Today's General Counsel, V11 N4, August/September 2014

AUG/SEPT 2014 VOLUME 1 1 / NUMBER 4 TODAYSGENER A LCOUNSEL.COM

FUNCTIONAL INQUIRIES Why Are Outside Counsel Hired, And Fired?

A Today’s General Counsel Survey Ten Things To Check On Your E-Discovery Bill Internal Fraud Investigation: The First Five Days Preserving Privilege in Internal Investigations Unemployed as Protected Class An Alternative Workweek in California Mitigating Written Communication Risk The New Cybersecurity Framework America Invents: Year One Antitrust Compliance – Train or Regret The Whistleblower Within Canada’s Antitrust Risk For U.S. Manufacturers Performance Pitfalls under Government Contracts The Kahn Decision and “Special Committees”

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Editor’s Desk

The e-discovery speciality, less than a decade old, is about to spawn a niche: e-discovery bill reading. As Andrea L. D’Ambra points out in this issue of Today’s General Counsel, the process of e-discovery is so complicated, and the person reviewing the bills is usually so far removed from it, that he or she cannot distinguish between legitimate charges and overcharges or errors. These issues are usually the result of honest mistakes, but they can add up. D’Ambra’s article provides some good tips on what to look for until bill reading consultants become an option.

Sandra C. McCallion and Melanie A. Grossman write about another aspect of e-discovery, the smoking guns within employee emails, texting and social media postings that can destroy a case. The authors call corporate America’s response to this issue ineffective, and suggest some strategies that might work.

Gary D. Friedman and Kent K. Anker discuss a recent Delaware Supreme Court ruling that needs to be kept in mind when a controlling shareholder drives a merger. The protection of minority shareholders is usually entrusted to special committee of the board, and the court describes how the committee should fulfill its duty in a way that results in an uncoerced, informed vote by minority stockholders.

Nikiforos Iatrou, Bronwyn Roe and Hayley Peglar explain three recent Canadian Supreme Court rulings that have serious implications for U.S. companies supplying goods or product components in Canada. Collectively, the decisions mean that companies acquiring products from resellers can bring class actions for damages based on violations of Canada’s competition laws. This is in sharp contrast to the United States, where a Supreme Court decision prohibits such claims on the federal

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level, and numerous states prohibit them as well.

A TGC survey on law firm hiring practices has some interesting findings, but the comments respondents submitted will be eye-openers for our law firm readers. “Please don’t use your political connections to force us to hire you. I think it skirts the bounds of ethics to solicit work this way,” says one respondent. A major takeaway: Technical proficiency and a track record trumps personal relationships every time.

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

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Features

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CANADA DECISION POSES ANTITRUST RISK FOR U.S. MANUFACTURERS

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INTERNAL FRAUD INVESTIGATION: THE FIRST FIVE DAYS

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PRESERVING PRIVILEGE IN INTERNAL INVESTIGATIONS

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AVOIDING PERFORMANCE PITFALLS UNDER GOVERNMENT CONTRACTS

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WHO CAN BE A FALSE CLAIMS ACT WHISTLEBLOWER?

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Nikiforos Iatrou, Bronwyn Roe & Hayley Peglar Indirect purchasers can be liable north of the border.

Erick O. Bell Secure evidence, organize resources, and evaluate the substance of the allegation.

Stephen A. Miller & Brian Kint The court’s “primary purpose” test for questions of document privilege.

Kara M. Sacilotto Manage subcontractors carefully or risk debarment.

Marilyn May Yes, even your compliance officer could blow the whistle.

COLUMNS

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ROBUST ANTITRUST COMPLIANCE PROGRAM CAN HAVE BIG PAYOFF

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NEW CYBERSECURITY FRAMEWORK PUTS LITIGATORS, INFORMATION SECURITY OFFICERS, ON SAME PAGE

Jeffery M. Cross Train your employees or the prosecutor won’t believe you’re serious.

Tom Lambakis Information management serves governance and litigation, as well as cybersecurity.

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Departments Editor’s Desk

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Executive Summaries

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Page 26 6 L ABOR & EMPLOYMENT

16 More States Ban Hiring Discrimination Against the Unemployed, Feds May Follow Salvador P. Simao No job posting references to employment status, no preference for the currently employed.

18 Setting Up an Alternative Workweek in California Jenna M. Crisci and Christopher W. Olmsted Devilish details in the alternatives to the eight-hour-a-day, five-day week.

E-DISCOVERY

20 Ten Things to Check on Your E-Discovery Bill Andrea L. D’Ambra Honest mistakes can add up.

24 Mitigating the Litigation Risk of Written Communications Sandra C McCallion and Melanie A. Grossman Corporate America’s response to the risks posed by all that’s memorialized has been ineffectual.

INTELLEC TUAL PROPERT Y

26 Internal Procedures and Third Party Agreements Under the AIA

TGC SURVE YS

32 Law Firm Hiring 2014

• Comments from Respondents

Snapshot of hiring preferences and practices.

Candid reflections on the hiring process.

Leigh C. Taggart and Heidi M. Berven Suppliers and other partners could beat you to the Patent Office.

• Technical Proficiency Prevails Over Personal Relationships

GOVERNANCE

What respondents see as the key attribute for law fi rms.

30 What the Kahn Decision Says About “Special Committees” Gary D. Friedman and Kent K. Anker Delaware court outlines path to an informed vote by minority stockholders.

• Convert and Standardize Data to Analyze Law Firms Rees Morrison A simpler way to visualize the metrics of law fi rm performance.

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exeCutive editor Bruce Rubenstein

senior viCe president & managing direCtor, today’s general Counsel institute Neil Signore art direCtion & photo illustration MPower Ideation, LLC law firm business development manager Scott Ziegler database manager Matt Tortora

Contributing editors and writers

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Kent K. Anker Erick O. Bell Heidi M. Berven Jenna M. Crisci Jeffery M. Cross Andrea L. D’Ambra Gary D. Friedman Melanie A. Grossman Nikiforos Iatrou Brian Kint Tom Lambakis

Marilyn May Sandra C. McCallion Stephen A. Miller Rees Morrison Christopher W. Olmsted Hayley Peglar Bronwyn Roe Kara M. Sacilotto Salvador P. Simao Leigh C. Taggart

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Executive Summaries L ABOR & EMPLOYMENT PAGE 16

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More States Ban Hiring Discrimination Against the Unemployed, Feds May Follow

Setting Up an Alternative Workweek in California

Ten Things to Check on Your E-Discovery Bill

Christopher W. Olmsted Ogletree Deakins and Jenna M. Crisci

By Andrea L. D’Ambra Norton Rose Fulbright LLP

The California Labor Code has some flexibility when it comes to employee work schedules, with the “Alternative Workweek Schedule.” Generally an employer must pay employees timeand-a-half when they work over eight hours but under 12 hours in one day, over 40 hours in one week, and up to eight hours on a seventh consecutive day in one week. Hours worked beyond these categories require a double-time payment.

An AWS allows for a longer workday before overtime liability kicks in.

Under an AWS, an employer must pay employees overtime at one and onehalf times their regular rate when they work more than 10 hours (but under 12 hours) in one day, more than 40 hours in one week, and up to eight hours on any day beyond those set by the AWS. The AWS must be properly adopted and implemented, as failure to do so can lead to significant liability for overtime wages.

To properly adopt an AWS, there are four basic steps. First the employer must present a proposal in the form of a written agreement to the “affected employees in the work unit.” Next, the employer must hold a meeting to explain the effects of the AWS on the affected employees’ wages, hours and benefits.

Then the employer must hold a secret ballot election at the job site, during normal work hours and on-theclock. Election results must be reported to the California Department of Industrial Relations within 30 days.

E-discovery bills are often overlooked as a source of potential cost cutting, for a number of reasons. Many corporations contract directly with their e-discovery vendors. Outside counsel, who use the services, do not see the bills. In many cases, the person reviewing the bills simply does not have a good grasp of the process and cannot distinguish between legitimate charges and overcharges or errors.

Most billing issues are the result of honest mistakes, but those mistakes can be costly if not identified.

Most e-discovery experts consider good project management to be the most crucial factor to a successful engagement. Project management time should be billed in at least 1/10th of hour increments. Bills with time increments that all end in “.0” or “.5” are red flags. Vendors should be required to provide detailed descriptions of tasks performed during that time. If a task is done incorrectly and the vendor is at fault, the vendor should not charge for the fix.

If you are paying for monthly user licenses for hosting/review software, request the vendor provide a list of current billed users with each bill. Make sure that free tech-assist hours, user licenses, or other free services negotiated in your contract are expressly represented as credits on the bill.

No matter how well intentioned the parties are, mistakes happen. By working together, vendors, retained counsel and clients can identify and rectify such mistakes and streamline the e-discovery process.

By Salvador P. Simao Ford Harrison/Ius Laboris

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E-DISCOVERY

Discrimination against the long-term unemployed has been a concern for both federal and state lawmakers over the past few years. Today the long-term unemployed make up nearly 36 percent of the unemployed total, as compared with 10 to 20 percent historically.

While there is currently no federal law prohibiting discrimination against the unemployed, some states have passed legislation. The earliest versions simply banned job postings that essentially stated that unemployed need not apply.

