trio of decisions, the U.S. Supreme Court has outlined a mechanism that could eviscerate commercial as well as consumer class actions where the underlying contract incorporates an arbitration provision and a class waiver.

In 2010, the Supreme Court decided Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. This decision was followed by AT&T Mobility LLC v. Concepcion, and more recently by American Express Co. v. Italian Colors Restaurant. These decisions seem to have settled the issues of the enforceability of a class waiver under the Federal Arbitration Act (FAA), and the right to have these claims arbitrated on an individual basis.

A company should consider an arbitration provision with an explicit class waiver in any commercial or consumer contract where there is a significant danger of a large number of small damage cases that can be economically brought only in a class action.

Through incorporation of a specific waiver of class arbitration, a company will be able to compel individual arbitration and effectively eliminate class action exposure.

Arbitration, though, has its own downside. There is no right of review, and a bad decision will usually stand.

Often rules of evidence are not applied. In certain circumstances, several individual arbitrations can be more costly and adverse to a business than a class resolution that secures the benefits of a class-wide settlement. Additionally, while companies may assume that arbitration is business-friendly, in some cases consumers may find a forum receptive to their claims.

By Phil Cha and Dan Farino Archer & Greiner, P.C.

Increasingly, plaintiffs are seeking damages for emotional distress engendered by a fear of contracting cancer.

Only a few jurisdictions have established prima facie standards for this complex cause of action. In arriving at them, courts have been challenged with the task of balancing competing public policy interests.

Potter v. Firestone Tire and Rubber Co., a Supreme Court of California decision, and Exxon Mobil Corp. v.

Albright, a Maryland Court of Appeals decision, present two significant precedents for proving a prima facie case of fear of cancer.

Potter set the seminal standard by requiring proof that the plaintiff was exposed to a toxic substance which threatens cancer, and that the plaintiff’s fear stems from knowledge, corroborated by reliable medical or scientific opinion, that it is more likely than not that he or she will develop cancer due to the toxic exposure. The court specifically rejected the argument that an exposure is enough to recover fear of cancer damages.

The Albright case set the most recent standard, in 2013. The court ruled that a plaintiff must show that he was exposed to a toxic substance due to the defendant’s tortious conduct; which led him to fear objectively and reasonably that he would contract a disease; and that as a result of that fear he manifested a “physical injury.” The only plaintiff that prevailed in Albright manifested depression, anxiety, headaches, and nausea – attributed in expert testimony to the defendant’s tortious conduct.

TODAY’S GENER AL COUNSEL APR/ MAY 2014

Executive Summaries FEATURES PAGE 54

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Defining the New Law Department Library

Five Best Practices for Corporate Counsel

To Arbitrate or Not to Arbitrate?

By Kris Martin HBR Consulting

By Bob D. Rowe Huron Legal

In 1983 legal research accounted for ten percent of a lawyer’s time. Thirty years later, with data available instantly through advanced search platforms, a survey indicates that they spend even more time on research.

This counter-intuitive result suggests there is a need to define the role of a new “library” within the law department. As the volume of available data continues to increase, lawyers will need to either dedicate more time to research, develop an increasing reliance on outside counsel for both legal and non-legal information, or bring in information professionals.

Many department heads may feel the Internet makes information professionals superfluous, but the promise of quality information through a simple free search on Google or other search engine often is not realized.

Among the points to keep in mind when considering today’s corporate law library: The costs and volume of required materials are high, but these materials may be shared across the organization. The need for general law books has given way to the need for specialty materials. The expectation of just-in-time information means that access to digital materials is essential, and it is available for both legal and non-legal materials.

The new library offers a digital collection, curated by professionals who understand the information practices of users they serve. It delivers services that respond to high demand with ever-tightening time frames. And it stays current with technology, information resources and user needs, as it provides service that maximizes resource value.

Based on a projection of the kinds of strategic initiatives successful law departments will be undertaking in respect to data management, metrics and compliance, the author suggests some best practices. Number one is prepare for a cyberbreach, considering internal as well as external threats. Establish a plan in case your data is compromised.

Review privileged-user policies as well as current access capabilities through administrative rights to privileged data, and consider using the proposed National Institute of Standards and Technology guidelines.

Focus on information governance.

With a solid governance foundation, organizations can be in a position to defensibly dispose of information that surpasses all regulatory, legal and operational needs. Organizations may want to investigate technological solutions to track and manage policy management, approvals, compliance training and investigations. Also, they may consider appointing an information governance officer. Draft a “bring your own device” policy to address smartphone use, and to insure its independence, consider separating the compliance function from the law department.

Remember that “what gets measured gets managed.” Law departments have traditionally been viewed as a cost center, and the usual key performance indicators employed by other departments may not accurately measure corporate counsel’s strategic contributions. To justify their budget and headcount, law departments must generate realistic numbers, supported by data, that they can report to the c-suite. Gathering data from industry surveys can offer a baseline perspective for measuring performance.

By Mark C. Zebrowski Morrison & Foerster

Arbitration clauses are often included in contracts without full understanding or based on assumptions that may not be true.

In fact, it can take as long or longer to get to arbitration as it can to get to trial. It can cost as much or more to arbitrate than to try a case. Arbitrators are not required to follow the evidence code or the substantive law, they tend to grant dispositive motions even less often than judges, and arbitration awards are generally not appealable.

Still, there may be good reasons to arbitrate. Arbitrators will generally enforce the parties’ agreement on procedural issues. Arbitration proceedings and awards are generally not public, and generally don’t create negative precedent. While there is the risk of an “incorrect” award being final, there is the benefit of the dispute coming to an end. A party may consider arbitration if it is concerned about a risk of jury bias. And for international business transactions, arbitration provisions can provide a known and neutral forum for dispute resolution.

If arbitration is the choice, parties and counsel should consider explicitly addressing a number of issues in the arbitration agreement. These include enforceability; the arbitration service provider to be used; which rules will apply; how many arbitrators there will be; who will select them and what qualifications they should have; and whether the award will be appealable – and, if so, on what grounds and to what body.

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Corporate Governance

Halliburton Decision Could Change the Game, But Won’t End It

By Mitchell A. Lowenthal and Lewis J. Liman

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ew forms of litigation have had a greater impact on U.S. public companies, and more broadly on U.S. capital markets, than class actions alleging fraud under the federal securities laws. The statistics are staggering: Since 1996, more than 40 percent of corporations listed on major stock exchanges have been targeted by a securities class action suit, and U.S. companies were 83 percent more likely to be the target of a securities class action in 2013 than they were from 1996-2000.

The trend has continued despite significant legislation designed to reduce such suits and Supreme Court decisions making them harder to bring. That’s why the Supreme Court’s agreement to hear a case that squarely presents the primary basis for securities class actions – the so-called fraud-on-themarket doctrine – may be a watershed.

An essential element of any securities fraud claim is “reliance.” Under the principal law that plaintiffs use to bring these cases, Section 10(b) of the Securities Exchange Act of 1934, the plaintiff

must have relied on a misrepresentation of fact made by the defendant in order to state a securities fraud claim. Also, to bring a class action, the plaintiff must show that the evidence (including proof of reliance) will apply class-wide – that there will be no need for individual proof on a plaintiff-by-plaintiff basis.

The fraud-on-the-market doctrine was embraced by the Supreme Court in a splintered decision, Basic v. Levinson, in 1988. The Basic decision is what permits most securities cases to be brought on a class basis because it presumes that, where securities trade in an efficient market, the market promptly absorbs all material facts (both true and false). Hence anyone buying or selling securities that trade in an efficient market can, under this doctrine, show “reliance” because the trading price by definition reflects the challenged (allegedly misleading) disclosures. Thus, proof that the securities traded in an efficient market permits plaintiffs to satisfy the reliance requirement on a class basis.

In a recent opinion, four members of the Supreme Court raised questions

about whether the fraud-on-the-market doctrine remained viable, based in part on recent economics research. So it was not a surprise when late last year the Court agreed to hear Halliburton v Erica P. John Fund, which will permit revisiting the 1988 ruling in Basic.

Many believe that a Supreme Court majority will reverse Basic because it was wrong in the first place to infer that “reliance” could be shown indirectly, through the presumed impact of disclosures on trading prices. Those who advocate this position (which include Halliburton itself) instead contend that Section 10(b) should require actual reliance – a plaintiff’s actual reading of the misleading statement.

This “eyeball reliance” standard has some force, because it is part of another private civil right under the Exchange Act, Section 18, and because modern Supreme Court jurisprudence has dramatically cut back on “implying” private remedies under federal statutes, and the private remedy under Section 10(b) was implied by the courts, not enacted by Congress. Eyeball reliance requires proof on a plaintiff-by-plaintiff basis, which forecloses bringing a case with that requirement in a class action.

Even if Halliburton overrules Basic for this reason, securities litigation will endure. First, claims based on misrepresentations in securities offerings, which are governed by the Securities Act of 1933, generally do not require proof of reliance. Overruling Basic, even by requiring eyeball reliance for Section 10(b) claims, will therefore not affect Securities Act class actions, and these can be very serious. Securities Act claims were the basis for class actions arising out of the collapse of Worldcom, Adelphia, and Lehman Brothers.

Second, a 1972 Supreme Court opinion, Affiliated Ute Citizens v. United

TODAY’S GENER AL COUNSEL APR/ MAY 2014

Corporate Governance States, is generally thought to permit class-wide proof of reliance, where claims are based on omissions, if the omitted information was material. That said, Affiliated Ute did not involve public statements, or even public markets, and its use in securities class actions has been completely overshadowed by the fraudon-the-market doctrine, in part because of the ease with which that doctrine could be applied, and because of Affiliated Ute’s distinguishing setting.

Third, while class actions are often the main litigation vehicle public companies face, very frequently some, and often many, major institutional investors opt out of those class actions to pursue claims in their own right. Indeed, recent rulings defining how applicable limitations periods run on securities claims will make opt-out suits even more common. These individual actions can be formidable, given the portfolios of some institutional investors. While a rejection of Basic will mean that these suits must assert some basis other than fraud-onthe-market for showing reliance, even an eyeball reliance requirement may not be a substantial barrier, as many such investors will be able to prove that, in fact, they (or their agents) read the challenged disclosures.

Still, overruling Basic will cause substantial change in the economics of securities fraud litigation. Absent an extension of the Affiliated Ute doctrine, requiring eyeball reliance for Section 10(b) claims is likely to dramatically limit class actions under that statute. But while few Section 10(b) class actions will survive class certification challenges, they may be replaced by actions filed by institutional investors one plaintiff at a time, or single actions filed by groups of such investors.

Those cases may well represent exposure of some magnitude to defendants.

Accordingly, however Halliburton is decided, companies will probably not be able to reduce D&O coverage. Still, unlike with class actions, plaintiffs bringing Section 10(b) claims post-Halliburton will need to fund litigation costs out of the recoveries they obtain, without being able to leverage them across an entire class, and that may have an impact on how frequently such suits are brought. ■

Mitchell A. Lowenthal is a partner at Cleary Gottlieb Steen & Hamilton LLP. He specializes in the prosecution and defense of complex civil litigations, with an emphasis on disputes arising out of securities and M&A transactions. He is admitted to practice before numerous state and federal courts including the U.S. Supreme Court. mlowenthal@cgsh.com

Lewis J. Liman is a partner at Cleary Gottlieb Steen & Hamilton LLP. His practice focuses on complex commercial litigation, including securities class action lawsuits, and on white-collar defense and investigations. He served as a law clerk to Supreme Court Justice John Paul Stevens and worked for more than five years as an Assistant U.S. Attorney for the Southern District of New York. lliman@cgsh.com

Securities Class Action Filings Jumped 9 Percent in 2013 Despite Increase, Filings Remain Below Historical Average

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laintiffs filed 166 new federal securities class actions in 2013, a 9 percent increase over 2012, according to Securities Class Action Filings 2013 Year in Review, an annual report prepared by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.

However, the 2013 filings, although boosted by a second-half surge, are still 13 percent below the historical average from 1997 to 2012.

One possible explanation for filings remaining below the historical average in recent years is the decline in the number of unique companies listed on the NYSE and NASDAQ. A new analysis in the report shows that the number of companies on these exchanges has decreased 46 percent since 1998, providing fewer companies for plaintiffs to target.

The report also analyzes the recent increase in IPOs on major U.S. exchanges. The 150 IPOs in 2013 represent the highest number in the last five years. In addition, there has been an increase in larger companies undertaking IPOs in recent years, particularly in 2013.

“While the almost 50 percent decrease in listed companies has played a part in the recent trend of low numbers of class action filings, the sharp increase in IPOs in 2013 may provide fuel for a new wave of filings in the next few years,” noted Dr. John Gould, senior vice president of Cornerstone Research.

A new analysis of class certification rulings for filings between 2002 and 2010 reveals that class certification was denied in less than 2 percent of cases due to a decision based on the merits of the motion.

During the same period, increasing proportions of cases were dismissed before class certification motions were filed.

The report also examines factors that could influence future securities class action filings, specifically Halliburton v. Erica P. John Fund.

“If Halliburton prevails in its case before the U.S. Supreme Court, then the entire market for class action securities fraud litigation is likely to be disrupted because it will become impossible to certify a large number of Section 10(b) class actions,” said Professor Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse. “Large investors with substantial losses in the biggest of the frauds will likely be able to litigate their claims on an individual basis, but small investors will then have to look to Congress to fashion an alternative remedy.” continued on page 19

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Corporate Governance

The Evolving Meaning of “Independence” in the Board Room

By Robert J. Gavigan and Jonathan H. Hofer

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any issues in corporate governance ultimately come down to independence. Faced with the potentially misaligned incentives arising from the “separation of ownership and control,” practitioners and policy makers have often pointed to independence as a solution. Even if management does not have the same interests as stockholders, the theory goes, a board comprised of independent directors can monitor management and make sure that a company operates for the benefit of its residual beneficiaries (stockholders, in most contexts).

But that ideal of the independent director, not beholden to management and forcefully protective of corporate interests, quickly runs into the question of how to spot this elusive creature in real life. At this point matters become more complicated, because while independence as a concept may have broad support, different actors use it for different purposes. The SEC and the stock exchanges have rules requiring minimum levels of independence and generally applicable rules that any director must meet in order to be independent.

By contrast, Delaware law, which provides the most discussed state law rules on corporate governance (generally a state law matter), does not require independence. Rather, courts applying Delaware law look at the independence of directors when determining how to analyze board actions or inactions. And these legal regimes are just the minimum requirements. Accordingly, it is not surprising that proxy advisory firms maintain their own guidelines. the sec/exchange framework

The SEC’s approach to independence largely focuses on disclosure, but the actual standard is not fully spelled out.

Instead, the SEC requires that corporations use standards from national securities exchanges or inter-dealer quotation systems.

Although the NASDAQ and NYSE independence standards vary, there are a few common themes. Both standards call for the board to make determinations as to independence, but the NYSE asks whether a director has a material relationship with the listed company, while the NASDAQ asks whether there is a “relationship which, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.”

Both offer a list of substantially overlapping factors that automatically make a director not independent.

For example, under the rules of either exchange a director is not independent if he or she worked for the company in the last three years; has a family member who is or in the last three years was an executive officer of the company; received more than $120,000 from the company, subject to certain exceptions like director fees; or has certain connections to the company’s outside auditor.

Given the multiplicity of actors and standards, a full treatment of independence is beyond the scope of this article. And given the speed at which the issue has developed, any such treatment would likely be quickly out of date. That said, this issue looms large and therefore is not one upon which directors and officers can afford to be uninformed.

So we have put together an overview of the three main independence regimes that public companies need to be aware of.

Both exchanges also inquire into

whether a director or the director’s family members have a relationship with a company that had a material relationship with the registrant corporation (although the thresholds differ).

NASDAQ also examines whether a director or a family member is simultaneously serving, or recently served, as an officer of a company at which one of the registrant’s officers sat on the compensation committee. This is meant to ensure that a director can make decisions in the best interests of the corporation without fear of any effect on the director’s outside compensation.

Finally, in addition to defining independence, the NYSE and NASDAQ rules provide substantive teeth. Both exchanges generally require that boards be majority independent, and that the audit, nominating and compensation committees be made up solely of independent directors. the state Law framework

Independence also affects the latitude given to directors and officers under state laws. Of these, the most commonly discussed is Delaware’s.

Much of Delaware law is built around the concept of business judgment, the idea that judges ordinarily should not second guess the good faith business judgment of business people.

Like all legal doctrines, however, this rule is subject to exceptions. Most notably, courts will not be as solicitous of judgments where there is conflict of interest, such as where the decision in question was not made by independent and disinterested directors.