More recent efforts go further. The most expansive measure was enacted in New York City in 2013. Violations carry penalties of up to $125,000 per violation, and up to $250,000 per willful violation. Additionally, unlike most other laws prohibiting discrimination against the unemployed, the New York City version permits individuals to file a complaint with the City Commission on Human Rights or file an action in court.

Employers should remove statements in their job postings or applications that refer to the applicant’s job status or indicate a preference for the currently employed. After removing overtly discriminatory practices, employers should work with human resources departments to eradicate unconscious bias against the unemployed.

Employers should also determine whether there are grants and government funds available for hiring the long-term unemployed. New York, for example, has them, and Michigan has received funding from state lawmakers to create subsidized employment opportunities for businesses in distressed communities.

TODAY’S GENER AL COUNSEL AUG/ SEPT 2014

Executive Summaries E-DISCOVERY

INTELLEC TUAL PROPERT Y

GOVERNANCE

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Mitigating the Risk of Written Communications

Internal Procedures and Third Party Agreements Under the AIA

What the Kahn Decision Says About “Special Committees”

By Sandra C. McCallion and Melanie A. Grossman Cohen & Gresser LLP

By Leigh C. Taggart and Heidi M. Berven Honigman Miller Schwartz and Cohn LLP

By Gary D. Friedman and Kent K. Anker Friedman Kaplan Seiler & Adelman LLP

With the prevalence of electronic communications – email, texting, social media postings – reviewing attorneys are often buried in material, but powerful algorithms that can electronically sort through those communications make opposing counsel more likely than ever to find the smoking gun that can destroy a case.

The response of corporate America has been largely ineffectual. The primary “fix,” disseminating written electronic communication protocols and teaching “netiquette,” has not worked.

The first step in any communication risk management program is to educate employees. They need to understand that whatever they write may come to light. Explain the basics of the discovery process and what it means if a document hold notice is issued.

Likewise with contractors. It is critical that they understand that their documents will likely be discoverable.

Even if the documents produced do not subject the vendor to liability, those documents can cause harm to the business relationship. Employees and consultants must know what they should and shouldn’t write – and why.

The more tailored the program to the particular subject matter for which each individual employee group is responsible, the better. Thus, provide marketing examples for consumer relations, engineering examples for the engineers, etc.

Minimally, employees need to be made aware of the implications of disclosing company information even on personal, non-work related social media. It isn’t enough to put this in a handbook. Employees must be educated in a way that drives the point home.

The America Invents Act introduced sweeping changes to patent law in the United States, among them the “first to file” system, which became effective on March 16, 2013. Before that patent law followed a first- to-invent paradigm.

All businesses have agreements with independent contractors, key suppliers, customers, and/or joint ventures.

Under first-to-invent, in most business relationships there was no need for a company to obtain an agreement that its partners would not file a patent application in areas related to the work of the company. If partners learned of patentable technology during the relationship, they would have a difficult time establishing that they were the first to invent that technology, even if they filed first.

With the change to first-to-file, the risk that a business partner would claim the company’s invention as its own has risen dramatically. First-to-file has created a “race to the patent office” that even a well-intentioned company with good internal processes may lose. If that should happen, there is a remedy called a derivation proceeding through the Patent Office, but its estimated cost is over $100,000.

A good protection strategy for inventions includes practices such as requiring signed and dated invention disclosure memos from inventors and recording results in notebooks, with witnesses. Signed agreements should prohibit third parties from filing patent applications in your company’s area of work, assign invention rights to the company and prohibit disclosure of information relevant to the company’s inventive activity.

The recent decision by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp. has generated extensive commentary. That decision held that the relatively deferential “business judgment” standard of review, rather than the more exacting “entire fairness” standard, may be applied in controllingshareholder merger transactions if certain procedural protections are in place from the outset of the process.

Those protections are: the approval of an independent, adequatelyempowered Special Committee that fulfills its duty of care, and the uncoerced, informed vote of a majority of minority stockholders.

The shift in the nature of the judicial review may be less dramatic than suggested by the headlines that followed the decision. Under Kahn, a court will apply the business judgment standard in controlling-shareholder merger transactions only if the Special Committee has actually performed its obligation to negotiate a fair price effectively and with due care, and if the court has scrutinized the factual record in sufficient detail so as to conclude that the due care and other conditions have been satisfied.

The Kahn decision represents a challenge by the Delaware Supreme Court to have Special Committees perform their roles with such vigor that the reviewing court will conclude that a fair price has been negotiated.

The court makes clear that it stands ready to review the work of Special Committees on the basis of the traditional “entire fairness” standard if the conditions laid out in the decision are not met.

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AUG/ SEPT 2014 TODAY’S GENER AL COUNSEL

Executive Summaries TGC SURVE YS PAGE 32

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Law Firm Hiring 2014

Canada Decision Poses Antitrust Risk for U.S. Manufacturers

In-house lawyers polled on their department hiring practices. Why law firms are hired and fired.

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FEATURES

More than 80 percent of respondents to a Today’s General Counsel survey of how in-house lawyers decide which law firms to hire rated the quality of the legal services they received from firms hired on the basis of personal relationships to be good or excellent.

Nevertheless, when asked if their organization would be better served if criteria other than personal relationships were used to select outside counsel, more than half of respondents said yes.

The “technical proficiency” of a law firm was of greatest importance to a large majority of respondents, but the way they defined that term varied greatly. Most indicated their perception of technical proficiency would be based on direct experience with the firm.

The main reason for retaining a particular law firm, according to 70 percent of respondents, was a previous positive experience with the firm.

More than half also identified subject matter expertise as a key reason, while just under half cited the reputation or expertise of a particular lawyer or the fee structure.

Respondents from larger organizations and legal departments were more likely to say they relied on recommendations from trusted sources inside their organizations for making decisions about hiring a law firm. Respondents from smaller organizations were more likely to report that they relied on recommendations from sources outside their organization.

The survey article includes submitted comments from respondents about the selection process and ways in which they would like it to change.

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By Nikiforos Iatrou, Bronwyn Roe & Hayley Peglar WeirFoulds

Last fall, Canada’s Supreme Court released three class action certification decisions with wide-ranging implications for U.S. companies supplying goods or product components in Canada. The decisions mean that individuals or companies that have acquired products from resellers (indirect purchasers) can bring class actions for damages based on violations of Canada’s competition laws. This is in contrast both to a U.S. Supreme Court decision that prohibits such claims on the federal level and numerous state’s laws.

Pro-Sys Consultants Ltd. v. Microsoft Corporation involved allegations that Microsoft Corporation and Microsoft Canada Co./Microsoft Canada CIE overcharged for PC operating systems and applications software. In SunRype Products Ltd. v. Archer Daniels Midland Company, a class comprised of direct and indirect purchasers alleged that the defendant companies had conspired to fix prices.

Infineon Technologies AG v. Option Consommateurs involved a proposed class action by direct and indirect purchasers under the Quebec Code of Civil Procedure, alleging that a pricefixing conspiracy had artificially inflated the prices of dynamic random-access memory chips sold in Quebec.

The SCC’s key holding, applicable to all three cases, is that indirect purchaser actions are available in Canada.

Where simultaneous proceedings are brought in the United States and Canada, counsel will confront differing legal standards in the two jurisdictions. U.S. and Canadian counsel will need to coordinate strategy across the jurisdictions, particularly in cases where the defendant must prove double or multiple recovery.

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Executive Summaries features

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Internal Fraud Investigation: The First Five Days

Preserving Privilege in Internal Investigations

Avoiding Performance Pitfalls Under Government Contracts

By Erick O. Bell StoneTurn Group LLP

By Stephen A. Miller and Brian Kint Cozen O’Connor

By Kara M. Sacilotto Wiley Rein

This article describes how to initiate an investigation into fraud allegations in a way that maximizes the company’s chance of recovering losses. It outlines actions that should occur within the first few days in order to secure evidence, organize resources, and evaluate the substance of the charge.

The company should develop an incident response plan before any allegation is even made. This plan will function as a road map for how to respond.

Often fraud allegations involve crimes or policy violations. In either case, consult legal counsel at the outset of the internal investigation. In some cases, the organization may need to involve outside counsel.

Carefully consider the composition of the investigation team. It can be internal, external, or a combination. The team should consider what data could be relevant, and then secure it. Before the team jumps to any conclusions, it is advisable to “reset” and ensure there is a clear understanding of the allegation.

The best source for this initial information is likely to be a whistleblower.

Once the investigation team has gathered enough evidence to conclude that the “predication” of fraud exists, it should develop an investigation plan.

The plan will leverage the information garnered in the initial assessment.

Prepare a list of insurance policies that cover potential losses due to fraud. Keep in mind that the first step in recovering fraud loss is understanding the time frame for reporting the alleged fraud, and then properly notifying the carrier.

The U.S. Court of Appeals for the D.C. Circuit recently vacated the district court’s decision in In re: Kellogg Brown & Root, a case that could have radically changed the way that companies conduct internal investigations.

The lower court had ruled that the documents at issue were created pursuant to a “compliance investigation required by regulatory law” and therefore were not privileged, because they were created “pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”

KBR petitioned for a writ of mandamus, asking the D.C. Circuit to vacate the district court’s ruling. A three-judge panel decided that the district court had erroneously employed the “but for” test, which dictates that communications are privileged only if made for the specific purpose of seeking legal advice, to determine whether materials were privileged.

The Appeals Court favored the “primary purpose” test, which treats communications as privileged if the primary purpose, among many other purposes, is legal advice. Strict application of a but-for test would sharply limit the scope of attorney-client privilege.

This case serves as a reminder that reasonable jurists can evaluate privilege issues differently. Companies may want to consider shifting the fight away from the courts: Instead of waiting for the next adverse ruling, the most fruitful course of action could be lobbying Congress and certain administrative agencies to clarify that statutory compliance requirements are not meant to disturb the privileged nature of those inquiries.

During the competition phase, it’s easy for a contractor to assume that the contract will be successful and profitable, despite concessions and aggressive assumptions. But much of contract performance is outside the control of the contractor. Among developments to note: There are several provisions of the National Defense Authorization Acts for 2013 and 2014 that are designed to ensure that subcontractors whom primary contractors claim to use are in fact used in performance of the contract.

To reduce the risks, pay as much attention to subcontract management as you do to management of the prime contract. Ensure that proposal teams and business development personnel are aware of the most recent requirements for small business subcontracting.

Review purchasing systems with respect to counterfeit electronic parts requirements. Take care to flow down schedule and other performance requirements that apply to subcontractors, as well as key tailored provisions of the prime contract such as those regarding security requirements or organizational conflicts of interest. Establish clear dispute resolution and limitation-of-liability provisions, and ensure that subcontractors are required to continue performance during the pendency of any disputes.

Contractors receiving any type of show-cause notice – or any inquiry from a debarring official – should take that notice seriously. This is the contractor’s opportunity, perhaps its only one, to convince the agency that more extreme action is not required. Recognize the warning signs that emerge from program metrics, performance metrics, performance evaluations and program reviews.

TODAY’S GENER AL COUNSEL AUG/ SEPT 2014

Executive Summaries FEATURES PAGE 58

Who Can Be a False Claims Act Whistleblower?

By Marilyn May Arnold & Porter

Q: Interested in Section 337?

Last year, the U. S. Department of Justice collected $3.8 billion from suits under the False Claims Act. Whistleblower suits represented the major portion – $2.9 billion – of that recovery. The DOJ opened 846 new False Claims Act cases in 2013, the majority of which (753) were whistleblower suits.

In a False Claims Act whistleblower lawsuit, a whistleblower, called a relator, files suit against an individual, a company or both. Because the suit, called a qui tam suit, must be filed under seal you won’t know that it has been filed. During the investigation the relator may still be working for you, secretly taping conversations or business meetings.

The relator has a huge financial incentive. The False Claims Act provides relators 15-30 percent of the government’s recovery, and in recent cases, the United States has paid relators as much as $100 million. In 2013, the United States recovered $2.9 billion in relator False Claims Act lawsuits, from which it paid relators $387 million.

If you do business with the government, have systems in place to insure that you are complying with contractual, statutory and regulatory requirements. If you are a government contractor, depending on the type and value of the contract, the regulations and contract provisions could include mandatory compliance requirements.

A good compliance program includes written policies and procedures, the input of compliance professionals, effective training and communication, internal monitoring and audits, proper enforcement of standards, and prompt response.

A: Contact the experts with 35 years of success.

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Labor & Employment

More States Ban Hiring Discrimination Against the Unemployed, Feds May Follow

By Salvador P. Simao

A

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lthough no federal law specifically prohibits discrimination against the unemployed, it has been a concern for both federal and state lawmakers over the past few years. While unemployment rates have dropped considerably since the worst of the downturn, analysts see a troubling trend: a rise in the number of long-term unemployed, defined as those out of work for six months or longer.

There is evidence that the longer someone is unemployed, the less likely that person is to find work. One study has found that an applicant with no experience at all was more likely to be called back than an applicant with relevant experience who had been out of work for six months.

In 2011 the U.S. Equal Employment Opportunity Commission (EEOC) held a hearing to examine the impact of hiring policies that consider only currently employed job applicants. The agency became concerned that such practices could have a disparate impact on some groups protected by U.S. anti-discrimination laws, including racial or ethnic minority groups.

Similarly, there could be a disparate impact on persons with disabilities, military veterans and older women, because of gaps in their employment due either to therapy or non-traditional career paths.

Despite the interest in the topic, the EEOC has not taken any specific action since conducting the 2011 hearing. However, President Obama expressed concern about discrimination against the long-term unemployed in his 2014 State of the Union Address, and he gathered pledges from CEOs from 21 companies – including Apple Inc., EBay Inc., Gap Inc., Pacific Gas & Electric Corp., 21st Century Fox Inc. and Walt Disney Co. – stating that they would not discriminate against the unemployed in job postings or hiring decisions.

STATE LEGISLATION

While there is currently no federal law that prohibits discrimination against the unemployed, some states have enacted their own legislation. The earliest versions of these laws simply banned job postings that stated, essentially, that unemployed need not apply. More recent legislative efforts go further, and they establish steep fines and permit aggrieved applicants to bring actions against the employer.

New Jersey was the first state to address the issue, in 2011, with a law that prohibits employers and their agents or representatives from publishing, in print or on the internet, any job listing stating that current employment is a requirement for job consideration. The New Jersey law also prohibits employment ads from stating that jobless applicants will not be considered, or that only the currently employed will be eligible for the position.

Employers who violate the law are subject to fines, payable to the New Jersey Department of Labor and Workforce Development. Fines are up to $1,000 for the first offense, up to $5,000 for the second offense, and up to $10,000 for the third and all subsequent offenses.

The law does not create a private right of action for aggrieved applicants.

Oregon was next, in 2012. The Oregon law similarly prohibits job postings that say

only currently employed applicants will be considered for the position. Oregon’s law likewise does not create a private right of action, but employers in violation are subject to fines imposed by the Oregon Bureau of Labor and Industries.

Also in 2012, the District of Columbia passed its law designed to combat discrimination against the unemployed, one that goes further than the New Jersey and Oregon laws. It prohibits job postings from stating that currently unemployed applicants are not eligible for hire, and it also prohibits employers and employment agencies in the District from considering the unemployed status of an applicant in employment and hiring decisions. Employers who violate the law are subject to penalties of $1000 per claimant for the first violation, $5000 per claimant for a second violation, and $10,000 per claimant for each subsequent violation, up to a total of $20,000 per violation. The District of Columbia law also does not provide for a private right of action.

By far the most expansive measure was enacted in New York City in 2013, as a New York City Human Rights Law amendment that prohibits employers with at least four employees from basing hiring decisions on the applicant’s status as unemployed. It defines unemployed as “not

today’s gEnEr aL counsEL aug/ sept 2014

Labor & Employment having a job, being available for work, and seeking employment.” The New York City law also prohibits “facially neutral policies” that could disparately impact the unemployed, unless the employer can demonstrate that such requirements are substantially related to the posting.

Violations carry stiff penalties of up to $125,000 per violation and up to $250,000 per willful violation. Additionally, unlike most other laws prohibiting discrimination against the unemployed, the New York City law permits individuals to file a complaint with the City Commission on Human Rights or file an action in court. Actions can also be brought on a class-wide basis, without the aggrieved applicant being required to identify the specific offending policies or practices. Successful plaintiffs can recover compensatory and punitive damages, injunctive relief, and may be awarded attorneys’ fees and costs.

Other states, including California, Florida, Hawaii, Iowa, Maine, Massachusetts, Minnesota, New Hampshire, New York, Pennsylvania and Virginia, have considered similar legislation.

FEDERAL LEGISLATION

The day after the State of the Union address, Congress re-introduced the Fair Employment Opportunity Act (FEOA).

That bill, first introduced in 2011, would add unemployment to the list of categories protected by federal antidiscrimination laws.

Specifically, the FEOA would prohibit employers with 15 or more employees from discriminating against unemployed job applicants, unless a requirement related to employment status is a bona fide occupational qualification. The bill does not distinguish between short-term and long-term unemployment. Rather, it defines “status as unemployed” as “an individual’s present or past unemployed regardless of the length of time such individual was unemployed.”

The FFOA would also prohibit employers and those acting on behalf of employers from publishing job postings stating that unemployed individuals are disqualified, and it would prohibit retaliation against any individual for exercising rights under the law or objecting to its violation.

The U.S. Secretary of Labor would be authorized to investigate and resolve complaints under the FEOA, or bring a civil action to enjoin violations. The Secretary could recover compensatory damages, civil penalties of no less than $250 per violation, and equitable relief as deemed appropriate by a court. Equitable remedies could include injunctions, specific performance, declaratory relief or reinstatement of rejected applicants.

The bill would permit applicants who are not hired because of their unemployed status to file an action in either state or federal court. Successful claimants could recover wages or benefits denied as a result of the violation, or monetary losses, or a civil penalty of $1,000 per day, whichever is greater. Claimants could also recover interest, liquidated damages, equitable relief, and attorneys’ fees and costs. Actions could be brought on an individual or class basis.

Should the federal law prohibiting discrimination against the unemployed be enacted, employers will likely see challenges to their hiring practices with regard to the unemployed. However, employers are still free to examine the circumstances that resulted in the applicant’s unemployment. For example, if a period of joblessness was due to incarceration for a felony offense, employers can take it into consideration. Likewise, if an applicant was terminated from the last job because of poor performance.