In addition, the discretion afforded to a board of directors in the context of derivative suits, a fairly complex area of law, often depends on whether there is some sort of disabling interest among a corporation’s directors.

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18

Perhaps the most common dynamic where these issues play out is when a corporation is acquired by a controlling stockholder. Here, courts traditionally replace the business judgment standard with “entire fairness review,” a fairly exacting standard which entails an evaluation of the process behind and the price agreed upon for the transaction. If a merger with a controlling stockholder is approved by a well-functioning special committee of independent directors, however, then the burden on the issue shifts. Rather than the controlling stockholder having to show that the transaction is fair, the party challenging the transaction (typically a minority stockholder) must show that the transaction was not fair.

In addition, in transactions that are subject to approval by a majority of the non-conflicted stockholders, approval by a well-functioning special committee will generally qualify a decision for business judgment rule protection. The rationale for this is that minority stockholders in such a situation have rights analogous to what stockholders traditionally have in a non-controlled corporation.

The key point for present purposes, however, is that Delaware law seeks not to determine whether a director is independent in a broad sense, but whether a director has a conflict as to a particular transaction. This inquiry has been shaped by decisional law over decades, and thus there is no master list of potential conflicts. Well thoughtout decisions, however, have provided signposts on potential issues ranging from director fees to fundraising and director-professors. To the extent these principles are capable of synthesis, the overriding focus is on the depth of a particular relationship rather than the mere fact that directors traveled in the same social circles or have conducted business together.

For example, in one recent case, the Court of Chancery concluded that a director with long standing ties to a venture capital firm (including investments in the firm’s funds and having been an officer at companies backed by the firm) was not independent in

the context of a transaction that was alleged to have benefitted the firm at the cost of common stockholders.

Other cases have addressed professors whose universities received donations, with cases drawing distinctions based on whether the professor had particular responsibility for fund raising (as would be the case with a university president).

Yet another set of cases have dealt with situations in which the director’s family members may have an interest, with opinions looking into the closeness of the familial relationship and the extent of the family member’s interest.

The Court of Chancery has, however, provided some assistance to general counsel dealing with conflicting standards by recently promoting the idea that the exchange and state law standards inform each other. A recent opinion written by the former Chancellor of the Delaware Court of Chancery, who is now Delaware’s Chief Justice, considered the independence of directors who qualified as independent under NYSE rules. Although the then-Chancellor was clear that being independent in the NYSE sense is not determinative under Delaware law, he noted that this fact should, in his view, be considered by a court applying Delaware law, given that the NYSE rules are based in part on the experience of the states (including Delaware) and the result of intensive study by experts. One of the Vice Chancellors on the Court of Chancery has also adopted this reasoning, and the Delaware Supreme Court concluded on appeal that it is not reversible error to look at the NYSE standards for illustrative purposes. Thus, while exchange rules do not resolve the issue, a board can have some confidence that the board’s efforts to comply with exchange rules will not be wholly disregarded.

PROXY ADVISORY FIRMS

Third-party proxy advisory firms like Institutional Shareholder Services Inc. and Glass Lewis & Co., L.L.C. are prominent activists in respect to independence. Both maintain their own standards of evaluation. They do

not have any formal legal power, but boards ultimately serve at the pleasure of their stockholders, and as a practical matter many stockholders give weight to recommendations from such firms, although how many stockholders and how much weight has been the subject of debate.

Like the NYSE and NASDAQ, however, ISS and Glass Lewis do not have a common standard, but their standards have some commonalities. Both advisors eschew the independent/inside dichotomy in favor of three categories: insider, affiliated and independent.

Neither affiliated nor insider directors are considered to be independent, but the “insider” label generally connotes a greater degree of conflict – for example, simultaneous employment with the registrant. In addition, both advisors have propounded tighter requirements than the NASDAQ and NYSE mandates, including with respect to business transactions with the registered company and past employment with the company or related entities. ■

Robert J Gavigan is a partner in the corporate group of Cohen & Gresser LLP. His practice includes domestic and international secured and unsecured loan financings, mergers and acquisitions, corporate governance, venture capital investments, private placements, and complex commercial arrangements. rgavigan@cohengresser.com

Jonathan H. Hofer is an associate in the litigation and arbitration group of Cohen & Gresser LLP. His practice focuses on complex commercial litigation, bankruptcy litigation,and corporate restructuring. jhofer@cohengresser.com

today’s Gener al Counsel apr/ may 2014

Corporate Governance Securities Class Action Filings continued from page 15 Key Findings

Percentage of U.S. Exchange-Listed Companies Subject to Filings 1997-2013 1997-2012 Average (2.85%)

• Filing activity increased by 21 per3.7% 3.6% cent in the second half of 2013, with 3.3% the largest number of non-merger3.2% 3.2% 3.1% 3.1% and-acquisition filings in recent 3.0% 3.0% 2.9% 2.8% 2.8% years.

• Rule 10b-5 claims continued at 2.5% 2.5% 2.3% heightened rates in 2013.

2.1% • Approximately one in 29 companies 2.0% in the S&P 500 was a defendant in a class action filed during the year.

• There was no new filing activity in the financials sector of the S&P 500 for the first time in the last 14 years.

• Healthcare, biotechnology, and pharmaceutical companies together accounted for 21 percent of total filings in 2013. As in 2012, companies 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 in this industry grouping were most Source: Securities Class Action Clearinghouse; Center for Research in Security Prices ( CRSP ) Note: Percentages are calculated commonly the subject of a class by dividing the count of issuers that were subject to filings by the number of companies listed on the NYSE or NASDAQ as of the beginning of the year. action.

19 • Foreign filings, led by filings against Filings By Industry Chinese companies, continued in 2013 at historically high rates. FilFinancial Consumer non-Cyclical industrial Technology Consumer Cyclical ings against Canadian companies Communications energy Basic Materials Utilities picked up in 2013.

• In 2013 there was a return to the more typical mix of filings in which 2013 45 16 20 19 23 14 51 18 NASDAQ companies were more frequently the subject of class action filings than NYSE companies.

2012 19 14 9 3 14 12 15 15 49 • Filing activity in 2013 was more concentrated in the Second and Ninth Circuits than in most years.

• In three of the last four years, the 2011 25 45 25 21 21 24 18 54 median lag time between the end of the alleged class period and the filing date has been markedly shorter than Average 37 45 17 25 21 31 7 43 1997-2012 the historical average.

• The total Disclosure Dollar Loss 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% (DDL) of $104 billion in 2013 increased 7 percent from 2012, but is • Healthcare, biotechnol• Reversing a four-year trend, • Filings against Energy comstill 17 percent below the historical ogy, and pharmaceutical filings against companies in panies increased in 2013. companies (included in the the Financial sector increased This is the third consecutive average of $126 billion.

Consumer Non-Cyclical modestly in number and year with heightened levels • The total Maximum Dollar Loss sector) together accounted as a percentage of all filings of filing activity in that (MDL) decreased significantly in for 21 percent of total filbut remained well below the sector.

2013, and is at its lowest level since ings in 2013. historical average.

1998. MDL was $279 billion in Note: 1. Analysis excludes two filings in the Government and Service sectors in 2010 and two in an unknown sector in 2012.

2013; 31 percent below the total Filings with missing sector information or infrequently used sectors may be excluded in prior years.

MDL in 2012, and 57 percent below 2. Sectors are based on the Bloomberg Industry Classification System. the historical average MDL. ■

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E-Discovery

In Legal Disputes, Make the Most of Your Own ‘Big Data’

By Larry Kanter

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s the general counsel of Southern Amalgamated Grain, Inc. you just found out that your company has been sued by one of your largest and best customers for “engaging in a scheme to systematically overcharge.”

In its complaint, your customer-turnedplaintiff says that it had a cost-plus supply agreement with Southern Amalgamated to supply non-genetically modified corn and soybeans, and that for at least 10 years the company has been misrepresenting its cost in the invoices it sent to the customer/plaintiff.

Further, your customer/plaintiff asserts that a former employee of your company confirms that Southern Amalgamated has received checks from its suppliers at the end of each year that

effectively reduced its cost by more than $30 million over the last 10 years, but failed to pass along those savings.

This is a potentially catastrophic lawsuit. If this case were to be lost, or even settled, other Southern Amalgamated customers would likely hear about it and sue as well. You contact your accounting people and they verify that Southern did in fact receive more than $30 million from vendors over the last 10 years. But your business people swear that they billed your customer/plaintiff – and all your customers – based on actual cost.

You look at the cost per bushel on Southern Amalgamated’s invoices to the customer/plaintiff and they do not reflect the payments from Southern Amalgamated’s vendors.

The above seemingly intractable problem surfaces routinely in today’s business world. While the industries, subjects, facts and alleged wrongdoings differ, the issue is the same. The general counsel is faced with a lawsuit where on the surface it appears the plaintiff has a persuasive case that would look plausible to the trier-of-fact. You know it is not true, but the legal team needs to prove it.

The case proceeds down the usual path. Documents are produced, email custodians and file servers are searched, and maybe a few initial depositions are taken. But ultimately you as the general counsel of Southern Amalgamated need to prove up your cost on each and every invoice you sent to your customer for the last 10 years.

A great deal of data maintained in business computer systems exists principally in the form of what is known as structured data. This is in contrast to email and correspondence, which is known as unstructured data. For example, if you wanted to retrieve check numbers from Outlook emails, because the data is not organized in a structured way, you would have to perform keyword searches for the word “check number,” pulling out of the email whatever number followed that phrase.

Moreover, if the check number was included in an e-mail but was not labeled as such, recovering check numbers would require manually or electronically hunting through e-mails in search of anything that looked like a check number.

Structured data, on the other hand is highly organized, in that the data is stored in fields that are defined in an exacting way by the software. Typically, software programs that are used to run a business – including account-

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E-Discovery

ing, inventory, HR, job cost, quality control, engineering and manufacturing – index and store each bit of information in that software package.

Thus pulling check numbers out of an accounting system requires only locating the check number field and then extracting all the numbers in that field.

To effectively search structured data, one needs to understand where it’s found. This information can be gleaned by way of a kind of inventory of the data, referred to by IT experts as a “data dictionary.” The data dictionary is often located in a document, workbook, user manual or spreadsheet, usually kept by the IT department. It sets forth the name of every field stored in the software program. The data dictionary includes critical information that describes the name of each field in the software package, its size, its layout, (such as 2-digit numeric or 4-character alpha-numeric), a description of what should be found in it, its location, and the meaning of its codes and abbreviations.

It is unlikely that an IT professional will ever mention the data dictionary to his or her general counsel. I am often asked why. Most commonly, the IT staff does not realize that (a) their recollections as to the fields described in the data dictionary are not as complete and accurate as the data dictionary document itself, and/or (b) they do not know where the data dictionary is, and most importantly (c) they just don’t realize how significant it is to make the legal team aware of absolutely every piece of data collected so that the legal team can decide what is important.

But asking the IT department to describe what data is collected in a given software program without their consulting an up-to-date data dictionary is unlikely to provide the legal team with a complete picture of what is available.

Let’s go back to the example at the beginning of this article, involving invoice pricing for corn and soybeans to that big customer. You learn from your IT department that over the last

10 years, Southern Amalgamated sent both paper and electronic invoices to the customer. Both versions were fairly straightforward, in that they contained detailed descriptions of the quantity, price, extended amount, delivery address, and so on.

But then your forensic expert requests the data dictionaries for the company’s invoicing, inventory, purchasing and grain processing software systems – and that reveals there are more than 140 fields of data captured in the invoicing system alone, many more than are on the face of the invoices, and they include a lot number. That field contains a 4-digit code that identifies whether the corn or soybeans sold were regular products or non-genetically modified products.

The forensic expert also finds fields that identify the source of the grain, as well as the identification of each silo and rail car that the grain was held in prior to shipment to the customer.

In the purchasing system, the forensic expert finds codes that also identify the source and that same 4-digit code.

Why are all these codes important? Because your business people have told you that all non-genetically modified product must be stored and transported in containers that are steam cleaned before that product reaches them. Steam cleaning is required to remove all traces of any genetically modified product previously held in the containers. Therefore, the costs are higher (over and above the cost of product acquisition), but up until now you had no way to prove up the increased costs.

However, most significantly, in looking at the checks that were received from Southern Amalgamated’s suppliers, you learn that they were sent to Southern at the end of every year to defray those costs of handling the nongenetically modified grain.

Your forensic expert extracts key data fields from the invoicing, purchasing, grain processing and the inventory systems. By locating one common unique field from each data system, it’s possible to link seemingly unrelated

data from separate systems and create a “roadmap” of the costs that were incurred for each shipment invoiced to the customer-turned plaintiff.

Based on the information that you never knew was available in Southern Amalgamated’s business systems, the legal team can now prove that the $30 million received over the last 10 years from vendors was reimbursement for costs Southern incurred but did not bill to the customer. In this case, what looked like an intractable problem was solved with actual data.

To recap, using contemporaneously collected data as a basis for addressing litigation issues is always more convincing than trying to “model” data.

Secondly, most organizations collect significantly more data than even their most technically proficient IT people realize.

Third, the most accurate way of determining what relevant data is actually collected is by locating and analyzing the data dictionary. Once the universe of data is understood, data relevant to the ligation can be extracted from the various systems within the organization and “joined” into one database that will allow for the complete examination and, hopefully, resolution of the issue that is the subject of the litigation. ■

Larry Kanter is founder of Dallas-based Kanter Financial Forensics LLC. He is a former Big Four accounting firm partner whose work in large cases included designing processes to locate money held in Swiss Banks and belonging to victims of Nazi persecution. He has a background in IT, accounting and litigation consulting, which he employs to turn data found across IT infrastructures into information needed by general counsel and litigators. larry@kanterforensics.com

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E-Discovery

Early and Routine Data Management Will Lower E-Discovery Costs

By Dave Canfield and John Connell

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eneral Counsel world-wide face a familiar set of challenges.

Data volumes are growing exponentially and the costs of litigation and e-discovery are increasing at alarming rates. The result is loss of control over litigation budgets and an absence of predictability.

Clearly, something has to change.

But what sorts of cost variables should GCs be looking for? What changes in processes and culture do legal depart-

ments need in order to regain control over their data and their budgets?

TRADITIONAL LITIGATION SUPPORT MODEL

To address these questions, GCs need to understand there are fundamental differences between litigation support, as it has been practiced, and data management. Traditionally, vendors and law firms have been rewarded with steady increases in revenue by focusing on the

processing, hosting and review of everexpanding volumes of data. Per-gigabyte costs for performing these operations have come down over time, but the total volume of data associated with each new matter continues to increase at a rate that easily outpaces the savings achieved via reduced unit pricing.

To be sure, some promising new technologies and improved processes have emerged, and they can help reduce data volumes and lower costs earlier in the litigation and e-discovery cycle. However, few of these approaches live up to the “early” label. Predictive coding, technology-assisted review and other early case assessment tools all require clients to upload and process all their data – paying all the significant associated storage and processing costs – before any analysis and data elimination can occur.

It’s also possible to ship data to low-cost offshore or “onshore” vendors who offer reduced hourly or per-document rates for large data volumes. But that doesn’t really solve the fundamental problem of processing much more data than is relevant or necessary.

These strategies exemplify the transactional nature of most relationships between corporate counsel and their vendors. Ultimately, transactional work using different vendors on each case cannot in itself create the longterm cost efficiencies that legal departments need. GCs need to decrease data volumes before processing begins and increase the speed with which the data is managed throughout the e-discovery cycle, across multiple matters.

THE PROMISE OF DATA MANAGEMENT

Data management represents a departure from traditional litigation support practices, which tend to be focused on “pushing” data through a series of pro-

toDay’s gEnEr al counsEl apr/ may 2014

E-Discovery

cesses at the lowest possible unit price.

Data management takes a step back from the familiar activities we associate with the e-discovery cycle, as they apply to individual matters, and instead it looks at what’s happening with enterprise data before it ever becomes the subject of a discovery request.

Data management requires a deep understanding of how data is shared among enterprise applications. The goal is to establish an architecture that allows for maximum efficiency in the storage, maintenance, backup, retention, destruction and use of data across the enterprise.

opportunity to plan activities outside of its own department. Even if the GC has an opinion that might require a change in system requirements, the legal department rarely, if ever, has any budget to pay for changes to the systems.

GETTING DATA UNDER CONTROL

If legal departments have no influence on the design of new applications, it’s hard to imagine how they will ever exercise truly proactive data management. However, there are immediate measures GCs can take, short of attempting a total transformation of company culture overnight.