HOW TO PREPARE

1. Ensure job postings and screening procedures do not discriminate against unemployed applicants.

The first step for employers is to remove any statements in their job postings or applications that refer to the applicant’s job status or indicate a preference for the currently employed, and work with unemployment agencies to do likewise.

Employers must also train interviewers and those who screen applications to ensure they are not using screening procedures that result in applications from unemployed job seekers being removed from the pool of qualified applicants.

2. Train HR and Managers to End Discriminatory Practices.

After removing overtly discriminatory

practices, employers should work closely with their human resources departments to eradicate unconscious bias against the unemployed. Researchers studying the psychological stigma associated with unemployment found that unemployed applicants were viewed as less competent than currently employed individuals. Employers should ensure that anyone involved in the hiring process is educated about these unconscious biases. That being said, employers can still ask an applicant about how he or she came to be unemployed.

Employers should determine whether there are grants and government funds available for hiring the long-term unemployed. New York, for example, has increased grants available for that purpose, and Michigan has received funding from state lawmakers to create subsidized employment opportunities for businesses in distressed communities.

3. Review Existing Policies to Ensure Compliance with Laws.

Employers should look carefully at their existing equal employment opportunity and nondiscrimination policies and amend them to expressly prohibit discrimination against the unemployed. Should the proposed federal legislation be enacted, unemployment status will join already protected classes of race, sex, religion, age and disability. ■

Salvador Simão is a partner at FordHarrison and manager of the firm’s New Jersey office. He also co-chairs the International Practice Group for Discrimination of Ius Laboris, an international alliance of labor and employment firms. His litigation experience includes defending employers in matters of discrimination, pay equity, whistle blowing, wage and hour class actions, non-compete claims, trade secrets and retaliation. He also advises Fortune 500 companies on dayto-day employment law issues. ssimao@fordharrison.com

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Aug/sept 2014 today’s gEnEr aL counsEL

Labor & Employment

Setting Up An Alternative Workweek in California

By Christopher W. Olmsted and Jenna M. Crisci

S

18

ometimes the standard eighthour day/five-day workweek is not ideal for employer or employee. A great example is the craft beer brewery. It’s a 24-hour a day, seven-day a week process that requires constant tinkering, testing, and tasting. Scheduling employees to tend to these high-maintenance beers can be challenging, given the constraints of the eight-hour workday and overtime requirements. Thankfully, the California Labor Code has some built-in flexibility when it comes to employee work schedules, with the so-called “Alternative Workweek Schedule.” But, like our local microbrewery beers, an AWS takes special expertise to craft.

Generally an employer must pay employees time-and-a-half when they work over eight hours but under 12 hours in one day, over 40 hours in one week, and up to eight hours on a seventh consecutive day in one week.

Hours worked beyond these categories require a double-time payment.

A properly adopted AWS, on the other hand, allows for a longer workday before the overtime requirement kicks in. Under an AWS, an employer must pay employees overtime at timeand-half when they work over 10 hours (but under 12 hours) in one day, over 40 hours in one week, and up to eight hours on any day beyond those set by the AWS. Hours worked beyond these categories also require a doubletime payment.

The key is that the AWS must be properly adopted and implemented.

Failure to do so can lead to significant liability for overtime wages.

To properly adopt an AWS, there are four basic steps.

Step 1: The Written Proposal.

First the employer must present a proposal, in the form of a written agreement, to the “affected employees in the work unit.” A “work unit” must be carefully defined. It can refer to the entire staff if the entire staff will be affected by the schedule, or it can refer to a single division, department, job classification, shift, separate physical location or recognized subdivision.

In the brewery example, the business might decide to define the work unit to include the brewers, the bottling and packaging departments, and the security guards or other definable units that require round-the-clock shifts. It might decide to exclude other departments that are not necessarily needed beyond the eight-hour day, such as accounting and sales.

The written proposal must specify the different schedules available under the AWS, although the specific days of the week and start/stop times need not be specified, as those may change from

week to week. Employers may offer either a single schedule or a menu of schedule options.

An AWS generally consists of one or more of the following: • The “4/10s”: Four 10-hour days per week.

• The “9/80”: Nine days and 80 hours over a two-week period.

• The “4 ½”: Four 9-hour days and one 4-hour day per week.

Under the single schedule option, the employer would propose one schedule which, if adopted, would become the standard schedule for the affected employees in the work unit.

Under the menu option, the employer would propose two or more options (which may include the standard “5/8s” – five 8-hour days per week) from which employees may choose.

It is important to emphasize that employers are not permitted to assign options to employees, although

today’s gEnEr aL counsEL aug/ sept 2014

Labor & Employment employees are permitted to alternate menu options with employer consent.

If business needs prevent employers from allowing their employees to freely choose from a menu of options, then a menu should not be offered.

Step 2: The Disclosure Meeting.

Next, the employer must hold a noticed meeting to explain the effects of the proposed AWS on the affected employees’ wages, hours and benefits. In essence, the employees must be informed that they are giving up their right to receive overtime wages for hours worked over eight (but less than 10) hours in one day in exchange for, among other effects, a flexible work schedule.

The meeting must take place at the affected employees’ job site, during normal work hours, on-the-clock, and the employer must provide written disclosures to each employee, explaining the effects to be discussed.

If at least five percent of the affected employees do not speak English, the disclosures must also be provided in their language. Finally, the employer is required to mail written disclosures to any employees not in attendance at the meeting.

Step 3: The Secret Ballot Election.

At least 14 days after the Disclosure Meeting, the employer must hold a secret ballot election. Again, the election must take place at the affected employees’ job site, during normal work hours, and on-the-clock.

Whether proposing a single schedule or a menu of options, at least a two-thirds vote of all the affected employees is required to adopt the AWS. If any affected employees fail to take part in the vote, or leave their ballots blank, their allotted votes must be counted as votes against the AWS. Step 4: Reporting the Results.

Election results must be reported to the California Department of Industrial Relations within 30 days. The Department will then post the results to its online database.

Once an AWS is adopted, there are a few rules to keep in mind regarding implementation: • There must be a grace period. Employers must wait at least 30 days before implementing the AWS, although employees may voluntarily opt to begin their new schedule sooner.

• There must be reasonable accommodations for employees unable to work the AWS. Employers are required to make a reasonable effort to provide a 5/8 schedule for any employees who voted in the election, but are unable to work the AWS. For new employees hired into a work unit with an established AWS, the employer may decide to provide an accommodation, but is not required to do so.

• There must be reasonable accommodations for religious beliefs.

Employers are required to explore any available reasonable alternatives to accommodate employees’ religious beliefs and observances which may conflict with the AWS. Shifts must be regularly scheduled.

Employers must schedule the actual work days and shift start/end times in advance (i.e. no “on-call” schedules).

Shifts are to be no less than four hours, and employers are required to give employees at least two consecutive days off per week. Employees may substitute one day for another day of the same length on an occasional basis to meet personal needs, with employer consent.

There is a short-shift penalty. Employers may not require an employee to work fewer hours than those regularly scheduled by the AWS without paying overtime. For example, if a 4/10s schedule is adopted, an employer cannot schedule an employee to work nine hours without paying the overtime rate for the additional hour over eight. However, an employee may request a shorter shift, or leaving early without penalty.

To repeal the AWS, an employee must first submit a petition signed by at least one-third of the employ-

ees. The employer must then hold a new secret ballot election within 30 days, and if at least two-thirds of the employees vote to repeal, the employer must dismantle the AWS within 60 days.

These rules and procedures generally apply to the adoption and implementation of an AWS in California.

However, there are differences within the California Industrial Welfare Commission Wage Orders and among the industries covered by the Orders (such as health care) in the schedules that may be adopted and the election procedures, among other rules. Applicable Wage Orders and the California Labor Code should be consulted before adopting an AWS. ■

Christopher Olmsted is a shareholder at Ogletree Deakins, in the firm’s San Diego office. He has represented clients in state and federal jury and bench trials, judicial and contractual arbitrations, administrative law hearings, and on appeals before California and federal appeals courts. He consults and provides training regarding employment law compliance, and he teaches human resources law at California State University, San Marcos, in the Human Resources Certificate program. christopher.olmsted@ ogletreedeakins.com

Jenna Crisci is a California attorney who practices in the areas of employment law and business litigation, including compliance and in defense of employers in state, federal, and administrative claims. jennacrisci@hotmail.com

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AUG/ SEPT 20 14 TODAY’S GENER AL COUNSEL

E-Discovery

Ten Things to Check On Your E-Discovery Bill

By Andrea L. D’Ambra

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G

iven the emphasis on cost savings in e-discovery, it’s surprising that the actual bills sent out by e-discovery vendors are often overlooked. There are a number of reasons for this. First, many corporations contract directly with their e-discovery vendors. Outside counsel, who actually direct and use the services, do not see the bills.

Second, the pace of the case may be such that the persons charged with reviewing the bills might feel they do not have time.

Third, in too many cases, the person reviewing the bills simply does not have a good grasp of the e-discovery process and cannot distinguish between legitimate charges and overcharges or errors.

As an initial matter, no client should sign a contract with an e-discovery vendor without carefully reviewing its terms with someone knowledgeable about e-discovery services. A contract presented by a vendor is drafted to protect the vendor’s interests, not the client’s, and often will leave off important points, such as appropriate time-billing

accounting, ownership of the data, definitions of services, and termination and migration provisions.