Good data management addresses what’s happening with enterprise data before it ever becomes the subject of a discovery request.

Data management activities can take place months, sometimes even years, before an application even exists. Because the personnel involved in these design activities include, among others, data storage architects, database analysts and administrators, and application designers, they are able to design systems for data storage and maintenance for maximum efficiency, resilience and integrity. They are also able to establish requirements for the various business stakeholders within the enterprise.

Rarely, however, does anyone consider litigation support concerns in choosing these applications, since the legal department is not paying for their development. Unless an application such as an email archive or a document retention system is designed for litigation support or management, litigation or compliance professionals are almost never consulted regarding their needs or requirements.

Not all of this is the fault of GCs. For example, most legal departments have little to no operational budget, save for salaries and some smaller general budgets for administrative items and supplies. GCs receive a budget allocation only after a legal matter arises, and that means the office rarely has the

One is to undertake a careful historical analysis of previous matters and the associated costs, to identify specific areas where expenses exceeded initial projections and/or seemed disproportionate to the value of the case. Armed with this information, the GC can approach future negotiations with vendors with some fairly concrete objectives. For example: • Organizations with many small cases may not pay as much for processing and document review based on data volumes, but still may be able to drive savings on data preservation and collection by partnering with a vendor who has efficient collection processes and tools.

• Organizations that typically have graphics-laden files that are large in terms of gigabytes but fewer in number may seek vendors offering lower per-document costs.

• Organizations with relatively few cases per year involving very large numbers of documents – many of which are likely non-responsive – may cultivate relationships with vendors who can most effectively

cull document populations, and then address document review costs via reduction in rates and/or increases in throughput, in order to reduce the overall spend associated with these services.

What’s important is that GCs ask vendors more pointed questions that reflect a longer-term, data management mind set. How are you going to help me reduce my overall spend? (Reducing unit prices doesn’t help me when data and document volumes are increasing exponentially.) Which tools or mechanisms will address my long-term challenges?

Can you reliably determine whether I have the right custodians, keywords and file types that will allow me to eliminate large chunks of non-responsive data before I begin spending on processing, long term hosting storage and the most expensive part, attorney review?

In the age of big data, vendors and GCs who are willing to forgo the usual transactional approach to their relationship and begin addressing these issues will be the winners. ■

Dave Canfield is a managing director, client solutions, at UnitedLex. He assists clients in the creation of discovery, data collection and case management strategies. dave.canfield@unitedlex.com

John Connell is a managing director at UnitedLex, in the cybersecurity risk services practice. He consults with clients on digital investigations, intellectual property protection and retention and electronic discovery. He also performs expert witness services related to electronic data. john.connell@unitedlex.com

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apr/ may 2014 today’s gener al counsel

Intellectual Property

Claims Without Merit are the Problem, Not Trolls

By Marla R. Butler

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A

t a Google+ Fireside Hangout discussion last year, President Obama jumped on the patent troll bandwagon. “They don’t actually produce anything themselves,” he said, “they’re just trying to essentially leverage and highjack somebody else’s idea, and see if they can extort some money out of them.”

The President’s words imply that enforcement of a patent by a person or entity that is not actually producing a product, or by a patent owner who is not the inventor, is -- or should be -- illegal.

But neither is illegal, and in all the legislation that has been circulated through Congress there has been no serious effort to make such enforcement illegal.

The President’s input on this topic misses the point and risks distracting from the real problem. The current statutory framework is very deliberate in granting to inventors the right to transfer a patent, and in granting the transferee the right

to enforce that patent. Not only does the Patent Act not preclude the purchaser of a patent from enforcing it, it explicitly gives the purchaser that right. And nothing in the Patent Act limits the right of enforcement to operating companies.

The right of a purchaser to enforce a patent is as important to the original patentee as it is to the purchaser. The story of Nortel Networks provides an excellent example. Nortel was a Canadian telecom company with roots in the manufacture of telephones in the 1800s. At its peak, it dominated the Toronto Stock Exchange. In the early 2000s, however, its stock plummeted and the company spiraled into irrelevance. Among its last remaining assets were 6000-plus patents and patent applications for inventions. Nortel sold those patents, and the right to enforce them, to what is now Rockstar Consortium, a non-practicing entity. This con-

sortium, which consists of Apple, RIM, Ericsson, Microsoft and Sony, outbid Google and paid Nortel $4.5 billion for these assets. That’s $4.5 billion to Nortel’s creditors and shareholders.

Rockstar paid for the right to enforce the patents through licensing or litigation, and has started enforcing them.

Last autumn it filed suit against Google, a significant competitor to all members of the consortium. The benefit to Rockstar is obvious: It hopes to earn, through its enforcement measures, multiples of its investment, and it hopes to squeeze that money from its competitors.

The benefit to Nortel should also be obvious: While its patents and applications helped Nortel protect its innovation when it was an operating company, those assets allowed Nortel to get significant value after the innovation ceased. It had a responsibility to maximize the value of its assets, and that value existed because the purchaser of its patents – a company that does not “actually produce anything themselves” – has a right to enforce them.

CLAIMS THAT LACK MERIT ARE A PROBLEM

There are activities that can poison our patent system. Mass mailing of letters threatening to sue where no serious infringement analysis has been done and where there is no intention to sue is one example. This type of activity unnecessarily and unfairly terrifies small businesses, and diverts resources from more productive work in major companies. This tactic works because, if the demand for payment is low enough, it is often easier and safer for the recipient of the threat to just pay it.

Communicating false information to potential licensors is another activity that needs to be addressed. One example is telling targets that a patent is valid and enforceable, when that patent has been invalidated in a judicial or patent

today’s gener al counsel apr/ may 2014

Intellectual Property office proceeding. Another is misrepresenting the number or identity of parties that have already taken a license.

Finally, knowingly filing a lawsuit that is without merit against a company that has insufficient resources to fight, and where the patent owner knows the company will likely just pay the patentee to escape financial ruin, is conduct that warrants redress.

Importantly, none of the conduct described here is necessarily limited to nonpracticing entities. This is conduct that should be prohibited no matter its origin.

STATES TAKING ACTION

Individual states have started to look for ways to protect individuals and small businesses from baseless assertions of patent infringement. In 2013 the Vermont legislature made it illegal to “make a bad faith assertion of patent infringement.”

While the language of the bill focuses largely on the content of demand letters, it also appears to have application to lawsuits that are filed in bad faith (which could raise federal preemption issues).

The act allows for equitable relief, damages, costs and attorney’s fees, as well as “exemplary damages in an amount equal to $50,000 or three times the total of damages, costs, and fees, whichever is greater.” (Vermont has also sued a patent owner under its existing Consumer Protection Act, alleging in the complaint that the patent owner has engaged in unfair and deceptive acts by sending a series of letters to many small businesses and nonprofit organizations in Vermont.)

In January 2014, Nebraska’s attorney general introduced an almost identical piece of legislation, the Nebraska Patent Abuse Prevention Act. Like the Vermont statute, the Nebraska legislation would make it illegal to make a bad faith assertion of patent infringement. It would also amend Nebraska’s Deceptive Trade Practices Act by adding a section to the Act that provides that “[a] person engages in a deceptive trade practice when, in the course of his or her business, vocation, or occupation, he or she . . . [v]iolates any provision of the Nebraska Patent Abuse Prevention Act.” Permissible remedies for violation of the Deceptive Trade Practices Act

include injunctive relief and costs. Attorney’s fees can be awarded if a groundless action is brought or if the violating party “willfully engaged in the trade practice knowing it to be deceptive.”

Attorneys general and legislatures in other states are also taking action. Bills similar to Vermont’s and Nebraska’s are pending in Pennsylvania and Oregon.

Minnesota’s Attorney General reached a deal with a patent owner (the same one sued by the state of Vermont) in August 2013, under which the patent owner agreed not to communicate with residents of Minnesota in connection with alleged patent infringement unless first obtaining written permission from the Minnesota attorney general. New York’s attorney general reached a similar agreement with the same entity, while also providing the opportunity for already existing licensees to void their license agreements and receive a refund of license payments made.

Because state action in this context could raise federal preemption issues, state attorneys general are asking the United States Congress to include in federal legislation provisions that affirm state authority to address demand letters under state consumer protection laws.

By addressing the problem under the deceptive trade practices umbrella, Vermont and Nebraska are more properly focused on the real problem -- reckless and deceptive assertions of infringement and demands for payment. It is important to note, however, that the statute in Vermont and the bill in Nebraska are not perfect.

Both provide that a patentee’s status as inventor, original assignee or institution of higher education is evidence that an assertion has not been made in bad faith. This effectively lowers the burden of proving that a purchaser has acted in bad faith, whether that purchaser is an entity whose sole purpose is patent enforcement or a technology company with thousands of employees. In addressing issues of patent abuse, the focus should be on the conduct, not the identity, of the patentee.

Much of the outrage expressed in the “patent troll” conversation relates to the filing of lawsuits against businesses that are simply employing technology that the businesses are not responsible for developing, but that is widely used, often out of

necessity, e.g., WiFi technology that uses the IEEE 802.11 standard. Under Section 271 of the Patent Act, “use” of a patented technology constitutes an infringement.

But infringement in such a situation should not result in liability falling on the coffee shop owner who provides WiFi for the coffee shop’s patrons.

The version of the Innovation Act currently pending in Congress includes an exception which would allow a manufacturer of a technology to intervene in a suit against its customer, and would give the court the ability to stay the customer action while the manufacturer defends the lawsuit. Under this provision, assuming it becomes law, the coffee shop owner may be able to let her Internet provider fight this battle for her.

But this provision would simply codify an option already available to federal courts. Federal courts have inherent authority to manage their dockets, including by staying pending actions when appropriate. If lawsuits are pending against a manufacturer and its customers A through Z, staying the customer suits would remove 26 suits from court dockets and allow determinations of infringement and validity to be made more efficiently. Resolution of the action against the manufacturer would also allow the manufacturer and customers to more efficiently address indemnification issues.

The first step in addressing the ills of our patent system has to be proper identification of the problem. Only then can we identify solutions that remedy the ills without weakening the foundation of that system. ■

Marla R. Butler is a partner at Robins, Kaplan, Miller & Ciresi LLP. She litigates high-stakes intellectual property trials, Markman hearings, mediations and arbitration. She serves on the firm’s Executive Board and chairs the Diversity Committee. mrbutler@rkmc.com

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apr/ may 2014 today’s gener al counsel

Intellectual Property

IP Law and Sound Business Practice

By Christopher V. Carani, Herbert D. Hart III and George Wheeler

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W

ith key America Invents Act provisions implemented in 2013, it’s more important than ever for attorneys to understand and convey to clients the new developments in U.S. and global intellectual property law. With that in mind, late last year our firm held its annual intellectual property symposium, to provide strategic and practical approaches to litigating at the Patent Office, growing and devel-

oping patent portfolios, and managing the costs of litigation.

The event focused on the increasingly important interrelationship between the world of business and the world of law. Presenters included attorneys from McAndrews, Held & Malloy, as well as representatives from Stryker Corporation, JM Huber Corporation, Navistar International, Stepan Company and others.

What follows is a synopsis of three of the most relevant and popular

topics presented at the event: Topic 1: GrowinG Your paTenT porTfolio To Take advanTaGe of The america invenTs acT.

Congress passed and the President signed the Leahy-Smith America Invents Act in 2011, profoundly changing U.S. patent law. In many situations, U.S. counsel should obtain separate preAIA U.S. patents under pre-AIA law and post-AIA patents under the AIA to

today’s gener al counsel apr/ may 2014

Intellectual Property obtain the best results. Any individual patent is either all pre-AIA or all postAIA and cannot be some of each.

Why is it advantageous to obtain separate pre-AIA and post-AIA patents in one technology portfolio, despite the extra costs involved?

Consider this hypothetical. Lets assume that your company: • Discovered a new type of machine for making computer chips (Machine A) in 2010, and then secretly sold Machine A to a customer in the United States on March 10, 2011.

• Developed a substantially improved Machine B on December 1, 2012.

• Filed a pre-AIA patent application describing and claiming Machines A and B on March 15, 2013 (one day prior to the effective date of the AIA).

• Developed a further improved Machine C on June 1, 2013.

Further assume that a competitor, X Company, independently developed Machine B2 (much like Machine B) and published a description of Machine B2 on February 28, 2013.

How can your company obtain the best available patent protection for Machines A, B, and C? Your company cannot validly patent Machine A in the pre-AIA patent application, as its secret sale in the United States more than a year before filing a U.S. patent application is considered a patent-defeating sale under pre-AIA law.

Machine A quite possibly can be validly patented under post-AIA law, however, according to the U.S. Patent and Trademark Office. Your company can elect post-AIA patent law by filing a post-AIA patent application today, disclosing and claiming Machines A and C. Your company cannot validly patent Machine B under post-AIA law because X Company publicized its independently developed Machine B2 before your company filed its first patent application. But you can get pre-AIA treatment for Machine B, and prevail over Machine B2 in the pre-AIA patent application above, by proving that your company invented Machine B before X

Company publicized Machine B2.

Machine C was invented after the March 16, 2013 – the effective date of the AIA – and is thus irretrievably a post-AIA invention. The best protection for Machine C is obtained by filing a patent application describing Machine C as soon as possible after it is invented. This can be the post-AIA patent application described above.

• Myth: if you know inter partes reexamination, you know inter partes review.

Fact: An inter partes review proceeding isn’t an examination, but a motionsbased trial. There are two important differences. The petitioner has just one chance to make its case, and all declarants offering testimony are subject to cross-examination.

Any individual patent is either all pre-AIA or all post-AIA, and cannot be some of each.

In short, your company must prosecute and obtain at least two patents under the above scenario to best protect Machines A, B, and C. Before the AIA was effective, all three inventions could have been bundled into one patent after Machine C was discovered. But now, careful use of both pre- and post-AIA law in separate patent applications often is necessary to achieve optimum results for your company.

Topic 2: Top Ten MyThs AbouT pTAb TriAls.

Post-grant trials at the Patent Trial and Appeal Board get a lot of attention, but much of it is misinformation. Here are some common myths: • Myth: PTAB trials are brand new proceedings.

Fact: Patent interferences were the model for post-grant proceedings. As long ago as the 2004 hearing before the House Subcommittee on Courts, the Internet, and Intellectual Property, the plan was to use the best practices developed in interference cases to quickly decide post-grant challenges.

• Myth: All practitioners started on a level playing field.

Fact: Interference practitioners have preexisting experience with PTAB trials and PTAB judges, while the overwhelming majority of attorneys who have appeared in post-grant proceedings to date are necessarily on a learning curve.

• Myth: If you are a district court litigator, you know how to handle a PTAB trial.

Fact: The Federal Rules of Civil Procedure are not applicable in a PTAB trial, though the Federal Rules of Evidence are. There are, for example, strict limits on the conduct of “depositions.”

• Myth: Terms in PTAB trials have their usual and customary meanings.

Fact: Key terms have special meanings in PTAB trials. “Discovery” is not discovery defined by Rule 26, F.R.Civ.P. Nor is a “trial” a live hearing, but the entire post-grant proceeding, from institution to final decision. A “deposition” is not a Rule 26 discovery deposition, but is ordinarily cross-examination subject to restrictive guidelines.

• Myth: Patent interferences are no more.

Facts: Pre-AIA 35 U.S.C. § 102(g) and § 135 apply to all pre-AIA applications and patents issuing from them.

The issue of first inventorship and the provisions of 35 U.S.C. § 135(b) will apply for years to come.

• Myth: If you need relief, you just need to file a motion.

Fact: At the PTAB, don’t file anything unless you have authorization by rule or order. Filing a paper without authorization typically results in an order expunging the file. continued on page 37

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Labor & Employment

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TODAY’S GENER AL COUNSEL APR/ MAY 2014

Labor & Employment

Safety and Health Audits Can Be Roadmap for Regulators

By Charles Palmer

M

ost businesses assume that inspecting their workplaces for safety and health hazards will reduce potential liability. If hazards or regulatory violations discovered by auditing are corrected, this of course reduces liability, and it’s the greatest incentive for audits. Also, audits are generally viewed by government regulators as an important aspect of corporate safety efforts. Done correctly, and combined with corrective action, audits are vital to a successful safety culture.

Administration regulates private workplace safety by inspecting workplaces, issuing citations and penalties for violations, and requiring abatement of those violations. Part of the proof OSHA must present to support a citation is employer knowledge of the condition that is cited. In addition, if the employer knew of the violation and failed to respond reasonably, OSHA may allege a willful violation, and the penalty may be as much as ten times the amount of a violation that is not willful.

While safety auditing improves safety and reduces liability, it also creates evidence that may increase liability.

However, anyone who has performed an audit is familiar with the unease that exists while hazards that have been identified remain uncorrected. In larger facilities, items that have been identified for corrective action can be numerous, and may not all involve simple, inexpensive corrective actions. Some can be corrected one day, and become non-compliant again the next. This is especially problematic when compliance depends upon employee behaviors, such as wearing safety equipment, using protective guarding and similar precautions.

While safety auditing improves safety and reduces liability, it also creates evidence that may increase liability. In the event of an accident or investigation by government regulators, a company’s own safety audits are certainly relevant to the question: Did the company know about the hazard or violation and fail to take required or reasonable steps to correct it?

The Occupational Safety and Health

It’s no surprise that an OSHA inspector would want copies of corporate safety audits as part of an inspection.

Most inspectors are unfamiliar with a specific facility, but the company’s own audits will provide a checklist of the safety issues in the work environment.

If, during an OSHA inspection, violations are discovered which were also listed on a prior company self-audit, this will assist the regulatory agency to prove knowledge of the hazard. But, again: Uncorrected hazards identified on the company’s audit may support a case for a willful violation. This evidence is especially compelling to OSHA where an employee has been injured or killed.

OSHA will sometimes ask, or even demand, that audits be turned over, but some companies object to disclosure of self-audits. After all, the audits have been created voluntarily in order to improve safety. Forced disclosure can have a chilling effect on the willingness of industry to engage in voluntary au-

dits and may, it can be argued, actually undermine OSHA’s own goal of making workplaces safer.

In spite of this argument, in recent years OSHA has persisted in forced disclosure of voluntary self-audits, and that leaves business owners needing to weigh this risk against the rewards gained from performing voluntary self-audits.

A review of three recent cases demonstrates that businesses may, in some circumstances, have some control over disclosure in lieu of the drastic step of discontinuing voluntary self-audits.

The first case, Solis v. Grinnell Reinsurance (Northern District of Illinois), made national headlines because two teenage boys died in a grain bin. It was no surprise that OSHA aggressively pursued penalties against the employer. However, as part of its investigation, OSHA subpoenaed historical safety audits that had been performed by the grain company’s insurer. Fearing the chilling effect such disclosure could have on its ability to get insured’s to cooperate in voluntary audits, the insurance company opposed the subpoena in federal court in Illinois. The federal judge ordered the audits to be disclosed. He rejected the argument that a year 2000 policy letter prohibited OSHA from seeking voluntary self-audits.

That policy memo stated that OSHA will not routinely request voluntary self-audit reports at the initiation of an inspection or use such reports to identify hazards on which to focus inspection activity.

However, if the agency has an independent basis to believe that a specific safety or health hazard warranting investigation exists, OSHA may exercise its authority to obtain the relevant portions of voluntary self-audit reports relating to the hazard. continued on page 33

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apr/ may 2014 today’s gEnEr aL counsEL

Labor & Employment

Providing Disaster or Hardship Assistance to Employees By glenn a. adams

L

30

arge companies with many employees likely had workers impacted by one of the recent natural disasters – this winter’s “polar vortex,” hurricane Sandy in the Northeast, fires in the West, tornadoes in the Midwest – or some other hardship. Moreover, although Florida hasn’t had a major hurricane recently and California hasn’t had a major earthquake in years, the odds are that one or more of these kinds of events will occur again in the nottoo-distant future. This article will summarize some of the IRS requirements for establishing a disaster relief or emergency hardship fund to provide assistance for employees under such circumstances.

Generally, an organization qualifies as an exempt charitable organization if it is organized and operated exclusively

for charitable purposes and serves public rather than private interests.

A question then arises regarding an organization that an employer sets up to provide assistance exclusively to employees in need: Is it considered to be operated for private interests?

In the past, the IRS considered such employer-sponsored organizations as enhancing employee recruitment and retention, thus resulting in private benefit to the employers. Also, the IRS has expressed concern that employers might exercise undue influence over the selection of recipients of funds from the organizations. However, following the events of September 11, 2001 and the enactment of the Victims of Terrorism Tax Relief Act of 2001, employers have been able to fund relief programs through charitable organizations aimed at helping their

employees cope with the consequences of a disaster or other hardship.

But special rules apply to these employer-sponsored charities. An employer-sponsored organization should not fulfill a legal obligation of the employer. For example, the program should not be part of a collective bargaining agreement or part of a written employee benefits plan.

Similarly, the organization should not be used by the employer to recruit employees, or induce employees to continue their employment or follow a certain course of action sought by the employer.

The types of benefits an employersponsored assistance program can provide depend on whether the employer-sponsored organization is a public charity or a private foundation. This article will focus on those

today’s gEnEr aL counsEL apr/ may 2014

Labor & Employment that qualify as public charities. If an employer-sponsored assistance program can qualify as a public charity, it generally will be subject to more public scrutiny, transparency and oversight, but the IRS will allow it to provide a broader range of disaster or employee emergency hardship assistance to employees than can be provided by a private foundation. What qualifies as a disaster, for example, is not as restrictive.

Typically, this type of program is separately incorporated as a notfor-profit corporation. To qualify as a public charity, the organization would have to file a Form 1023 Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code within 27 months of incorporation.

Contributions to the fund should come not just from the employer, but also from the employees and the general public. Specifically, the organization should aim to meet the “public support test,” meaning at least one-third of its total support must come from government agencies, contributions from the general public, and contributions or grants from public charities (with each individual donor’s contribution, for purposes of calculating the numerator of the foregoing one-third fraction, being capped at two percent of the total funds received).

Any amounts contributed by the employer would not be treated as coming from the public for purposes of this test. Employers that wish to qualify this type of organization as a public charity should consider soliciting donations from their employees via automatic payroll deductions or otherwise, from their vendors and customers, and from governmental agencies or other public charities so as to meet the public support test.

As noted above, the employees would be included as general public for purposes of the test, but their contributions would only count to the extent that they do not exceed two percent of the total funds received.

For example, if an organization has ten employees who each contribute

$1,000 (and the organization receives no other contributions), each employee’s contribution would be capped, for purposes of calculating the numerator, at $200, because any amount beyond $200 would be more than 2 percent of the total funds received (that is, $10,000).

The organization would fail the onethird public support test because only 20 percent of the contributions would be considered to come from the “general public” ($200 x 10 ÷ $10,000).

As the number of employees who are contributing increases, it would be more likely that the public support test would be met.

The following requirements also must be met by an employer-sponsored organization: (a) The class of beneficiaries must be large or indefinite (a “charitable class”), (b) the recipients must be selected based on an objective determination of need or distress, and (c) the recipients must be selected by an independent selection committee, or adequate substitute procedures must be in place to ensure that any benefit to the employer is incidental and tenuous.

The group of individuals that may properly receive assistance from a 501(c)(3) organization is called a “charitable class.” A charitable class must be large enough or sufficiently indefinite so that the community as a whole benefits when a charity provides assistance.

A pre-selected group of people would not be an acceptable charitable class. If the group of eligible beneficiaries, however, is limited to a particular group, such as employees of a specific employer, the group of persons eligible for assistance must be indefinite. A proposed relief program must be open-ended and include employees affected by a current disaster and those who may be affected by a future disaster to be considered by the IRS to benefit an indefinite class.

If a charity has a policy of assisting employees who are victims of all present or future disasters, arguably it would be providing assistance to an indefinite charitable class.

Employers also should consider including affiliates, retirees, former employees, and spouses and children of employees to increase the eligible recipients within the charitable class.

There is no bright line test for the number of employees needed to qualify as a permissible charitable class under these circumstances. A large number of employees eligible to participate would be a positive factor considered by the IRS, but, again, should not be determinative if there is an indefinite class.

Charitable organizations can serve disaster victims and those facing emergency hardship situations in a variety of ways. They may provide assistance in the form of funds, services or goods to ensure that victims have the basic necessities, such as food, clothing, housing (including repairs), transportation and medical assistance.

For example, immediately following a natural disaster, a family may be in need of food, clothing and shelter, regardless of their financial resources.

Generally, an organization must make a specific assessment that an aid recipient is financially or otherwise in need. Individuals do not need to be totally destitute to be financially needy in the event of a disaster.

They may simply lack the resources to obtain basic necessities at that time. But charitable funds cannot be distributed to individuals solely because they are victims of a disaster.

Thus, a charity’s decision about how its funds will be distributed must be based upon an objective evaluation of the victims’ needs at the time the grant is made.

An organization should maintain adequate records to show that it has made distributions to individuals after making appropriate needs assessments based on the recipients’ financial resources and their physical, mental and emotional well-being.

Documentation generally should include: (a) a complete description of the assistance provided, (b) costs associated with providing the assistance, (c) the purpose for which the aid was given, (d) the charity’s objective criteria

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for disbursing assistance under each program, (e) how the recipients were selected, (f) the name and address of each recipient and the amount distributed to each, (g) any relationship between a recipient and officers, directors or key employees of or substantial contributors to the charitable organization and (h) the composition of the selection committee approving the assistance.

However, a charitable organization that is distributing short-term aid (e.g., blankets, water, hot meals, coats, etc.) in the hours immediately following a disaster would not be required to keep records that are as detailed as generally might be required.

The charity’s selection committee is independent if a majority of its members are not in a position to exercise substantial influence over the employer’s affairs. The organization should not be controlled excessively by the employer. It’s prudent, instead, to have management in the hands of

a committee composed of persons who either (a) are independent of the employer (i.e., no financial interest in the employer) or (b) represent a broad group of employees from different ranks who understand that they are acting in a personal capacity as agents of the employee hardship organization, not as representatives of the employer.

This committee should evaluate and choose recipients of assistance while adhering to a conflicts of interest policy in connection with all committee decisions.

If the organization qualifies as a public charity, then donors who make contributions to the organization generally would be entitled to a charitable deduction. Also, if the requirements summarized above are met (along with other specific IRS requirements) the public charity’s payments to the employer-sponsor’s employees and their family members in response to a disaster or emergency

hardship are presumed: (1) to be made for charitable purposes, and (2) not to result in taxable compensation to the employees. ■

Glenn A. Adams, a partner with Holland & Knight in Orlando, Fla., practices in corporate and tax law. He advises clients on issues that arise during the life cycle of a business, beginning prior to formation, continuing as the business grows, and through the period when the business or a business unit is liquidated upon sale or other circumstances. He also represents none-profits with respect to tax and corporate matters, including formation of the entity and obtaining tax-exempt status from the IRS. glenn.adams@hklaw.com

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Labor & Employment Safety and Health Audits continued from page 29

“Self-audit” means a systematic, documented, and objective review by or for an employer of its operations and practices related to meeting the requirements of the Occupational Safety and Health Act. The Illinois judge ruled that the policy memo was not binding, and that it did not apply to protect the insurer’s audits from disclosure.

about a month into the inspection, and at the other they were demanded at the beginning of the inspection. The company opposed both demands, and then opposed administrative subpoenas in which OSHA ordered the audits to be turned over to the agency.

The subpoenas were presented by OSHA to a federal judge for enforcement. In this case, a team of lawyers from our firm prepared a motion asking the court to reject the subpoenas. They

General counsel and other company attorneys should not assume their involvement in audits will protect the results.

The second case, Solis v. Milk Specialty Products (Eastern District of Wisconsin), involved a Wisconsin employer that manufactured dried milk. The employer had been cited by OSHA for combustible dust hazards. Following that case, the employer engaged in an analysis of combustible dust exposure at its other plants.

The analysis was directed by the general counsel of the company.

When OSHA demanded the analysis results be disclosed during a second OSHA inspection two years later, the company opposed that demand on the basis that the analysis was subject to attorney-client privilege and was attorney work product prepared in anticipation of litigation.

A federal judge ordered the analysis reports to be disclosed. He ruled that the company’s reports were not prepared in anticipation of litigation, because the first OSHA case had ended by the time the reports were prepared. The judge also ruled that the company’s general counsel was not engaged in providing legal advice when he directed that the analysis be done, and that he added no legal advice or recommendation to the report. He was merely engaged in giving business advice.

In the third case, Solis v. Grede (Western District of Wisconsin), OSHA demanded a foundry company’s selfaudits at two separate plants. At one of the plants, the audits were demanded

argued that the same OSHA policy memo discussed in the Illinois grain company case (Grinnell) was more than just a nonbinding policy, and that by preparing the policy memo and publishing it, OSHA engaged in an effort to encourage businesses to perform voluntary self-audits. By doing so, OSHA provided assurances that it would not ordinarily demand the audits as a roadmap for inspection.

The judge agreed that this created a constitutionally protected right of privacy against government intrusion.

OSHA’s subpoenas were rejected until OSHA could actually independently identify hazards, and then only the portions of self-audits related to those independently identified hazards would need to be disclosed.

As a practical matter, the holding of the judge required OSHA to first conduct an inspection, and then identify hazards, before asking for audit reports. The reports themselves cannot be used by OSHA to find hazards in the first place.

The lessons learned from these cases are:

1

Because OSHA lost the third case, there is less risk that OSHA will demand audits at the beginning of an inspection in Wisconsin. OSHA is likely to demand only portions of an audit directly related to a specific violation or accident it already knows about.

2

An insurance company’s audit of its insured should be subject to the same protections as an insured’s own self-audits, but that case has not yet been argued in Wisconsin. However, the reasoning of the court is likely to be applied to insurance company audits, since the OSHA policy applies to reports prepared “by or for an employer.”

3

General counsel and other company attorneys should not assume their involvement in audits will protect the results due to attorney-client privilege, or will be viewed by a court as attorney work-product. Consideration should be given to engaging outside counsel to direct the audits, and if they do so, outside counsel should actually provide advice related to the audit.

4

If the audit can be prepared in connection with ongoing or threatened litigation, it is more likely to be viewed as attorney work-product. In recent years, OSHA has created numerous emphasis programs targeting specific employers or industries. If a company is identified as a target, or likely target for one of these inspections, connecting the purpose of the audit to that targeting program may increase the chances of protecting its content.

5

Legal counsel should be consulted regarding the design and handling of voluntary self-audits, and such audits should not be disclosed to others, including government investigators, without consulting counsel. ■

Charles Palmer is a managing partner at Michael Best & Friedrich LLP and part of the firm’s manufacturing and energy teams. He also is a member of the Employment Relations Practice Group and co-chair of the Construction Group. cbpalmer@michaelbest.com

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APR/MAY 2014 TODAY’S GENERAL COUNSEL

E-DISCOVERY MEETS MORAVEC’S PARADOX COLUM N

by MICHAEL SIMON

T

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he first set of results from the Oracle/Electronic Discovery Institute joint research project on the effectiveness of Predictive Coding/Technology Assisted Review (PC/TAR) have just been released.

Law Technology News has reported on the results with the somewhat breathless title, “EDI-Oracle Study: Humans Are Still Essential in EDiscovery,” with an introduction (or lead, as journalists would call it) that says “you can’t turn discovery over to robots – humans are still the most vital component... ” The Oracle/EDI study was designed to evaluate the efficacy of PC/ TAR systems and processes. More than a dozen providers participated, providing 19 sets of evaluated results. (Some providers did not finish, and some provided multiple results, but we have not been given further details at this point.)

The results evaluate estimated cost and F1 score (a statistical measure of accuracy) of each solution for relevancy, privilege and “hot document” tagging, based on 1.6 million documents taken from a Department of Justice pricing investigation settled in 2011.

Michael S. Simon is the co-founder of Seventh Samurai, an e-discovery consulting firm. He has seven years’ experience as a trial attorney in Chicago and is an adjunct professor at Boston University School of Law, where he coteaches a class on e-discovery law and practice. He was formerly a member of Practice Support and IT Project Management with Winston & Strawn. michael.simon@seventhsamurai.com

From a rather sparse reporting of results, the Law Technology News article identifies several key takeaways, the primary and most important of which is: “Software is only as good as its operators. Human contribution is the most significant element.”

Another standout takeaway is that the team that arguably did the best in terms of results (ranked number one in two of three tagging categories, and for a relatively low price) utilized the work of just a single attorney, whereas another team that used the exact same technology, combined with a full contract review team, finished far behind the single-attorney team, at over twice the price.

Another team, which heavily emphasized human review – so much so that nearly 50 percent of the documents

were manually reviewed – came in reasonably well for accuracy, but at a jaw-dropping price of over 14 times the cost of the more accurate singleattorney team.

The LTN article suggests that these results, which highlight the influence of humans on “precisely consistent” technology are surprising. It is is implied that LTN did not expect that they could defend the role of humans in information retrieval and categorization. But we shouldn’t be surprised at all.