This article is not intended as an indictment of vendors or their billing practices, as most billing issues are the result of honest mistakes. But those mistakes can be costly if not identified, and this article does provide some practical advice on contracting with e-discovery vendors and managing costs throughout the engagement, by identifying ten things to keep in mind as you check over your bill.

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E-Discovery

1. Project management time billing increments.

Most e-discovery experts consider good project management to be the single most important factor in achieving a successful engagement.

It is also an area where a significant number of very costly errors can occur.

Assuming you have a well written contract, project management time should be billed in at least 1/10th of hour increments. Absent such specificity, a vendor may interpret an hourly rate to mean billing in hourly increments. Bills with time increments that all end in “.0” or “.5” are red flags. Vendors should be required to provide detailed descriptions of the tasks performed during

2. Project management time billed for fee-based items or other tasks that should not be billed.

Most vendors structure their pricing so that certain common e-discovery tasks are billed on a volume basis.

For example, creating TIFF or PDF images of production documents is usually charged on a per GB basis, and OCRing scanned paper is done on a per image basis.

These charges reflect all of the work involved in accomplishing the given task. Therefore, if one is paying $400 per GB to image a production, the vendor should not be billing for project management time related to this task as well. (This is another reason why detailed descriptions are so important.)

Most billing issues are the result of honest mistakes, but those mistakes can be costly if not identified.

that time. If you expect such descriptions from your outside counsel, you should expect the same from your e-discovery vendor.

Make sure that the person who is most familiar with what the vendor is required to do (often that’s outside counsel) checks the bill every month.

Even when contractually obligated to bill time a certain way, many vendors forget to change their billing defaults and may bill in full, half, or quarterhour increments.

You should also consider whether the time billed is reasonable for the task described. When in doubt, talk to litigation support. If you find vague and inconsistent descriptions, or incorrect increments, raise this issue with your vendor representative immediately. A reputable vendor will remedy the error immediately, provide further explanations to satisfy your concerns and, when warranted, issue a credit for overbilling.

Similarly, if a vendor charges $200 per GB for processing incoming data, the vendor should not charge project management time for quality checking that processing. While QC is unquestionably a critical part of any project, you are paying to have the job done properly not on an “as is” basis, and QC should be included in the per GB fee.

3. Credit to fix vendor errors.

If a task is done incorrectly and the vendor is truly at fault, the vendor should not charge for the fix. Often in the heat of battle we forget and do not check the bill when it comes a month later. It helps to keep a log of any vendor errors and check it against the bill at the end of the month. This is another good reason for detailed descriptions for all charges.

Obviously, be fair. Errors caused by counsel or client should not be written off by the vendor.

4. Charges should conform to the contract.

Do not assume that just because you have a contract with hard-fought pricing concessions that those concessions will appear on your bill. Even wellmeaning vendors can forget to enter in or adjust their billing systems to reflect the pricing to which you have agreed.

Also, do not assume that because the last seven bills received have included the correct pricing, that the eighth bill will too. Glitches occur all the time, and if not flagged can cost the client thousands, or even hundreds of thousands of dollars.

5. Track tiered volumes.

Many contracts provide discounts when certain volume targets are reached, so it is important to keep track of the volumes you are hosting/ processing, etc., to ensure that you get the discounts applied as soon as they become effective.

6. Track user licenses.

If you are paying for monthly user licenses for hosting/review software, request the vendor provide you with a list of current billed users with each bill.

This serves two purposes. First, you can ensure that the list reflects any additions or subtractions requested during the preceding month. Second, it allows you to review on a monthly basis the users for which you are being charged and make any additional modifications necessary based on recent departures or additions to the case.

7. Credit for negotiated freebies.

Make sure that free tech assist hours, user licenses, or other free services negotiated in your contract are expressly represented as credits on the bill. If you negotiate 10 free hours of project management time each month or 15 free user licenses, make sure that those are noted on each bill.

There are two reasons for this: First, so you can be sure that those freebies are accounted for in each bill after the entire charge is assessed. Second, it serves as a reminder to both you and

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aug/ sept 20 14 toDay’s gEnEr al counsEl

E-Discovery

the vendor that these freebies should be deducted. If they are not accounted for on the bill, it is easy for both vendors and clients to forget. And, more important, you may not know what services you received free.

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8. Data loaded = data hosted.

Make sure you compare the amount of data loaded with the amount hosted, and that they are the same.

You should be charged only for the hosting of your data, not for the hosting of the review software and database infrastructure in which your data resides. That’s an internal operating cost for the vendor.

Make sure your contract is clear regarding how your hosting charge will be calculated, and on what data the charge will be based. Hosting charges are the number one source of profit for e-discovery vendors, and the difference between hosting just your data and hosting the entire review platform infrastructure can be staggering – literally hundreds of thousands of dollars a year.

9. System availability (“up time”) credits.

There is nothing so devastating to a review budget (and deadline) as a review platform going down unexpectedly.

Reviewers are stuck in limbo, unable to leave in case the platform comes back up, but unable to do the work for which they were hired.

Most vendor contracts contain a guarantee of a certain percentage of time the system will be available each month (not including scheduled maintenance). This is often called the “up time guarantee.” Usually there is some credit given to the customer if the system is not available at least 99.5 percent of the time. The lower the up time, the higher the credit. In order to ensure appropriate credit, you must track this up time percentage. Most vendors will report the up time percentage on their bills, and for those that do not, you can request it.

As with other items on the bill, however, you should independently verify the percentages by keeping a log

of when the system goes down for unscheduled maintenance or is otherwise unusable or unavailable. Your document review team leader is probably the person in the best position to track this information and it can be included in his/her monthly report.

10. The invoice date is important.

Make sure the date on the invoice is the date the invoice is sent to the client for payment. The vendor will calculate the deadline for payment, and start charging interest on overdue payments, based on the date on the invoice. Therefore, it is

receipt by the client. However, not only will the time for payment be compressed, but the potential arises for crossed communications as several parties concurrently review the same invoice. In addition, the vendor will be unable to adjust for any errors or credit any mistakes until the next month’s bill.

No matter how well intentioned the parties might be, mistakes happen, but keeping these ten things in mind will go a long way toward keeping the process on track. Good e-discovery management is about

Keep a log of when the system goes down for unscheduled maintenance, or is otherwise unusable or unavailable. important that date is the date the vendor sent the invoice to the client for payment. If an invoice must first go through an approval process with retained counsel, this could delay the date on which the client eventually receives the invoice. The approval process should move as quickly as possible, but when the final invoice is sent, it should have the final date (after approval).

There are two schools of thought about whether vendors should wait for approval before sending the invoice to the client. Having retained counsel review and approve invoices prior to sending them to the client is not only a service to the client, but benefits the vendor as well. That way, if there are issues with the bill then they are dealt with before the client sees them, and the vendor does not lose face in front of the client.

Nevertheless, some vendors prefer a “shotgun” approach, sending the bill out directly to the client and to retained counsel for review at the same time. This avoids any delay in

more than just making sure that document productions go out on time. It is about ensuring one’s client gets the services for which it paid, and pays only for the services required under the contract. By working together, vendors, retained counsel and clients can quickly identify and rectify mistakes and streamline the entire e-discovery process. ■

Andrea D’Ambra is senior counsel at Norton Rose Fulbright LLP, working out of the firm’s New York office.

She counsels on information governance and technologies, information management and efficient e-discovery. She also teaches e-discovery at Temple Law School and is a member of two Sedona Conference working groups. She writes and speaks frequently on e-discovery issues. andrea.dambra@ nortonrosefulbright.com

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xerox-xls.com ©2014 Xerox Corporation. All rights reserved. Xerox ®, Viewpoint,™ Xerox and Design® and Ready for Real Business® are trademarks of Xerox Corporation in the United States and/or other countries. Xerox does not offer, and is not authorized to provide, legal advice, representation or counseling in any jurisdiction.

AUG/ SEPT 20 14 TODAY’S GENER AL COUNSEL

E-Discovery

Mitigating the Risk of Written Communications

By Sandra C. McCallion and Melanie A. Grossman

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J

uries love documents. Jury consultants and survivors of jury trials can attest to the fact that documents can save or sink a case. Given this reality, the goal of every plaintiff is to find the smoking gun among the defendant’s documents to wave in front of the jury.

Not so long ago, the task of finding it fell to junior or contract attorneys, who would burrow through box after box. Unearthing the key document was part diligence and often part luck.

Today we live in a new reality. With the prevalence of electronic communications – email, texting, and social media postings – reviewing attorneys are often buried in material, but powerful algorithms that can electronically sort through those communications make opposing counsel more likely than ever to find the smoking gun that can destroy a case, and these algorithms will only get better with time.

Of even greater concern to companies is that the unique characteristics of electronic communication make it near-

ly certain that “bad” documents will be created, and once created will exist virtually forever, waiting to be found in the ever-broadening sweep of American-style discovery.

According to an analysis of email usage at 46 organizations worldwide by The Radicati Group, Inc., the average business user sends and receives a total of 103 emails per day. Unlike memos, letters, face-to-face communications or even phone conversations, the messages contained in these computer-mediated communications (CMCs) do not embody the immediate social cues to alert the senders that their information is, for example, incorrect or inappropriate. Moreover, senders of CMCs are much more likely to impulsively convey negative and highly emotional language and opinions.