Information science has known about Moravec’s Paradox since the 1980s. Coined by artificial intelligence researcher Hans Moravec, it simply says that computers are better at some things and people are better at other things, some of which

THE MAGA ZINE FOR THE GENERAL COUNSEL, CEO & CFO APR/MAY 2014

seem quite simple. One area where Moravac’s Paradox has been put to good use provides a powerful example of why humans and computers need to work together. It might surprise some. It’s chess.

In February 2011, former world champion chess grandmaster Gary Kasparov recounted in the New York Review of Books how he came to be the poster child for “machine defeats man.” At the start of his career in the 1980s, he was able to defeat any computer competition, even besting the first incarnation of IBM’s Deep Blue purpose-built chess system in 1996.

However, just a year later, the next generation of Deep Blue defeated him, to the delight of the AI community.

What left the AI community less than delighted, though, was the way that Deep Blue (and every computer chess system before and since) works – not like the subtle and strategic human brain, but instead by churning through

billions of tactical situations and scenarios to find the right pattern to match. Still, this brute-force approach, combined with ever-increasing computing power, permits even cheap desktop chess programs to handily defeat even human grandmasters.

Rather than give in to despair, Kasparov came up with something new: “advanced chess,” a teaming of a human chess master and computer systems. The human sets the strategy and makes the judgments, while the computer provides tactical guidance, confirmation and warning of potential trouble. The strength of that combination was proven in a 2005 online tournament, where advanced chess teams, even using weak software, beat almost every competitor, even the most feared software systems.

The most surprising result of the 2005 tournament, though, and perhaps the most telling of the future of PC/TAR for us in our world of legal

technology, was the team that ultimately won the entire tournament.

The winner was not a grandmaster with a state-of-the-art PC but a pair of amateur American chess players using three computers at the same time. Their skill at manipulating and “coaching” their computers to look very deeply into positions effectively counteracted the superior chess understanding of their grandmaster opponents and the greater computational power of other participants.

Weak human + machine + better process was superior to a strong computer alone, and more remarkably, superior to a strong human + machine + inferior process.

Strong process won out over inferior process, even when the system and users of the inferior process were better. They learned this in chess over eight years ago. We are just now re-discovering this for ourselves in e-discovery. ■

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D I G I TA L .T O D AY S G E N E R A L C O U N S E L . C O M

apr/ may 2014 today’s gener al counsel

IndexIng makes data On VaryIng scales manageable Colum n

by rees morrison

o

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ne of the challenges of looking at changes in data over a period of time is that sometimes the metrics you are comparing are not all represented in the same way or in the same magnitudes. Let’s illustrate that with an example.

You might want to show the number of patents applied each year for the past five years, and those might be numbers increasing between 20 and 60.

You can add to your graphic the total number of invoices reviewed by your department those same years, which ranged from 200 to 400. You might want to show each year’s total legal spending, amounts that are in the low millions of dollars. Finally, you would like to add the revenue trend of your company and express it as hundreds of millions of dollars each year.

Notice that the four metrics differ by what they indicate – patents, invoices, numbers and dollars – as well as by their orders of magnitude: 20 patents, 200 invoices; $2,000,000 in spending and $200 million in revenue.

If you were to create a graph that has a line from year to year over the past five years for each of those four metrics, the huge numbers needed to show revenue would mean that patent filings and invoices would

rees Morrison is an attorney and the founder of General Counsel Metrics, LLC. Based in Princeton, NJ, he has for the past 25 years consulted solely to law departments on a wide range of management challenges. He coordinates the largest law-department benchmarking database and analysis ever conducted, with more than 1000 participants. rees@reesmorrison.com

disappear at the bottom, too small to show up at all. You could divide revenue by billions, and legal spend by millions, and invoices by tens and thereby place all four metrics on the same numeric scale, but that is harder to explain to people who study your graphic.

An alternative technique sometimes referred to as indexing lets you portray all of your data clearly on the same graph and on the same scale.

What you do is figure out the average of each of your metrics for all the years. Let’s say your law department applied for 20, 30, 40, 50, and 60 patents in 2009, 2010, 2011, 2012, and 2013 respectively. The average for the five years is 40 patent applications.

Next, you divide each year’s figure by that average figure. You get .5, .75, 1,

1.2, and 1.5. You can now use various software packages to plot those percentages by year.

Take the next metric, the number of invoices received per year, and calculate the average, then divide each year’s figure by the average and plot it. Amazing! When you are finished with all four metrics, the trend line for invoices will have the same scale as the trend line for patent applications, and so on!

You can index any set of numbers – divide the numbers by the average – and create what is sometimes called a centered set of data. Think of it as converting numbers into percentages of their average and you can see how the technique lets you graph widely differing sets of numbers in a comparable way. The graphic below shows how some illustrative data might look. ■

Inde x: Percentages of aver age 150% 140% 130% 120% 1 10% 100% 90% 80% 70% 60% 50% 2008 Inde x : Pat ent s

2009

20 10

Inde x : In voIces

20 1 1 Inde x : r e v enue

20 12 Inde x : t l s

today’s gener al counsel apr/ may 2014

Intellectual Property IP Laws

continued from page 27 • Myth: A petition can simply identify the issues.

Fact: In district court, notice pleading prevails. Not so at the PTAB, where the petition is, in substance, the complaint and the case-in-chief all in one.

shape if an iPhone) and graphic designs (e.g. the graphical user interface, or GUI, and icons on the screen of an iPhone).

Design patents grant the patentee the right to exclude others from making, using, selling, offering to sell, or importing the patented design for 15 years from the date of issuance. A unique feature of design patents is that

Myth: Being clever can pay off. Fact: The Board of Patent Appeals expects counsel to play it straight and has zero tolerance for gamesmanship.

• Myth: Your can have a case that deserves an exception to the rules.

Fact: The Board rarely grants exceptions to the rules, even for what would be a routine request in district court, especially not without a showing of substantial need.

• Myth: Being clever can pay off.

Fact: The Board expects counsel to play it straight and has zero tolerance for gamesmanship.

Topic 3: The Rise and WRaTh of design paTenTs.

On August 24, 2012, before a packed courtroom, the most exciting words that can be uttered in legal theater were pronounced: “The jury has reached its verdict.” This verdict was bold and decisive: $1.05 billion dollars in favor of Apple. At the time, it represented the largest patent infringement jury award ever.

As a result of the epic battle between Apple and Samsung, and the increasing importance of design in customer purchasing decisions, there has been a surge of interest in design patents. It may therefore be helpful to revisit some of the basics of design patents.

Under U.S. law, there are two main types of patents available: a utility patent, which protects the function of a product, and a design patent, which protects the appearance of a product.

Design patents can be obtained for traditional industrial designs (e.g., the

there are no maintenance fees due during the life of the patent.

In addition to protecting the overall aesthetic design of a product, design patents can be used to protect the aesthetic design of portions of a product.

This overlooked claiming strategy is an effective means to secure significant and broad coverage that transcends a particular overall product design. For example, a design patent can be used to claim a design for a table leg, separate and apart from the table top.

As for the design patent document itself, it includes a series of drawings from varying perspectives. Significant design protection can be attained when careful thought is given to preparing the drawings, e.g., through the strategic use of some underused drafting techniques such as phantom lines, indeterminate break lines, multiple embodiments and multiple applications.

Often there isn’t enough thought given to design patent drawings, resulting in a “narrow” patent that offers little protection and is easy for others to design around.

Design patents can be quickly and inexpensively acquired. On average, it takes about 12 to 14 months for design patents to issue once filed, and an attorney can typically file a design application for $2,000-$3,000, depending on the complexity of the design. When filing a design patent application, it is advisable to work with an attorney who has specific experience using advanced design patent claiming techniques.

Lastly, it is important to consider that design patents are not substitutes for utility patent protection, just as utility patents are not substitutes for design patents. Each protects rights to different aspects of the product, and both can be obtained on the same product. If the goal is a robust and enforceable patent portfolio, both forms of patent protection should be considered. ■

Christopher V. Carani is a shareholder at McAndrews, Held & Malloy.

His practice focuses on securing and enforcing intellectual property rights. ccarani@mcandrews-ip.com

George Wheeler is a shareholder at McAndrews, Held & Malloy. He has counseled corporate clients for over 25 years in a wide variety of patent matters involving chemical, mechanical and medical technologies, including over 25 ex parte reexaminations and several inter partes reexaminations. His specialty is patent analysis and prosecution, both for patentees and for patent opponents. gwheeler@mcandrews-ip.com

Herbert D. Hart III is a shareholder at McAndrews, Held & Malloy.

He maintains a full-service IP practice in the life sciences, petroleum, chemical, agribusiness, and aerospace industries. He has many years of experience in litigation before the Board of Patent Appeals and has served as an expert witness on interference law and practice. hhart@mcandrews-ip.com

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apr/ may 2014 Today’S Gener al CounSel

TGC Surveys

Cautious Endorsement of Legal Project Management Cost Benefit Analysis Necessary to Overcome C-Suite Resistance

L

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egal project management is a trend that is slowly catching on in corporate legal departments, with smaller departments leading the way. According to a recent Today’s General Counsel survey, departments with ten or fewer attorneys are more likely than larger departments to have at least one project manager on staff.

They are also more likely to require law firms that submit RFPs to use project managers and/or describe their management techniques, but this remains a relative rarity among departments of all sizes.

Comments solicited from those who took the survey generally indicate cautious endorsement of the concept, along with concerns about cost versus benefit.

“Our legal department has not used project managers in the past, but the company added an in-house project management office in January 2014, and we now have two matters assigned to them,” says Karin Anderson-Barrett, vice president and associate general counsel, LifePoint Hospitals.

Since the project managers are a shared resource, their cost is spread across the company at LifePoint, which is still in the process of deciding how to make the best use of them. “So far they have streamlined projects, coordinated personnel and resources and enhanced efficiency in matters involving large teams from our corporate office, individual hospitals and outside vendors,” says Anderson-Barrett.

Many legal project management activities – putting retention terms in place, tracking project plans, manag-

ing budgets, and capturing results and work product for future projects – can be done effectively by someone without specific legal training, according to Rob Thomas, co-founder of Thomson Reuters’ Serengeti Law and vice president, Thomson Reuters.

“Lawyers or experienced legal staff still need to be involved in selecting the team, assessing the project plan and budget, and making strategic decisions,” Thomas says. “So it often makes sense to team lawyers with non-lawyer project managers to more efficiently manage legal projects.”

in place to prevent scope-creep and delays,” says Keller. “We build a project plan with goals and deliverables clearly delineated. Projects have managers and teams, with functional resources identified. We conduct regular check-ins and reviews of status, deliverables and overall project goals. My team has a portion of their incentive comp attached to successful project completion.”

Queried about staffing for specific projects, Keller says it varies according to the nature of the matter. “Sometimes the entire team is legal, in consultation

“It often makes sense to team lawyers with non-lawyer project managers.”

Rob Thomas, Serengeti Law Serengeti Tracker is one of several platforms mentioned by respondents, who were queried about their use of software to manage legal matters.

Microsoft products including Excel, Word and MS Project were the most frequently used, followed closely by Serengeti and Sharepoint.

“We use project management tools to keep long term projects on track, especially the ones with lots of tentacles,” says Sara Lee Keller, Executive Vice President and General Counsel of Clear Channel Outdoor, a company with a seven-lawyer department.

“I’m adamant about setting clear goals at the outset and putting checks

with some subject matter experts from the markets. But if, for example, it is an IT project, then the team will be principally staffed with IT folks along, with a finance person, a lawyer and a mentor.”

Anderson-Barrett of LifePoint identifies two main obstacles when it comes to demonstrating need for project managers.

“There is a lack of understanding about the work they perform – which is far more than administrative work – and how it enables the lawyer to be more efficient by focusing solely on legal work.

Additionally, we’ve had to identify the value in financial terms and provide a cost/benefit analysis to support project

Today’S Gener al CounSel apr/ may 2014

TGC Surveys

management in the past, when it was viewed as a luxury item. But in the last couple of years the project managers we hired have demonstrated the benefit in large projects requiring a multi-disciplinary approach across the company.”

According to Thomas of Serengeti, law-department to law-department contacts and benchmarking are the most effective means of selling the concept of legal project management.

“We put departments that are considering it in touch with other law departments who have used technology that automates project management. That way they can hear first-hand from sources they trust who will describe significant savings they’ve experienced in both time and money.”

Some of those gains are made by simply monitoring budgets on major legal projects, says Thomas. Technology automatically compares bills with the budget and provides alerts when spending is ahead of where it should be, rather than waiting until the end of the project when it is often too late to remedy.

According to the TGC survey, the tasks that dedicated legal project managers are performing most often are managing process improvement, managing risk, managing deadlines and scheduling meetings.

Lawyers involved in the project are still the most likely to take on an overall management role. Among small departments, that lawyer is most likely to be the CLO. In departments larger than ten lawyers, no respondents said that the CLO routinely took on management chores, with the vast majority reporting that it was another attorney from the department. ■

Trends in Legal Project Management 2014 A Today’s General Counsel Survey The survey, conducted in February, captured trends in the adoption of legal project management by in-house departments. Just under half of respondents reported having at least one project manager in their legal department, while slightly more than half indicated no project managers in the legal department.

In the majority of departments that had a project manager, that manager was an attorney.

PM is a lawyer: 65% PM is a non-lawyer staff member: 35%

Smaller organizations and legal departments were more likely than larger ones to report having at least one project manager on staff.

52%

1 to 10 lawyers 10 to 100 lawyers

36% 68%

1 to 100 employees 100 to 500 employees

44%

500 to 5000 employees

44%

5000 or more employees

38%

continued on page 41

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apr/ may 2014 Today’S Gener al CounSel

TGC Surveys

Advantages Of Case Management Platform Shared By Clients

L

ittler, a global labor and employment firm with dozens of offices and more than 1000 attorneys, has developed its own proprietary case management system, called CaseSmart.

The firm’s far-flung practice and large caseload makes efficient, predictable and consistent delivery of services a challenge, and the way the firm has combined information management and case management to address that challenge may be a forerunner of how legal services are delivered in the future.

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more and more from clients who were tasked with lowering legal costs. We wanted to respond, but we were wary of getting into a race to the bottom. As a result we formed a multi-disciplinary committee to address the issues of lowering costs while maintaining quality, and passing the savings on at a level of profitability that made sense for us.”

CaseSmart came out of that discussion. An important aspect of the system is the technological integration of flextime attorneys, many of them senior

“There were talented attorneys we’d been losing, either because they had young children or were getting older and didn’t want the full rigors of working at the firm.”

A major portion of the firm’s caseload consists of defending clients against employee complaints, called “administrative charges,” that are filed with agencies such as the EEOC and its state counterparts. CaseSmart was developed in order to efficiently manage the life cycle of these cases. It tracks case status, allows managers to identify regions or industries that are prone to repeated complaints, and generates reports that compare performance by results, costs, and other metrics. It also includes a dashboard for clients.

CaseSmart was designed in 2010, but the idea of a case management platform goes back farther than that, according to Scott Forman, Office Managing Shareholder at Littler, who led the effort to develop CaseSmart.

“The legal landscape changed in 2009,” says Forman. “We were hearing

practitioners whose life circumstances had changed while they were engaged in the practice of law.

“There were talented attorneys we’d been losing, either because they had young children or were getting older and didn’t want the full rigors of working at the firm,” Forman explains.

“Now they can work in a home office environment that we provide, connected through CaseSmart.”

Clients log in to the system in much the same way that one logs into a bank account. They have real-time access to the work product on their matter, plus an overview of trends and metrics that relate to that legal problem more generally. That enables the in-house personnel to look at the situation from a perspective more like a law firm’s portfolio as opposed to a single issue for an individual company, enabling them

to use the information for planning, staffing and business strategy, as well as for dealing with that issue. Trends and metrics are available to them, although each client’s information is firewalled from all other client matters.

Because of its size and caseload, Littler had developed a voluminous database on labor and employment law before CaseSmart was developed. The system allowed the firm to gather data more efficiently, put quality assurance measures in place to assure its accuracy, and use it more effectively across regions and venues.

“We’ve always had the ability to capture information,” says Forman.

“The quality control we have now helps us manage ourselves better internally at the same time it brings value to the clients. It lets us explain information to them. For example, we can tell them, in a sanitized way, how their own numbers compare to those of their competitors.”

One consideration with a database like CaseSmart’s is the potential for discovery. A protocol is in place to make sure the data is harvested in the context of a service provided to a client. The term Littler uses is “attorney-client privileged analytics.”

According to Forman, the system’s value is best demonstrated by a situation a client found itself in when it instituted a workplace policy that led to administrative charges in several places around the country.

“We looked at the dashboard and noticed right away that the policy was implicated in these charges,” he says. “We notified our client of the potential for a systemic investigation by the EEOC if we didn’t get ahead of that. So we were able to address that risk proactively.” ■

Today’S Gener al CounSel apr/ may 2014

TGC Surveys

Trends in 2014

continued from page 39

Project Management Responsibility: Almost one-fourth of respondents said the CLO was the person most responsible for planning, implementing and managing a project.

However, the larger the department or organization, the more likely it was that another lawyer in the department was responsible.

All respondents

1 to 10 10 to 100 1 to 100 lawyers lawyers employees

100 to 500 employees

500 to 5000 5000 or more employees employees

A dedicated project manager

9%

13%

4%

15%

5.6%

5.3%

10%

CLO

24%

42%

0%

55%

38.9%

31.6%

4%

Lawyer involved in the project

66%

47%

94%

35%

61.1%

60.5%

84%

A staff member in the department

8%

8%

9%

5%

16.7%

7.9%

8%

Ten percent or more of respondents reported having a dedicated manager for various aspects of legal projects.

Has a dedicated project manager Manage communications

10%

Negotiate changes in project scope

11%

Define project scope

11%

Schedule meetings

12%

Plan budget

12%

Manage the knowledge management part

13%

Plan and manage risk

13%

Manage deadlines

14%

Manage process improvement

14%

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Almost three-quarters of respondents reported that they did not require outside counsel to use managers for their organization’s matters. However, smaller departments and organizations were much more likely to report that they did require outside counsel to have project managers.

10%

Overall

17%

1 to 10 lawyers 10 to 100 lawyers

0% 25%

1 to 100 employees

6%

100 to 500 employees

13%

500 to 5000 employees 5000 or more employees

4%

apr/ may 2014 Today’S Gener al CounSel

TGC Surveys

Only a small percentage said they required outside counsel to describe their project management techniques in RFPs they submitted, but smaller departments and organizations were more likely to have this requirement.

9%

Overall

45%

12%

1 to 10 lawyers

39%

7%

10 to 100 lawyers

30%

1 to 100 employees

11%

100 to 500 employees 500 to 5000 employees 5000 or more employees

Smaller legal departments were more likely to provide project management training.

5% 4% 1 to 10 lawyers

Respondents were almost equally split between those reporting that their legal departments provided training in project management to lawyers and/or staff and those that did not.

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Don’t know 8%

Training offered 45%

No training offered 47%

In your legal department, who is responsible for the various aspects of managing a particular project or matter?

Lawyer involved in the project Define project scope

63.8%

Manage communications

64.1%

Manage deadlines

66.4%

Schedule meetings

56.9%

Plan budget

56.2%

Manage process improvement

56.0%

Manage the knowledge management part

55.0%

Negotiate changes in project scope

63.4%

Plan and manage risk

62.8%

10 to 100 lawyers

Comments from Respondents Respondents were offered the opportunity to comment, with or without attribution.

“At LyondellBasell we don’t use dedicated project managers because we expect the lawyers who supervise outside counsel to be project managers. These lawyers are in the best position to understand the work activity breakdown of a matter, the phases and the tasks in each phase. They are also responsible for the creation of the matter budgets (which vary in complexity depending on the anticipated spend on the matter) and accountable for the total spend on the matter . . . It is the melding of legal knowledge and experience with project management principles that yields the best results.

Craig B. Glidden Executive Vice President and CLO LyondellBasell

“We don’t use project managers, primarily because we are too small a company.

With limited resources, most employees wear several hats (I serve as both CFO and GC). I am the only member of the

Today’S Gener al CounSel apr/ may 2014

TGC Surveys

legal department. In my previous work experience I had several attorneys in the legal department, and I served as the project manager based on the issues at hand.”

Brian Chaiken Chief Financial Officer, Principal Accounting Officer, Chief Legal Officer and Secretary Z-Trim Holdings, Inc.

“I’m afraid the reasons we don’t use LPMs are very prosaic. First, this is a relatively recent trend and we have not caught on to it yet. Second, project management is not an essential skill in the context of our practice in-house, where more than 95 percent of the work is advice or contractual matters/ negotiations that do not require a whole lot of scheduling or coordination of different tasks by multiple individuals. Ours is mostly a single practitioner-type practice writ very large. We typically have only a handful of files that require a semblance of organization. The largest one is indeed being run by a project manager, but not within the legal department. We have an important role, but not a lead role in the file . . . This being said, some of our lawyers have expressed the need to be more proficient at project management, and we have agreed to invest some of our development budget in that area. We shall see if it brings us additional benefits . . . ” Maryse Bertrand Vice-President and General Counsel CBC Radio-Canada

“We use non-legal staff to control documentation. That’s probably not what you are thinking of as ‘project managers’ in the sense, for example, of managing litigation, but we do international aircraft leasing which is a different world. The kind of project management we do is basically a paralegal function, and it is really efficient for us. We don’t need counsel time spent on these issues.”

Gerard Melling Senior Vice President and General Counsel Mitsui Bussan Aerospace Corp. - Long Beach Operations

“We don’t use project managers in the legal office since we are only five lawyers and the cases are not so large and complicated that we have seen the need.”

John A. Holland Staff Counsel Office of Spill Prevention and Response California Department of Fish and Wildlife

“An organization must have the budget to implement effective project management processes, and the finance side often denies requests for same, even if they will improve efficiencies. We need better methods of demonstrating to the finance and budget people that these investments will result in a positive return on investment in the cost of the processes.”

“One size does not fit all, and efforts to make the litigation process fit into a project management scheme do not always work.”

“PMI principles and experience don’t translate well to legal matters. Litigation is a negotiation, not a path.”

“Our legal dept is utilizing PMs more often - and inevitably projects involving PMs are more successful.”

“Some law schools are instituting project management course work for law students.

Also we are seeing more non-lawyers (particularly consultants) getting involved in the analysis of the legal process.”

“I have been doing it for 15 years. It is not a fad. It should be a core competency of inside and outside counsel.”

“The discipline of project management is changing, and as such all stakeholders need to have constant education.”

“I have seen the benefit of having separate project managers instead of having overworked lawyers try to do everything, but the company only employs what I would consider one project manager, in that we have a separate security (IT) information officer.”

“There are some areas, such as transactions, where project management makes sense.”

“I haven’t really seen it as a trend.”

“I see value in increased use of technology and databases for project management.”

“I think it would be very helpful to employ these techniques with dedicated employees or outside counsel to manage budget concerns as well as timeline and coordination with other parties. A big opportunity area.”

“It is a priority item for our department this year.”

“It is much needed.”

“Legal is late to the game. Again.”

“It is a process that is way past due in the legal field. Selling it to attorneys is the most difficult part.”

“Law Departments should consider cost of resources, and that in-house resources are not free. Establish processes for managing projects. What steps need to be taken for new and closed matters? What steps should be done by attorneys or staff to maximize efficiency?

“Legal is very late to the game. Project management is key, especially if there is an e-discovery component.”

“There were time when project management tools were primarily relied upon for the purpose of creating a paper-free environment, especially focusing on electronic invoices. However, now the expectation has gone to the next and higher level – a one-point project lifecycle management tool, which should do matter assignment; budget management and validation; timekeeper rate management and validation; approval tracking; periodical report tracking and alerts; automated invoice review and validation; early case assessment; law firm performance evaluation . . . ” “This would be most useful to us in managing insured litigation where the regular communication needs are more extensive and precise, internally and externally.”

“We are managing more and more projects that are less legal and more operational.”

“We use project management tools selectively on our major goals and initiatives, rather than on every matter or project that comes to our department. Our organization has a project management department, and we leverage that department rather than employing a project manager within our own department.”

“Yes, I’m a believer in a formal project plan and RACI chart to manage projects, but not for handling ‘matters’, i.e., cases where we have outside counsel engaged.” ■

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THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO APR/ MAY 2014

Cartel Enforcement Ramps Up in China

By Fay Zhou and Clara Ingen-Housz

S

ince its Anti-Monopoly Law (AML) came into force in August of 2008, China has become an increasingly important and dynamic jurisdiction for global antitrust lawyers. Over the past year, cartel enforcement in particular has intensified, as the agencies have built up capacity, confidence and experience. The result has been a series of high-profile actions against domestic and foreign companies in a broad range of industries.

This article provides an overview of some unique features of cartel enforcement in China and their significance for corporate counsel managing compliance risks for multinational companies.

THE LEGAL FRAMEWORK Cartels have been an enforcement priority and the target of the majority of enforcement actions for both the National Development and Reform Commission and the State Administration for Industry and Commerce.

NDRC and SAIC, together with their local offices, have distinct but often overlapping enforcement authority over different forms of cartel conduct involving price and non price-related agreements. Since 2012, the courts have also recognized a cause of action for private cartel enforcement.

Cartel agreements are prohibited as “monopoly agreements” under the AML. Article 13 covers a non-exhaustive list of horizontal restraints, including many traditional “hard core” cartel agreements, such as pricefixing, output/sales restrictions, market allocation and joint boycotting.

Notably, under Article 14 monopoly agreements also extend more broadly to vertical agreements, such as resale price maintenance (RPM).

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Article 15 provides for certain enumerated exemptions that essentially function as affirmative defenses, in which the parties prove ex poste that the agreement does not substantially restrict competition and enables customers to share any benefits.

These include situations where an agreement improves research and development of new technology, enhances product quality, improves operating efficiency of small and medium-sized companies, or involves a specific crisis cartel scenario. Cartel agreements may also violate related provisions of the Price Law and Anti-Unfair Competition Law. NDRC and SAIC have become increasingly active in targeting domestic cartels. Most of NDRC’s public enforcement actions have involved horizontal price-fixing agreements, although it has also been active in targeting RPM agreements. Most of SAIC’s decisions involve market allocation, output restrictions, and joint boycotting. The vast majority of both agencies’ enforcement cases involved consumer goods and services, including rice noodles, insurance, dairy products, used automobiles, LPG, tourism services, and driving schools.

NDRC has also joined the international crackdown on cartels and may become more active this year. In January 2013, NDRC sanctioned six multinational LCD panel makers from Korea and Taiwan with record fines totaling RMB 353 million (approximately U.S. $56 million), as part of a global investigation by agencies around the world. Recent talks with antitrust regulators in the United States included efforts to expand cooperation on global cartel investigations.

Media reports also suggest that the Chinese regulators have received complaints in connection with the global investigation of auto parts suppliers, an effort that has already resulted in significant fines in the United States and Europe.

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Fay Zhou is a counsel in Linklaters’ Beijing office. She has extensive experience in antitrust matters in China and other jurisdictions. She served in the Chinese Ministry of Commerce for eight years, and practiced with other international law firms in Washington and Beijing for six years before joining Linklaters. fay.zhou@ linklaters.com

UNIQUE FEATURES OF ENFORCEMENT IN ChINA The intensifying cartel enforcement activity provides insights into the agencies’ approach on a number of key issues, and accordingly the ramifications for multinational companies doing business in China. For in-house counsel, the level of enforcement and the scope of potential liability underscore the importance of incorporating China within a broader global compliance program. But even more important, the enforcement experience to date demonstrates that the compliance program must consider the specific risks associated with the market structure and regulatory environment in China.

While trade associations always present antitrust risks, enforcement experience shows that they may be of particular concern for multinationals who participate through agents and local offices in China. To date, trade associations were implicated in the majority of the investigations carried out by NDRC and SAIC, and they have been fined along with their members. In these cases, trade associations were found to have orchestrated anti-competitive cartels among their members. Sometimes information published by the trade associations on their own web sites was used as evidence against them.

While trade associations are subject to a fine cap of RMB 500,000 (approximately U.S. $80,000) under Article 46 of the AML, the exposure of the members may be significantly higher.

One reason that trade associations are particularly prone to cartel risk is their unique historical role in the Chinese market economy.

Unlike their counterparts in mature economies, many trade associations in China, due to administrative reforms conducted in the past decades, are former government agencies. Given their previous role in the industry, trade associations have in practice tended to initiate and manage concerted action among their members.

Furthermore, most trade associations do not yet have antitrust compliance programs.

As a means to access the market, many multinational companies are members of Chinese trade associations and attend trade association activities (including engaging with competitors and participating in joint actions organized by such trade associations). Companies should stay vigilant concerning the risk associated with these activities.

Although resale price maintenance enforcement may not be traditionally considered a form of cartel enforcement in other jurisdictions, the interplay between RPM and cartel liability in China should not be ignored. RPM is of particular importance for multinational companies in China due to the legal and practical reality that many of them rely heavily on domestic distributors to access these growing markets.

RPM is defined under the AML as a “monopoly agreement,” similar to a horizontal cartel agreement, and it is subject to the same fine provisions. Although NDRC has not issued clear guidance on the standards that should apply, officials have publicly taken the position that it is essentially treated as “per se” illegal, though with limited affirmative defenses.

Moreover, RPM increasingly has become an enforcement priority for NDRC. In August

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO apr/ may 2014

2013, for example, NDRC imposed total fines of RMB 670 million (approximately $108 million) on six domestic and foreign milk powder producers.

NDRC has recognized that RPM arrangements can be intertwined with horizontal cartel agreements. For example, for an upstream suppliers cartel, a company may impose RPM requirements to better implement the downstream prices it has agreed with competitors.

An RPM investigation may reveal evidence of horizontal collusion, or allow NDRC to bring a less burdensome proxy enforcement action even absent such evidence. For example, NDRC’s local branch in Jiangsu Province sanctioned several suppliers of dairy products for a combination of horizontal price-fixing and RPM. The competing suppliers were found to have colluded to fix the downstream prices of dairy products offered to supermarkets, and used RPM clauses in agreements with these supermarkets to further fix the price of dairy products sold to consumers.

RAPID INVESTIGATIONS, LIMITED SAFEGUARDS. Compliance risks are also on the rise as cartel enforcement actions are stepping up. Indeed, agencies’ investigative tools and skills have become increasingly sophisticated. For instance, NDRC and SAIC have launched dawn raids in cartel investigations and have become increasingly experienced in calling up an effective task force to carry out detailed high-tech investigations. They have accessed and relied on evidence from deleted emails, indicating their use of forensic IT techniques.

Cartel and RPM enforcement in China proceeds very quickly and lacks many procedural safeguards provided in more mature jurisdictions. For example, there is no formal right to external counsel, and no mechanism for limiting the scope of the investigation. Since attorney-client privilege protections do not apply in China, communications with counsel are not protected from disclosure. NDRC in particular is known to conduct its initial investigation very rapidly and seek confessions within days of a dawn raid. The milk powder RPM investigation, for example, lasted only a couple of months.

There is a statutory right of defense, but defendants often have little opportunity to exercise it and limited recourse to challenge a penalty.

While parties may attempt to defend their

conduct or limit the scope of liability, the pace of the investigation and narrow window for raising defenses makes preparation paramount.

As cartel enforcement becomes more active, cases involving big companies and significant fines are likely. The AML provides for fines of one to 10 percent of the offending company’s sales revenue for the preceding year, plus confiscation of alleged unlawful gains. However, the agencies have not yet published clear rules on the calculation of fines or unlawful gains.

In addition, cartel enforcement cases to date have not been entirely clear on what sales were the basis for fine calculations, including any limitations by geography or relevant business lines.

Consistent with some of SAIC’s prior decisions, several NDRC officials authored an article that appears to suggest that NDRC may ultimately calculate the fine on some level between the revenue generated from the affected products within China and the global revenue for the full product portfolio.

In the meantime, a company can potentially mitigate its exposure through cooperation with regulators. The agencies have been taking a flexible but unconventional approach to leniency that is broader in practice than in mature regimes like Europe and the United States.

While the AML requires self-reporting as a condition of leniency, the general administrative law includes a more flexible mechanism allowing companies to qualify for varying degrees of leniency depending on their level of cooperation and initiative in taking rectification measures.

The leniency provisions extend beyond horizontal cartel offences; they also cover RPM cases. Multiple companies have obtained full exemption of fines in a single investigation. Furthermore, although it’s less likely for a clear cartel violation, NDRC and SAIC have discretion to suspend an investigation without penalties where the parties undertake specific measures to rectify the anti-competitive conduct.