At the same time that such communications are becoming more common, courts are taking a more expansive view of what is discoverable. As a result, if a company is sued, the likelihood is that the CMCs – all of them, including email, texts, and social media postings – will be produced. Another result, and now widely understood, is that discovery has become the biggest expense of litigation.

Corporate America’s response has been largely ineffectual. The primary “fix” – to disseminate written electronic communication protocols and teach “netiquette” – has not worked.

Despite the warnings and the horror stories, employees at all levels continue to communicate in ways that are alarmingly clueless. A recent case in point involved Governor Chris Christie’s staff, regarding the bridge

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E-Discovery

closure. And those lawyers at Dewey & LeBoeuf – what were they thinking?

This article suggests a practical, proactive approach for legal counsel and their companies to take, in order to address the growing problem of electronic communication and the litigation cottage industry that feeds off them. It is possible to manage what is created so that, in the inevitable production of documents, there are no unwarranted “smoking guns” – or at least that the damage is not catastrophic. In fact, companies can teach both employees and contractors to think twice about what they put in writing without scaring them or discouraging them from coming forward when legitimate issues arise.

CMC risk can be effectively managed with a program that consists of five components:

explain the basics of the discovery process and what it means if a document hold notice is issued. By using documents from the company’s own industry (or better yet, its own documents) as examples, participants can see what it is like to be on the hot seat.

The same is true for contractors.

It is critical that they understand that their documents will likely be discoverable. Even if the documents produced do not subject the vendor to liability, those documents can cause irreparable harm to the business relationship.

3) Document distribution. There is a tendency in departments or groups to use the reply-all button as the default.

Employees like to include everyone when expressing their opinions, particularly when the opinion is negative.

sible for a corporation to argue that management had no “knowledge” of a particular issue, even if it is true.

4) Clear rules. Employees and consultants must know what they should and shouldn’t put in writing, and why. It is this last step that is often missing in “netiquette” training. The more tailored the program is to the particular subject matter for which each individual employee group is responsible, the better.

Thus, provide marketing examples for people in consumer relations, engineering examples for the engineers, etc.

When it comes to rules for writing, there are some key principles: • Do not speculate. “There is no way they missed this during testing.” “I think they uncovered a similar problem with the last model.”

If an employee or consultant sends an incendiary and likely inaccurate opinion, someone with knowledge should respond immediately, so that if the email is produced in discovery there is a plausible explanation.

1) Document management. It is unlikely that employees are purposely trying to sabotage the company by writing harmful emails. Rather, they are largely clueless. Many employees, for example, still believe that if they hit “delete” the communication no longer exists.

Therefore, the first step in any communication risk management program is to educate employees. They need to understand that what is written likely lives forever, and someday whatever they write down may come to light.

Clearly this is a message that is not being conveyed effectively.

2) The litigation process. This includes discovery and document preservation protocols. Employees need to understand the consequences for the company should it be involved in a lawsuit.

The best way to drive this home is to

Urge employees to adopt a new default: For any sensitive document, send only to employees who need to see it.

Which employees does that include? That is something that should be discussed at the beginning of an assignment, not when a crisis hits.

Managers must be involved in guiding their subordinates – whether employees or vendors – as to what should be distributed to the whole team, or beyond.

The reason is simply that the more widely a document is distributed, the more likely it is to reach someone who is not familiar with all the facts or the context of what is being discussed. That creates an opportunity for gossip and misunderstanding, or an improvident but discoverable reply.

This kind of widespread distribution also makes it difficult if not impos-

Employees must think before they hit send. Are you in the engineering department? Do you know what you are saying is true? If not, don’t say it.

• Do not exaggerate. “There must be thousands of complaints coming in.” “I’ve never seen so many problems with one device.” “It will take years to fix this.”

You and often others in the department might be able to tell right away that you are exaggerating. A jury probably will not.

• Avoid colorful language and colorful text. “This is a disaster.” “We are receiving a deluge of complaints.”

Avoid red text. Red text never leads to anything good! Using colorful language may be one of the most common mistakes that employees make, and it is the easiest to avoid. continued on page 29

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AUG/ SEPT 2014 TODAY’S GENER AL COUNSEL

Intellectual Property

26

Internal Procedures and Third Party Agreements Under the AIA

By Leigh C. Taggart and Heidi M. Berven

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orporate counsel who practice in the area of intellectual property law need to consider the effects of the America Invents Act (AIA) on their internal procedures, and particularly on their independent contractor, supplier and joint venture agreements. Agree-

ments written to protect companies under the previous patent law regime are likely to provide insufficient protection under the AIA. Internal procedures to insure clear and timely recording of new inventions must work in practice to protect important company assets.

The AIA introduced the most sweeping changes to U.S. patent law since the implementation of the Patent Act of 1952. The first-to-file system became effective over a year ago, on March 16, 2013. Before that patent law followed a first-to-invent paradigm, which gave preference to

today’s gener al counsel aug/ sept 2014

Intellectual Property the first inventor to invent a new composition, device or method. For pre-AIA filings, there are fairly detailed rules allowing the first inventor to trump a later inventor even if the first inventor delayed in filing the patent application.

First-to-file rewards first inventors who file patent applications, regardless of whether they were the first to invent.

Under the first-to-file paradigm, longstanding and well-understood rules for identifying inventors, determining priority dates among competing inventors, and establishing what types of information qualified as prior art changed in significant ways.

The goal of first-to-file is to provide important benefits in harmonizing global patent law. Despite these benefits, many applicant/inventors rushed to file patent applications before the implementation date. The number of U.S. patent filings dramatically increased in the several weeks before March 16, 2013, from an average of approximately 2,000 applications per day, to approximately 14,000 in the last week of filing

understand the need to protect their company’s confidential information that its partners may learn in the course of the relationship, and they

With the change to first-to-file, the risk that a business partner may claim the company’s invention as its own has risen dramatically. regularly negotiate, draft and enforce contractual provisions to do so.

Under the first-to-invent system, in most business relationships, there was no need for a company to obtain agreement that its partners would not file a patent application in areas related to the work of the company.

If partners learned of patentable technology during the relationship, they would have a difficult time establishing that they were the first to invent that technology, even if they filed a

First-to-file has created a “race to the patent office” that even a well-intentioned company with good internal processes could easily lose.

under the first-to-invent system. These filing numbers suggest a significant preference for the perceived advantages of the old system, and uncertainty regarding the effects of the new first-to-file law.

AGREEMENTS AFFECTED BY FIRSTTO-INVENT

All businesses, from start-ups to Fortune 100 companies, have agreements with independent contractors, key suppliers, customers, and/or joint ventures. Astute corporate counsel

cesses could easily lose. Thus, the new law requires a rethinking of a company’s contractual protections for its nascent intellectual property.

patent application for the invention.

If the company did not have good practices in place to record and have new inventions witnessed, this could still present a challenge, but one that could be solved by improving the company’s internal procedures.

With the change to first-to-file, the risk that a business partner may claim the company’s invention as its own has risen dramatically. First-tofile has created a “race to the patent office” that even a well-intentioned company with good internal pro-

Suppose that your company works with a key supplier to develop harder and more heat resistant materials for making a product. The supplier knows from your requisitions and purchase activity what types of additives your company is considering to achieve the desired characteristics, and understands the manufacturing processes involved. Your company’s practice is not to file patent applications until it has identified the best additive and process conditions to achieve the goal.

Over time, the supplier recognizes that a few particular additives are the clear front-runners, and begins to file patent applications covering the material, additives, and likely processes for achieving the goal. Due to its own expertise in analyzing and procuring the additives, some developed in the process of working with the company, the supplier considers itself to be an inventor entitled to file these applications. Since the patent applications do not become public until 18 months after filing, your company is unpleasantly surprised when it learns that the supplier has filed several patent applications covering the new technology, including the additive and process that the company has identified as most useful.

REMEDY IS EXPENSIVE

If your company has lost the race to the Patent Office to a business partner, all is not lost. You may be eligible to institute a derivation proceeding under 35 U.S.C § 135.

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aug/ sept 2014 today’s gener al counsel

Intellectual Property A derivation proceeding is a new trial proceeding that is intended to replace interference proceedings. The derivation proceeding is conducted before the Patent Trial and Appeal Board to determine whether (1) an inventor named in an earlier application derived the claimed invention from an inventor named in a later filed application (the “true” inventor) claiming the same or substantially the same invention, and (2) the earlier filed application claiming the same or substantially the same invention was filed without the authorization of the “true” inventor.

A derivation proceeding is instituted by filing a petition with the Patent Trial and Appeal Board (PTAB). The petition must be filed within a year from the first publication of a claim to an invention that is the same or substantially the same as the earlier

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based on the derivation petition.

There are additional costs for a trial, including drafting and filing motions, discovery, and preparing for and attending oral hearings.

In short, a derivation proceeding will likely cost the petitioner much more than $100,000.

PREVENTION IS LESS COSTLY, MORE EFFICIENT

As part of the strategy for protecting your inventions under first-to-file, before entering into agreements you should document your inventions. A system to protect inventions typically includes practices such as: • Requiring signed and dated invention disclosure memos from scientists and other inventors.

• Routinely recording maintained and witnessed results in lab notebooks.

Derivation proceedings likely will take months to years to resolve and come with hefty price tags. applicant’s invention and must set forth evidence to support a finding that the earlier named inventor derived the claimed invention.