Companies doing business in China cannot afford to overlook this jurisdiction in their global antitrust compliance programs. Vigorous and large-scale cartel enforcement is likely to become the norm, as NDRC and SAIC gradually accumulate experience and build up enforcement capacity. The NDRC, for example, has increased its Price Law and AML enforcement staff at both the local and central level by 150 since 2011. Companies are advised to carefully assess their risks in light of the unique features of cartel enforcement in China, and to monitor developments closely. n

Clara Ingen-Housz is an antitrust partner in Linklaters’ Hong Kong office. She has expertise in Asian competition law and global antitrust matters, and experience in multijurisdictional merger filings, anti-competitive agreements, dominant firm analysis, distribution network structuring and compliance. clara.ingen-housz@ linklaters.com

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DOES THE MODERN ARBITRATION CLAUSE MEAN THE DEATH OF THE CLASS ACTION?

By Fletcher W. Paddison 48

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO APR/ MAY 2014

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n a trio of decisions, the U.S. Supreme Court has outlined a mechanism that could eviscerate commercial as well as consumer class actions, where the underlying contract incorporates an arbitration provision and a class waiver. While there are pitfalls to arbitration, and several strategic issues to be considered, serious thought should be given to incorporating an arbitration provision with a specific class waiver into commercial and consumer contracts where there is significant exposure to class proceedings and individual arbitrations would limit liability.

In 2010, the Supreme Court decided Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. This decision was followed by AT&T Mobility LLC v. Concepcion and more recently American Express Co. v. Italian Colors Restaurant. These decisions seem to have settled the issues of the enforceability of a class waiver under the Federal Arbitration Act (FAA) and the right to have these claims arbitrated on an individual basis.

Stolt-Nielsen dealt with the plaintiff’s ability to compel class arbitration. The Court held that arbitration is based on the “contractual rights and expectations of the parties,” and “as with any other contract, the parties’ intentions control.” Thus, the “parties are generally free to structure their arbitration agreements as they see fit,” and they can agree to limit the issues they will arbitrate and whom they choose to arbitrate with. This includes class action arbitration, and “it follows that a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”

have no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration.” This opens the door to uncharted territory regarding what evidence would support such a finding.

EARLIER DECISION SHOULD BE REVISITED

The uncertainty here is exacerbated by the Supreme Court’s decision on which tribunal – the trial court or the arbitrator – should make this determination. On this issue, the Supreme Court noted that its prior decision in Green Tree Financial Corp. v Bazzle apparently “baffled” the parties and the courts below. Small wonder. The decision in Bazzle was a plurality opinion with four Justices finding that it was for the arbitrator to determine if the parties had consented to class arbitration.

This holding should be reconsidered. The courts have uniformly held that the issue of whether the parties’ contract incorporates an enforceable arbitration agreement is to be decided by the court. Whether the parties’ contract also incorporates an agreement to class arbitration should likewise be determined by court. Leaving this issue for the arbitrator to decide, with no real right of review, will result in conflicting and potentially arbitrary results.

However, the issue should be academic. Given the Supreme Court’s decisions in AT&T Mobility and American Express, an arbitration provision should incorporate an explicit waiver of class arbitration, if that is the intent of the parties.

Through incorporation of a specific waiver of class arbitration, a company will be able to compel individual arbitration and effectively eliminate class action exposure.

In Stolt-Nielsen, the arbitrator ordered class arbitration based on public policy concerns rather than the agreement between the parties. Based on the parties’ stipulation that there was “no agreement” on class arbitration, the Supreme Court reversed, holding that there was no evidence that the parties had agreed to class arbitration.

This stipulation makes this case unique. It is not enough to show that the arbitrator committed error; it is only when the arbitrator strays from the agreement, “and effectively dispenses his own brand of industrial justice that his decision may be unenforceable.”

In a tantalizing footnote, the Court stated “[w]e

In AT&T Mobility and American Express, the Court held that individual arbitrations will be compelled in consumer and commercial cases where the arbitration clause includes a class waiver. In AT&T Mobility, the Court held that a class waiver was enforceable even where it’s used by a “party with superior bargaining power” to carry out “a scheme to deliberately cheat” consumers. In American Express, the Court held that the class waiver is valid even where a class action is the only mechanism to effectively enforce statutory rights and vindicate the public policy underlying these statutes.

In AT&T Mobility, the U.S. Supreme Court invalidated the California Supreme Court’s Discover Bank

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decision, which had held that a class waiver in a consumer contract was unconscionable.

The California Supreme Court noted that “the waiver becomes in practice the exemption of the party from responsibility for [its] own fraud, or willful injury,” and such waivers are unconscionable and should not be enforced.

The U.S. Supreme Court held that this allowed the consumer to demand class arbitration ex post, and thereby avoid arbitration entirely. The U.S. Supreme Court also held that this rule “stands as an obstacle” to the accomplishment “of the full purposes and objectives of Congress,” interferes with the federal policy favoring arbitration and was preempted by the FAA. Under the FAA, a party may limit its arbitration to an individual party and refuse to participate in class arbitration.

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Many arbitrators are reluctant to exclude hearsay or other evidence that would be routinely excluded in court.

Fletcher W. Paddison, based in San Diego, is a partner with Troutman Sanders LLP. He has significant trial experience in federal, state and bankruptcy court litigation covering a wide range of business issues, including unfair competition, antitrust, trade secret/intellectual property, and class action matters. fletcher.paddison@ troutmansanders.com

This holding was reinforced by the U.S. Supreme Court’s recent opinion in American Express, holding that business merchants could be compelled to participate in individual (not class) arbitrations. The Merchant Agreements there provided: “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.” Following its prior decisions, the Court held that this class waiver was enforceable and that individual arbitrations could be compelled even if the costs exceeded the potential recovery.

Significantly, the Supreme Court found that: there was no “entitlement” to have claims determined on a class basis under Rule 23 of the Federal Rules of Civil Procedure; and there was no right to a class arbitration under the Sherman or Clayton Acts, even if a class action was necessary to the vindication of a statutory right.

CONTRACT CAN ELIMINATE EXPOSURE

A company should consider an arbitration provision with an explicit class waiver in any commercial or consumer contract where there is a significant danger of a large number of small damage cases that can be economically brought only in a class action. Through incorporation of

a specific waiver of class arbitration, a company will be able to compel individual arbitration and effectively eliminate class action exposure.

This issue is controversial, however, and many courts (and arbitrators) will push back against it. In the American Express proceedings, the Second Circuit had previously reversed the district court’s order compelling individual arbitrations three times. In light of the Supreme Court’s decision in Bazzle, this issue is to be decided by the arbitrator, and an arbitrator may well stretch to find some contractual ground to support class arbitration. It will be difficult to challenge the arbitrator’s decision unless there is absolutely no evidence to support that finding.

Accordingly, the arbitration agreement should incorporate a clear and definite class waiver.

It should be noted that pressure for a legislative change will undoubtedly build. Legislative change could be in the context of either consumer actions, or situations where Congress found that class actions are necessary to the vindication of a statutory right and public interest. Assuming these legislative changes were retroactive, these amendments would likely invalidate the class waiver but may not invalidate the underlying arbitration agreement.

In such a case, the arbitration clause would be enforced and class arbitration could be compelled. Given the current trend of federal law on class certification, a company may well prefer the protections afforded by Fed. Rule of Civ. Proc. 23, over having the matter heard before an arbitration panel. In those circumstances, a company should give consideration to an arbitration clause that incorporates a specific waiver of class arbitration with a provision that, if this waiver was deemed unenforceable, any class action could only then be heard in district court. Note that this type of provision has not yet been tested in court.

Arbitration has its own downside. There is no right of review and a bad decision will usually stand. Discovery is limited. Often, rules of evidence are not applied. Given that one of the grounds for reversing an arbitration award is the refusal to hear relevant evidence, many arbitrators are reluctant to exclude hearsay, incompetent evidence, or prejudicial evidence that would be routinely excluded in a court of law.

Additionally, while companies may assume that arbitration is “business friendly,” sometimes the consumer may find a welcome forum receptive to their claims. And, in certain circumstances, a flurry of individual arbitrations can be more costly and adverse to a business than a class resolution that allows for the company to secure the benefits of a class-wide settlement. n

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Law and the Fear of Cancer

By Phil Cha and Dan Farino

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO apr/ may 2014

I

ncreasing numbers of plaintiffs are seeking damages for emotional distress engendered by a fear of contracting cancer. In the toxic tort field, many fear-of-cancer lawsuits have involved complex claims of exposure to carcinogenic or potentially carcinogenic compounds, such as asbestos or petroleum additives. However, only a few jurisdictions have established prima facie standards for this complex cause of action, and in arriving at those standards the courts have been challenged with the task of balancing competing public policy interests.

Despite improving medication and treatment, cancer remains a life-threatening illness and legitimate fear of developing of cancer can cause emotional distress. One person may develop cancer from a different level of exposure than another, and the latency period of cancer varies, so post-exposure distress can occur prior to actual diagnosis of cancer.

Therefore, consistent with tort law’s goal of making plaintiffs whole, courts have been challenged with providing a means for individuals who experience legitimate emotional distress as a result of exposure to carcinogenic compounds to obtain compensation, while setting reasonable standards to prevent meritless claims.

Nevertheless, because of the confounding characteristics of cancer, the potential for misapplication or abuse of this claim exists.

A plaintiff’s claimed emotional distress may be meritless or wholly speculative. Aside from the usual challenges of evaluating the veracity of an individual’s claimed emotional distress, because of cancer’s inconsistent genesis and latency period it is challenging for a fact finder to evaluate whether a toxic exposure will cause the plaintiff to develop cancer at some point in time, which in turn makes it difficult to evaluate whether a plaintiff’s emotional distress claim is reasonable.

An opportunistic or disingenuous plaintiff could use this uncertainty to advantage, feigning emotional distress in order to secure a financial windfall. Due to the scientific uncertainty surrounding what exactly causes cancer in humans, any person who has been exposed to a carcinogen could theoretically be entitled to fear-of-cancer damages in the absence of a legal standard providing guidance and limits for this cause of action.

The courts that have ruled on emotional distress claims have set standards for a plaintiff to

prove an objectively reasonable fear of cancer, but those standards vary from jurisdiction to jurisdiction. Potter v. Firestone Tire and Rubber Co., a Supreme Court of California decision, and Exxon Mobil Corp. v. Albright, a Maryland Court of Appeals decision, present two significant precedents for proving a prima facie case of fear of cancer.

In 1993, the Supreme Court of California in Potter set what is widely regarded as the seminal standard regarding fear of cancer claims, by requiring proof, in the absence of a present physical injury or illness, that the plaintiff was exposed to a toxic substance which threatens cancer; and that the plaintiff’s fear stems from knowledge, corroborated by reliable medical or scientific opinion, that it is more likely than not that he or she will develop cancer due to the toxic exposure.

In striving to ensure that a plaintiff’s fear of cancer claim is genuine and reasonable, the Potter court specifically rejected the argument that an exposure – or even a significant increase in the risk of cancer – is enough to recover fear of cancer damages where there is no showing of the actual likelihood of developing cancer due to the exposure. The court explained, for example, that “nearly everybody is exposed to carcinogens which appear naturally in all types of foods. Yet ordinary consumption of such foods is not substantially likely to result in cancer. Nor is the knowledge of such consumption likely to result in a reasonable fear of cancer.”

In 2013, the Maryland Court of Appeals set the most recent standard for fear-of-cancer claims in the Albright case. Until this litigation no legal standard existed under Maryland law, but the lower courts had awarded significant financial damages to numerous plaintiffs with respect to their claims stemming from alleged contamination of their well water as a result of a significant gasoline leak from a nearby gasoline station.

Making the court’s task difficult was the fact that the chemical at issue was considered a potential carcinogen rather than a known carcinogen. Still, plaintiffs contended through an expert witness that since the compound is known to be mutagenic, no safe level of exposure to this compound exists and therefore any exposure increases the risk of cancer.

On appeal, the Albright court asserted a significant interest in applying a measure of objective reasonableness to fear of cancer continued on page 57

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THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO apr/ may 2014

Defining the new Law Department Library

by Kris martin

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n 1983, at a time when nearly all legal research required going to a physical library to use books and terminals, the UCLA Law Review published a study related to time spent on litigation. The authors found that legal research accounted for 10 percent of a lawyer’s time.

Thirty years later, given the instant availability of data through advanced search platforms, you might think that lawyers would spend far less than 10 percent of their time conducting research. But a 2012 survey conducted by the Association of Law Libraries found that, overall, research time has increased. Although a slight majority of 600 respondents reported spending less than 15 percent of their time on legal research, the remaining respondents are spending more time. Twentyfour percent of respondents reported they spent 15 to 25 percent of their time conducting legal research, and 23 percent spent more than a quarter of their time on research.

Apply this statistical trend to the 1.2 million attorneys practicing just in the United States, while also considering the $10 billion spent annually on their legal research products, and the need to define the role of a new “library� within the law department is clear.

The nature of the law library has changed dramatically. Primary and secondary legal content, once available only in print, is available now at the desktop and through mobile devices. This kind of change is forcing law departments to consider the cost and value of information services.

For one thing, because so much information is digital, collection management is evolving from a purchase-and-maintain to a subscribe-and-license model. Moreover, the collection is no longer focused only on legal topics, but incorporates content that can serve the business of legal services and provide a full spectrum of client support.

Although the majority of law departments today have a law library in some form, few have formal library or information management professionals. In the 2013 HBR Consulting Law Department Survey, only 8 percent of the 226 corporations that responded had a librarian. Even fewer had more than one. But as the volume of available data continues to increase rapidly, lawyers will either need to dedicate more time to research, develop an increasing reliance on outside counsel for both legal and non-legal information, or bring in information professionals.

Information professionals have distinct advantages. They can, while carrying out their primary role in the law department, also provide services to other corporate departments. Their methods of delivering information can take into account considerations ranging from region, practice, and specific industry content, to user behavior and product and technology preferences. Information professionals may provide

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highly curated content that will increase the organization’s efficiency and effectiveness, while decreasing cost and risk.

Nonetheless the need for information professionals is likely to be questioned.

Many leaders may feel the Internet makes information professionals superfluous. But it can be argued that professional skill and knowledge is essential. The promise of quality information through a simple free search on Google or other search engine often is not realized. Given the business models of these services, they may come with some risk to the organization.

is not the best response. The alternative is to revisit the overall library information strategy and create a charter to incorporate only the most needed resources.

Consider a single component of every legal collection: primary material. Accessed electronically, case law and statutes have been largely commoditized, and lawyers can obtain them for little or no cost. Sources such as Fastcase or Loislaw offer search flexibility and may be alternatives to premium services.

In addition Justia and Cornell’s Legal Information Institute offer complete free access, although without the bells and whistles of

The collecTion is no longer focused only on legal Topics, buT incorporaTes conTenT ThaT can serve The business of legal services and provide a full specTrum of clienT supporT. 56

Kris Martin, a senior director at HBR Consulting. He leads HBR Consulting’s Research + Information Solutions team, which provides cost reduction, technology and operations consulting to law firms and law departments.

Across a 15-year consulting career, he has led more than 400 projects globally. kmartin@ hbrconsulting.com

The information professional’s role, in short, is to assess resources and then provide results that will enable the organization to avoid incurring the potential significant costs of incorrect or missing information.

Another concern is attorneys and other knowledge workers who engage in poor information management practices, which can come at a significant cost. An IDC study released in 2012 quantifies the negative impact of poor practices surrounding the creation, management and finding of information at nearly $20,000 per year per employee.

Print materials are a prime target for any resource rebalancing project. Similar materials across various publishers may be duplicative, in part or entirely. Large distributed law departments may have multiple copies of the same title. A systematic study can identify these issues, the options for moving to electronic sources, and the best practices to manage the change.

In most law libraries, costs continue to increase. The Emory Law Library website includes a compilation of increased print material costs for law libraries and indicates some alarming percentages, including a 72 percent increase in the cost of continuations between 2002 and 2006. Simply cutting titles

paid services. Google Scholar also offers an alternative. Advanced skills are not needed to use these services. To be fair, however, they may in practice contribute to the cost of time wasted, as referenced in the IDC study.

Here are the key points to keep in mind when considering today’s corporate law library: The costs and volume of required materials are high and increasing, but these materials may be shared across the organization. The need for general law books has given way to the need for essential specialty materials. The expectation of just-in-time information means that access to digital materials is essential – and it is available, cost-effectively, for both legal and non-legal materials. At the same time, there has never been a greater need for legal teams to include professionals who can ensure that users receive the right information.