The derivation proceeding is uncharted and uncertain. Some companies may not have the time or resources to pursue it. Derivation proceedings promise to be like litigation, taking months to years to resolve and coming with hefty price tags. In its 2012 Final Rule Making, the Patent Office estimated that the costs for preparing a derivation petition would be in excess of $61,000, a figure that reflects the complex issues relating to the conception of an invention, and the communications between the parties to the petition.

The Office also estimated that it would cost at least another $29,000 to request reconsideration if the PTAB decides not to institute a trial

• Signing and dating minutes of meetings, including brain storming sessions, where inventions are discussed.

Perhaps the most important and cost-effective protection against the new risks introduced by the first-to-file system is to review and, where necessary, update and rewrite your contractual provisions governing business relationships. Third party agreements with independent contractors, key suppliers, customers, and/or joint ventures should clearly: • Prohibit third parties from filing any patent applications in your company’s area of work.

• Assign any inventive rights to the company.

• Prohibit disclosure of any information relevant to the company’s inventive activity.

• Require supplier employees with relevant company knowledge to also sign such an agreement.

Although the first-to-file regime of the AIA has passed its first birthday, the party for corporate counsel has just begun. Prudent counsel should educate their key inventive personnel about the new rules, and ensure that a strong internal invention capture system is in place and rigorously followed.

Counsel should also educate the purchasing and other personnel who engage and maintain key supplier relationships about the new risks of first-to-file, and ensure that the contract templates are updated to reflect the new protections required. Finally, existing contracts and relationships must be evaluated to determine whether corrections are necessary to reflect new realities. ■

Leigh C. Taggart is a partner and member of the Intellectual Property Department and the IP Litigation Practice Group at Honigman Miller Schwartz and Cohn LLP. He has 23 year’s experience in law practice. For nine years, he served as in-house counsel, including general counsel, at a consumer products company. ltaggart@honigman.com

Heidi M. Berven, Ph.D, a member of the Intellectual Property Department at Honigman Miller Schwartz and Cohn LLP. She previously served nine years as in-house patent counsel in the pharmaceutical industry. hberven@honigman.com

toDay’s gEnEr al counsEl aug/ sept 2014

E-Discovery

Written Communications continued from page 25

• Pay careful attention to trigger words. “Complaint” versus “problem” or “issue,” or worst of all, “defect.” In the antitrust context, “monopolize,” “fixing or setting the price.”

These are legally-charged words, but scientific terms can also be problematic.

For example, a drug failure rate of one percent may be considered “epidemic” to a scientist, but when the average jury member reads “epidemic,” he or she certainly thinks the number is higher.

• Unless you are speaking with an attorney, avoid discussing legal issues or lawsuits.

and consultants – that anything they say in social media postings may be discoverable and used against the company. It isn’t enough to put this in an employee handbook. Employees must be educated in a way that will drive the point home.

TIMING AND FOLLOW-UP

When should communication training take place? We advise at the beginning of any new project, particularly for outside consultants.

Follow-up is also critical. What the company does during the course of the relationship is just as important as the initial training. When a sensitive issue about a specific product surfaces, the company should consider

The more tailored the program is to the

email is produced in discovery there is a plausible explanation.

Training should cover these issues in a non-intimidating way. You don’t want employees or consultants to feel inhibited in performing their job responsibilities. You do want them to feel comfortable bringing problematic documents to management’s attention instead of encouraging them to take further (and surely unsuccessful) attempts to bury them. Making training in this area a regular part of the company’s training program will go a long way to creating the desired environment and results.

As the saying goes, an ounce of prevention is worth a pound of cure.

Taking the time to train your employees and contractors about smart communication could literally save your company millions down the road. ■

particular subject matter for which each individual employee group is responsible, the better.

Employees/consultants should be familiar with what is and is not protected by the attorney-client privilege.

They also should be aware of what may be legal determinations they aren’t qualified to make. Examples are whether a warranty was breached; whether the company complied with relevant FDA or other government regulations; and whether the product label was accurate or misleading.

Employees and consultants should avoid discussing the merits of any ongoing lawsuits with anyone except counsel.

5) Social media. As more and more employees now use social media, addressing it has become an important part of a communications risk management program. It takes only minutes for a video or tweet to go viral.

At minimum, employees need to be made aware of the potential implications of disclosing company information even on personal, non-work related social media. The company must remind employees –

conducting live training to address how to communicate in writing about the issue. This step is often overlooked in the panic of the moment.

A problem arises and perhaps is even reported in the media or on blogs, and it may take the company weeks to come up with an action plan.

Don’t let junior-level employees or contractors who may be dealing with the public every day be the ones to fill in the blanks in terms of what to tell customers. Have weekly or even daily calls if necessary to ensure that everyone is on the same page.

If there is a word that you would prefer representatives not use, say so.

If misinformation is discovered and corrected in real time, everyone is better off.

Another type of follow-up involves correcting the record if the training doesn’t “take” and an employee or consultant sends an e-mail blast with an incendiary and likely inaccurate opinion. Someone with knowledge should respond immediately, so if the

Sandra C. McCallion is a partner at Cohen & Gresser LLP, in both the Litigation & Arbitration and Intellectual Property & Technology practice groups. She is experienced in trial and arbitration, and she has litigated a broad array of complex commercial disputes, with an emphasis on products liability, patent and trademark litigation. smccallion@cohengresser.com

Melanie A. Grossman is an associate at Cohen & Gresser LLP. Her practice includes litigation and investigations, with particular experience in antitrust and structured finance litigation, contract disputes, accounting malpractice cases, white collar defense and Foreign Corrupt Practices Act compliance. mgrossman@cohengresser.com

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AUG/ SEPT 2014 TODAY’S GENER AL COUNSEL

Corporate Governance

What the Kahn Decision Says About “Special Committees”

By Gary D. Friedman and Kent K. Anker

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T

he recent decision by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp. has generated extensive commentary in the legal press because of its holding: that the relatively deferential “business judgment” standard of review, rather than the more exacting “entire fairness” standard, may now be applied in the context of controlling shareholder merger transactions if certain procedural protections are in place from the outset of the process.

Those protections are: the approval of an independent, adequatelyempowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of minority stockholders.

However, a close reading of the decision reveals that the shift in the nature of the judicial review may be less dramatic than suggested by the headlines that followed the decision.

Under Kahn, a court will apply the business judgment standard in con-

trolling shareholder merger transactions only if the Special Committee has actually performed its obligation to negotiate a fair price with due care and was effective in doing so, and if the court has scrutinized the factual record in sufficient detail so as to conclude that the due care and other conditions have demonstrably been satisfied.

The key will be the Special Committee’s ability to demonstrate that it acted effectively in negotiating with the

today’s Gener al Counsel aug/ sept 2014

Corporate Governance controlling stockholder in a manner that replicates genuine arm’s-length negotiations with a third party.

Here are the main lessons we see in the decision:

acterizes the applicable legal standard using several different formulations that underscore the substantive requirements to be complied with by Special Committees:

• Don’t expect that early dismissals of lawsuits challenging a controlled merger transaction will become routine. If a plaintiff can plead “a reasonably conceivable set of facts” showing that one of the requisite conditions was not satisfied, the plaintiff will be entitled to proceed with the case and conduct discovery. Accordingly, Special Committee members and their counsel should anticipate that a wellpleaded complaint will survive a motion to dismiss, and that discovery will occur.

• The business judgment standard will be applicable only where there is “an independent, adequately empowered Special Committee that fulfills its duty of care.”

• Pretrial discovery could be extensive. In order to prevail without a trial, the defendant must establish that there are no triable issues of fact as to the Special Committee’s due care and effectiveness. Depending on the applicable facts, this is not a light burden for a defendant to carry. In Kahn, the court noted that the Court of Chancery had made its decision on the basis of “a highly extensive record” (during eight months of discovery, appellants had received more than 100,000 documents, had deposed all four Special Committee members as

Special Committee members and their counsel should anticipate that a well-pleaded complaint will survive a motion to dismiss, and that discovery will occur.

• The court will undertake two price-related pre-trial determinations: “first, that a fair price was achieved by an empowered independent committee that acted with care and second, that a fully-informed uncoerced majority of the minority stockholders voted in favor of the price that was recommended by the independent committee.”

Each member of a Special Committee should at all times maintain the mind-set of an independent third party without any predisposition to accommodate the controlling stockholder. well as the Committee’s financial advisers, and had also deposed senior executives of the relevant companies). On the basis of this record, the court found that compliance with the dual procedural protections “had both been undisputedly established prior to trial.”

• The court’s “procedural” standards embody substance as well as procedure. The court in Kahn char-

mittee has been effective in negotiating an arm’s-length price. The price that has been achieved will be the critical factor in the court’s analysis, and the Special Committee must be shown to have exercised real bargaining power on an arm’s-length basis in the negotiations.

The court will carefully examine and evaluate what the Special Committee actually did. In Kahn, the court carefully reviewed and recounted the care and

• Finally, the case will proceed to trial under the entire fairness standard of review if there are any triable issues of fact as to whether “the dual procedural protections were established, or if established were effective.”