The new library offers a rich digital collection, curated by professionals who understand the needs and information practices of the users they serve. It delivers services that respond to the challenge of high demand with ever-tightening time frames. It stays current with the changing landscape of technology, information resources and user needs, and it provides service that maximizes the value of selected resources. n

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO apr/ may 2014

Law and Cancer continued from page 53

Courts have been challenged with providing a means for individuals who experience emotional distress as a result of exposure to carcinogenic compounds to obtain compensation, while setting reasonable standards to prevent meritless claims. claims. With this in mind, the court held that to recover emotional distress damages for fear of contracting a latent disease in Maryland a plaintiff must show (1) that he was actually exposed to a toxic substance due to the defendant’s tortious conduct, (2) which led him to fear objectively and reasonably that he would contract a disease and (3) as a result of that fear he manifested a physical injury capable of objective determination.

Under Maryland tort law “physical injury” would not mean the plaintiff manifested cancer, but that the injury for which recovery is sought is capable of objective determination, meaning testimony “must contain more than mere conclusory statements” and be sufficiently detailed “to give the jury a basis upon which to quantify the injury.”

Applying this new standard, the Albright court overturned emotional damage awards for all residents who failed to present evidence of detectable contamination in their well water, as they could not meet the first prong of its fear of cancer standard.

To ensure that the plaintiffs’ fears were reasonable and objective, the court determined that even those plaintiffs who demonstrated detectable contamination in their well water had to show exposure above the concentration level of a particular contaminant at which treatment of contaminated water is required by the State of Maryland. Finally, to ensure against the possibility of feigned claims, and to prove a causal relationship to the alleged tor-

tious conduct, the court examined whether the plaintiffs had presented sufficient evidence of a “physical injury” resulting from their objectively reasonable fear.

Of the eighty-eight plaintiffs who were originally awarded emotional damages for fear of cancer, only one plaintiff’s fear of cancer claim survived judicial scrutiny, based upon expert testimony attributing the plaintiff’s depression, anxiety, headaches, and nausea to the defendant’s tortious conduct.

The prima facie standards set by the Potter and Albright courts are not without critics. The uncertain science regarding the genesis and latency of cancer means a person exposed to carcinogenic compounds might experience some level of emotional distress from fear of developing cancer. Plaintiffs’ advocates would argue that victims of toxic torts do not choose to be exposed to carcinogenic compounds, and therefore deserve a means of compensation for any genuine emotional distress that results.

Critics of the Potter and Albright standards would also argue that the prima facie standards require plaintiffs to expend significant amounts of money for toxicology and epidemiology experts, and are too stringent and difficult to meet.

Nevertheless, a clear message has been sent.

In the eyes of the judiciary, a standard which ensures that plaintiffs’ fear of cancer claims are genuine and objectively reasonable is prudent and necessary, and satisfies competing public policy interests. n

Phil Cha is a shareholder at Archer & Greiner, P.C. His environmental law practice includes environmental litigation and transactions, regulatory compliance, oil and gas and toxic torts. He has extensive experience representing clients in the remediation, sale and development of contaminated properties. pcha@archerlaw.com

Dan Farino is an associate at Archer & Greiner, P.C., in the firm’s Environmental Litigation practice group and Petroleum Industry Practices group. He is a member of the firm’s E-Discovery Standing Committee. dfarino@ archerlaw.com

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Five Best Practices for

Corporate Counsel

By Bob D. Rowe

W 58

e expect this year’s most successful corporate law departments will implement initiatives to streamline and protect corporate data, measure departmental performance, and foster the development of a strong, independent compliance program. With these strategic initiatives in mind, we propose the following five best practices for corporate counsel.

1. Prepare for a cyberbreach.

Do you have a plan in case your data is compromised? If not, now is the time, well before a data breach occurs, to establish one. When you do, consider how the breach may affect the public as well as the company’s goodwill.

Keep in mind the possibility of internal as well as external threats. Edward Snowden’s leak of documents relating to the National Security Agency’s clandestine surveillance programs has brought cybersecurity issues to the forefront.

Organizations should review their privileged-user policies as well as current access capabilities through administrative rights to privileged data.

In addition, they should examine the framework proposed by the National Institute of Standards and Technology (NIST). Though designed to address the needs of critical infrastructure, such as telecommunications and transportation, its principles serve as useful guidelines for all organizations, regardless of industry.

2. Focus on information governance.

As organizations’ data continues to grow, they face new information management issues and risks. The more data that exists, the greater the risk of mishandling or inappropriately destroying it. Law departments recognize their shortcomings in this area.

Organizations should take steps to develop actionable policies that provide clear direction on retention and preservation obligations.

With a governance foundation in place, organizations can be in a defensible position to systematically dispose of information that

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO APR/ MAY 2014

surpasses all regulatory, legal and operational needs. Counsel should understand their duty to preserve data and collaborate with the IT and Records Management departments to develop a workable strategy. Technologyassisted review tools may help identify and categorize information according to its retention requirements. Creating a map of the stored data will help in the event of litigation or a government investigation.

Organizations should focus on a broad, enterprise-wide information governance strategy developed by IT, legal, records, and business stakeholders. With an increased focus on cybersecurity and the proliferation of Big Data, companies may also want to consider appointing an information governance officer, who has responsibility for enterprise-wide information governance and ensures that the organization has sound information management, privacy, records retention, and data security strategies in place.

3. Separate work and play.

If your company is not among the 33 percent of companies with a bring your own device (BYOD) policy that addresses smartphones (that’s according to a 2013 survey by Gartner), it’s time to draft one. A recent survey by IT governance, risk, and compliance company Coalfire reported that 86 percent of respondents used the same smartphone for business and work purposes. And of the respondents, 47 percent reported that they did not use passwords to protect their mobile phones.

BYOD policies ensure employees remain productive on their mobile devices while simultaneously protecting the company’s confidential information. At a minimum, BYOD policies should mandate the use of complex, alphanumeric passwords, not just four-digit PINs, and require the use of lock screens.

In addition, organizations should look into mobile device management software (MDMS), new technology that manages data on mobile devices such as smart phones and tablets. This technology can allow the organization to retain control over the work-related data, so it can collect the business data for discovery or wipe it if the phone is lost or if the employee leaves the company.

4. Strengthen internal compliance controls.

There have been a number of recent news stories about organizations facing large regulatory penalties relating to securities, bribery and

other alleged regulatory violations. While the organization’s immediate impulse may be to blame a “rogue” employee, a better solution is to take preventive action by examining and, where necessary, strengthening internal compliance controls.

TO JUSTIFY THEIR BUDGET AND HEADCOUNT, LAW DEPARTMENTS MUST GENERATE REALISTIC NUMBERS, SUPPORTED BY DATA, THAT THEY CAN REPORT TO THE C-SUITE.

Particularly in this environment of heightened regulatory scrutiny, whistleblower activity and various reforms, bolstering your organization’s governance, risk management, and compliance (GRC) program is common sense.

Organizations may want to investigate the opportunity to use technological solutions to track and manage policy management, approvals, compliance training and investigations. Companies also may want to consider separating the compliance function from the law department to ensure its independence.

5. Remember that “what gets measured gets managed.”

Law departments have traditionally been viewed as a cost center, and the usual key performance indicators employed by other departments may not accurately measure corporate counsel’s strategic contributions.

To justify their budget and headcount, law departments must generate realistic numbers, supported by data, that they can report to the c-suite.

For instance, gathering data about competitors and similarly sized industry peers from industry surveys, such as the 2013 IMPACT® Benchmarking Survey or through individualized benchmarking, can offer a baseline perspective for measuring performance.

In-house counsel can use data from matter management programs, e-billing systems and other practice management software to study internal data to analyze the department’s current state and to monitor year-over-year progress, so they can identify opportunities for improvement. ■

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Bob D. Rowe, Huron Legal Executive Vice President and practice leader, has more than 20 years experience providing solutions and project management for legal matters, including e-discovery, to Fortune 500 corporations and to law firms.

He previously led the discovery services business for Huron Legal.

Earlier in his career, he practiced antitrust law with several AmLaw 100 firms. browe@ huronconsultinggroup.com

The First Question: To Arbitrate or Not to Arbitrate?

By Mark C. Zebrowski

60

Y

ou may have heard of the 2013 “trial of the century,” which resulted in a $1 billion verdict. But have you heard of what I will refer to as the 2013 “arbitration of the year” that resulted in a $2.8B award in an action for termination of a distribution agreement?

Arbitration clauses can have major consequences, but they are often included in contracts without a full understanding of arbitration or based on assumptions that may well not be true.

• Faster? It can take as long or longer to get to arbitration as it can to get to trial.

• Cheaper? It can cost as much or more to arbitrate than to try a case in court, and of course if it is not faster, it is probably not cheaper.

• Less risky? Arbitrators are not required to follow the evidence code or the substantive law, they tend to grant dispositive motions even less often than do judges, and arbitration awards are generally not appealable.

Consider these Rules: Under California law, the rules of evidence and judicial procedure need not be observed (California Code of Civil Procedure Section 1282.2) and unless specifically required by the arbitration agreement to act in conformity with the law, arbitrators may base their decision on “broad principles of justice and equity, and in doing so may expressly or impliedly reject a claim that a party might successfully have asserted in a judicial action.” (Moncharsh v. Heily & Blase, 1992).

Under federal law, parties may not successfully attack an arbitration award based on the arbitrators’ failure to understand and apply the law. (Collins v. D. R. Horton, 9th Circuit, 2007) Under the American Arbitration Association’s Complex Commercial Arbitration Rules, “conformity to legal rules of evidence shall not be necessary,” and “the arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties.” continued on page 64

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61

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62

IN A CLASS By THEMSELvES

FIrM MAKeS An ArT oF JoInInG ForceS To MAKe A MAJor IMPAcT Some of the most important tools a lawyer has to help injured people are class and mass actions. Such lawsuits allow individuals – all of whom have suffered some harm – to join together to take on powerful institutions they could not afford to battle alone.

Girardi | Keese has made an art form of the technique, using class and mass actions to help individuals whose homes were not built to code or built on toxic waste dumps; who were prescribed medication that ended up harming them; or who were charged unfair fees by insurers.

“It’s critical that consumers be allowed to band together to take on rich, powerful corporations,” says Graham LippSmith, who heads the firm’s class action division.

In 2011, he and Tom Girardi won the settlement of the year on behalf of 13 million policyholders of Farmers Insurance who had been assessed unfair management fees for their policies. The firm scored a $549 million settlement for the policyholders.

“While each of these policyholders may only have been charged small amounts, when put together you can see that Farmer’s took millions from its customers unfairly,” LippSmith explains.

Keith Griffin and Girardi used a mass action to successfully settle claims against GlaxoSmithKline, whose Avandia diabetes drug caused up to 200,000 heart attacks in the U.S. The firm represented 4,200 patients who took the medication to regulate their blood sugar.

“Whether we are taking on Vioxx, Fosamax, Avandia, Yaz, Actos, Zometa, it is exceedingly important to our ability to help people that we be able to form a united front of those who have been injured,” explains Jack Girardi, who is handling the firm’s work on Zometa and Fosomax. Merck marketed Fosamax as a drug to combat osteoporosis.

However, according to more than 2,300 lawsuits over the drug, it can cause ‘dead jaw,’ in which the jawbone deteriorates requiring they do business – in addition to paying monetary compensation.

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The firm’s work on pharmaceutical cases has facilitated dangerous drugs being withdrawn from the market.

“That’s how developing is done,” he explains.

“If you can save a little money on one house and multiply that over dozens of developments and thousands of homes, you save a lot of money on the cost of building houses.”

Class and mass actions aren’t just for taking on the pharmaceutical and insurance industries, either. LippSmith is currently representing 10,000 homeowners in Hawaii in construction defect class actions over shoddy building that left the homeowners Recreated in Illustrator vulnerable to high winds.

Not Outlined

Times New Roman Regular “These homeowners are in a terrible situation,” says 100% size asLippSmith, in PSD file who studied for and passed the Hawaii bar to facilitate the claims. “These are wonderful people, former military members as well as young families who have been sold homes that will not withstand the high winds that can hit Hawaii.”

The flaw in the home construction is the connectors that join Recreated in Illustrator the foundation to the first floor, the first floor to theOutlined second and 100% size as in PSD file the second to the roof. “The connectors have to have sufficient strength to deal with what’s called uplift and lateral shift,” LippSmith says.

To save money, the builders used connectors—hurricane straps—that withstand wind speeds way below the requirements to be safe. “We’re seeing some homes where the straps have cracked all the way through, so there’s nothingOriginal holding the frame from Photoshop Saved as Photoshop EPS to the foundation,” LippSmith says. The developer could have 100% size as in PSD file used anchor bolts, he explains, which are far safer and more secure, however that would have cost more money.

“It’s always about the bottom line” in class actions, LippSmith says.

“If you can find where the mistakes were made, that’s the key to doing well for the people we represent.”

Another important element of class and mass actions is the ability to repair harm–or get companies to change the way they do business–in addition to paying monetary compensation. The firm’s work on pharmaceutical cases has facilitated dangerous drugs being withdrawn from the market, while its work on toxic housing developments has required developers to clean up the soil. In Hawaii, “We’re not just trying to get people money in their pockets,” says LippSmith. “We want these homes fixed. It doesn’t do any good to give someone $50,000 and tell them to go have their home fixed when what the community needs is to be made safe for the residents, many of whom are military who’ve served our country overseas in combat.

“You really feel you’re helping people by protecting them and helping restore value to their homes,” he says 1126 Wilshire Boulevard Los Angeles, CA 90017 Phone: 213.977.0211 www.girardikeese.com

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apr/ may 2014 today’s gener al counsel

The First Question continued from page 60

Reasons to Arbitrate: All of that said, there still may be good reasons to consider arbitration, including: Control. Arbitrators will generally enforce the parties’ agreement on procedural issues such as arbitrator selection and discovery.

Confidentiality. Arbitration proceedings and awards are generally not public.

Precedent. Arbitration awards generally do not create negative precedent.

Finality. While there is the risk of an “incorrect” award being final, there is the benefit of the dispute coming to an end.

No jury bias. A party may consider arbitration if it is concerned about a risk of jury bias against the party, its industry, etc. or about jury bias in favor of its likely adversary (e.g., its consumers or employees).

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Qualified listeners. The parties may desire that one or more arbitrators have particular qualifications.

Particular benefits for international transactions. International business transactions often have arbitration provisions to provide a known, perceived neutral forum for dispute resolution.

Mark Zebrowski, a Morrison & Foerster commercial litigation partner, has practiced in San Diego for 30 years. In addition to commercial litigation matters, his practice includes real estate, section 17200 litigation, partnership and shareholder disputes, and legal malpractice defense. mzebrowski@ mofo.com

Arbitration Clause Considerations: Commercial arbitration is a creature of contract, and courts and arbitrators will generally enforce the agreement of the parties. If arbitration is desired, then parties and their counsel should consider expressly addressing at least the following issues in an arbitration agreement.

Enforceability. While arbitration clauses are generally enforceable, it is important to review and comply with the latest federal and state court opinions on the topic, particularly in consumer and employment contracts. California courts may be reluctant to enforce an arbitration provision if they determine it to be substantively or procedurally unconscionable.

The provider. Identify the arbitration service provider to be used.

Rules. Many providers have more than one set of rules. Which will apply? Be sure to be familiar with rules before agreeing to them.

When selecting the rules, consider whether the operative rules will still be those in place at the time of contracting, or those that may be amended thereafter.

Number of arbitrators. Will there be one or three?

Arbitrator qualifications. Will the arbitrators be retired judges? Attorneys? Professionals with other qualifications (e.g., architects, accountants, life science professionals)?

Arbitrator selection. Will the provider present proposed arbitrators, with each side allowed to strike some? Will each side select a “party” arbitrator, with the two party arbitrators to then select the third arbitrator?

Alternative provider. Identify an alternative provider in case the provider of choice is unable to meet the parties’ needs – for example, it is not able to provide arbitrators with the agreed upon qualifications.

Discovery. What discovery will be allowed?

How much? What limitations? Consider agreeing to a circumscribed scope of e-discovery, such as with identified, limited search terms.

The law. Will the arbitrators be required to follow the law?

Timing. When must the hearing commence? How long does the panel have to render its decision?

Arbitrator powers. Will the arbitrators be empowered to award equitable relief?

Form of award. Will the award be merely a monetary award? A statement of decision?

Appeal. Will the award be appealable? If so, on what grounds and to what body? This is another area where it is important to review and comply with the latest applicable court opinions on the topic.

Like a hammer, arbitration may be the right tool for the right job, but can do a lot of harm if used in the wrong situation. Carefully consider whether arbitration is the proper tool for the legal job at hand and, if so, how to use the tool for its maximum benefit with minimal risk of harm. ■

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