The court will assess whether the price is fair and whether the negotiations have been arm’s-length. The court will examine whether, in its view, the Special Com-

sophistication with which the Special Committee obtained financial information from management, gave directions to its financial adviser to consider other strategic alternatives, and engaged in negotiations with the controlling stockholder. Significantly, the court referred to its previous Americas Mining decision, in which the Chancery Court had engaged in an extensive critique of the Special Committee’s actions and concluded that the Special Committee “fell victim to a controlled mindset” that allowed the controlling stockholder to dictate the terms and structure of the transaction.

If the case proceeds to trial, the business judgment standard will not be applicable and the court will conduct the traditional entire fairness review. The less exacting business judgment standard is applicable only if the court decides that the undisputed facts establish both protections described above (the approval of the Special Committee, and the vote of a majority of the minority stockholders).

If, after discovery, triable issues of fact remain as to either of these conditions, then the case will proceed to trial under an entire fairness standard.

In light of these lessons from the decision, what is a Special Committee continued on page 39

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aug/ sept 2014 Today’S Gener al CounSel

TGC Surveys

Law Firm Hiring 2014 A Today’s General Counsel Survey The survey, conducted in June, sought data from in-house lawyers about their department’s hiring practices.

Key findings: Eighty-nine percent of respondents said that the chief legal officer or general counsel was the person responsible for selecting law firms. About half that number identified the deputy general counsel or a senior lawyer as part of the selection process.

Smaller organizations and legal departments were much more

32

likely to report that the CEO or CFO was involved in hiring

The most common way to research a new firm was to ask friends and colleagues inside the organization, second only to asking friends and colleagues outside the organization. Only seventeen percent researched a law firm by checking out the firm’s web site. Fewer relied on talking to a reference provided by the firm, searching for information about the firm online, or finding out if the firm was mentioned in any “best firms” directories.

How do you research a law firm?

(Percent that ranked a factor as either number one or number two.)

Ask friends / colleagues inside the company about the firm

84%

Ask friends / colleagues outside the company about the firm

63%

outside counsel. Larger organizations and departments were

17%

Look at ther website

more likely to say that senior lawyers or a division counsel was

Talk to a reference they provided

part of the hiring process.

Search online (e.g. “Google” them)

Would your organization be better served by using a method of selecting outside counsel other than “relationships”?

Other 4%

No 41%

See if they are mentioned in any directories of “best” firms

Look at how they rank in various surveys

Social media

Yes 55%

8% 5% 3% 1%

More than eighty percent of respondents rated the quality of the legal services they received from law firms that they had retained on the basis of personal relationships to be good or excellent. Nevertheless, when respondents were asked if they felt their organization would be better served if criteria other than relationships were used to select outside counsel, more than half said yes.

continued on page 34

Today’S Gener al CounSel aug/ sept 2014

TGC Surveys

Technical Proficiency Prevails Over Personal Relationships

P

ersonal relationships still count a lot when it comes to hiring law firms, but a Today’s General Counsel survey on hiring reveals an undertone of discomfort with that part of the process. Eight of 10 respondents rated the quality of service they received from law firms that had been retained on the basis of personal relationships as “good” or “excellent.” Nevertheless, more than half said they’d be happier if criteria other than those relationships were decisive when outside counsel were engaged. (Personal relationships were defined as relationships with a chief legal officer or another senior executive, usually forged in law school; relationships with lawyers from another firm or department; or relationships developed with opposing counsel in a courtroom.)

“Personal relationships are not very reliable,” says Philip L. Pomerance, COO & General Counsel, Best Practices Inpatient Care, Ltd. “I can think of at least one time when a lawyer selected because of a personal relationship – a former colleague at a firm – let me down. But I can also recall a time when a lawyer selected on the same criteria, in an area of law with which I was unfamiliar, did a stellar job. I use several criteria other than personal relationships, and generally I’ve gotten excellent results. Recommendations from lawyers with whom I have a good working relationship are very valuable, and when it’s appropriate I often ask colleagues who does this sort of work for them.”

Pomerance also investigates whether firms he is considering are active in the professional bar associations relevant to areas of law related to particular matters. His company is in health care professional services management, and he wouldn’t consider a firm for a health law-related matter unless it has an active membership in both the American Health Lawyers Association, and the ABA Section on Health Law.

“Technical proficiency, experience and a track record are minimum qualifications that must always be met,” says Darryl Marsch, Senior Vice President, General Counsel and Secretary at Krispy Kreme Doughnuts, Inc. “Then we rely on recommendations and personal relationships to help decide among qualified firms.”

None of Marsch’s colleagues from law school, former firms and companies or professional organizations are currently representing Krispy Kreme. That is happenstance, he explains, and not due to any philosophical opposition to the practice.

“Technical proficiency,” is the standard most respondents preferred over personal relationships when it comes to hiring law firms, but when they were invited to describe what they meant by that term, answers were all over the map.

They included “experience and versatility with legal issues around e-discovery,”

a technical nature indicate to the other side that they are dealing with someone who can be taken advantage of.”

No matter how respondents define technical proficiency, more than 90 percent were in agreement on the best method of researching firms prior to hiring them. They ask colleagues and friends, either in or outside the company, about their experience with potential hires. Thus their preferred method of assessing law firms remains personal, but based on experience, not relationships.

More than 80 percent of respondents said they’d terminated relationships with law firms in the past few years. Krispy Kreme Doughnuts Inc. was in the minority. “We’re neither expanding nor contracting the number of firms we use,” Marsch said. “Our relationships tend to be long term.”

Pomerance’s department is consolidating the number of firms it uses. “Our

“Technical proficiency, experience and a track record are minimum qualifications that must always be met.” “ability to manage large amounts of documents electronically,” “innovation,” and “project management.”

Others emphasized skills related to basic lawyering. One respondent equated technical proficiency with “the ability to effectively and efficiently represent the client while knowing legal obligations and deadlines so the legal matter can be managed properly.” Others cited “the ability to manage documents and exhibits at trial” and “subject matter expertise, knowledge of the rules applicable in the particular court and attention to detail.”

One respondent offered this insight: “At a sophisticated level of transactional practice, one or two missteps of

needs are very distinct,” he explains. “We use general business and tax counsel for some matters, and medical malpractice defense counsel as needed. In my experience, malpractice insurers spread the work out among several defense-oriented firms, which is actually quite inefficient.

I try to keep our work within a small group of lawyers who have been successful defending our physicians.”

Relatively few respondents considered diversity at the firm to be an important criterion for hiring.

As for firm websites, many looked at them, but said they rarely chose or rejected a firm based on what they saw there. ■

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aug/ sept 2014 Today’S Gener al CounSel

TGC Surveys

Law Firm Hiring 2014 continued from page 32

Reasons cited for choosing a law firm 70%

A previous experience

59%

Subject matter expertise of the firm The reputation / expertise of a particular lawyer at the firm

47% 45%

Fees / fee structure Recommended by a trusted source outside the company

37% 28%

Geographic presence of the firm Recommended by a trusted source inside the company

21% 15%

Results in similar cases

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Diversity of the firm Firm has a quality control system in place

4% 1%

The main reason for retaining a particular law firm, according to 70 percent of respondents, was a previous positive experience with that firm. More than half also identified a firm’s subject matter expertise as a key reason. Just under half cited the reputation or expertise of a particular lawyer, and about the same percentage cited the firm’s fee structure. Respondents from larger organizations and legal departments were more likely to say they relied on recommendations from trusted sources inside their organization. Respondents from smaller organizations were more likely to report that they relied on recommendations from trusted sources outside their organization.

Where are relationships with outside counsel developed?

Colleagues at a former firm / company / organization

80% 44%

Professional organization

34%

Law school Opposing counsel in a previous transaction or court case

32% 19%

Other (please specify)

14%

Bar association Religious / civic / charitable / social organization

5%

Undergraduate school

5%

Family

2%

Eighty percent of respondents reported that the most likely way for a relationship to develop with an outside counsel was through tapping a working relationship as colleagues at a previous company or organization.

Other ways for corporate counsel and outside counsel to develop a relationship were through a professional organization, shared experience at a law school, or as opposing counsel in a previous matter.

Today’S Gener al CounSel aug/ sept 2014

TGC Surveys

Eighty-four percent of respondents said their organization had terminated its relationship with at least one law firm in the past year. The reason cited most frequently was failure to deliver good service. Respondents from larger organizations and legal departments were more likely to cite billing issues or lack of client focus.

The technical proficiency of a law firm was of great importance to the majority of respondents.

Most indicated that their perception of technical proficiency would be based on experience with the firm.

Reasons for terminating the relationship with a law firm

The larger the department or organization of the respondent, the higher the number of law firms hired over the course of a typical year. On average, five law firms are hired over the course of the year by each organization.

Poor service

14%

Inefficient

14%

Too expensive / Service not worth the price

12%

Not client-focused enough

12% 11%

Billing issues Assignment ended / internal budget or operating change

9%

Not technically proficient enough

Average number of law firms hired, as a function of organization size and department size

8% 7%

Poor advice

5%

No real legal strategy

4%

Conflicts

3%

No real business strategy Arrogance / Poor communications / Ethics

1%

Relationship attorney left

1%

5,000 or more employees 500 to 4,999 employees 1 to 499 employees 26 or more lawyers 11 to 25 lawyers

8

4

2

10

6

5

3

6 to 10 lawyers 1 to 5 lawyers

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aug/ sept 2014 Today’S Gener al CounSel

TGC Surveys

Comments from Respondents Respondents had the opportunity to submit comments along with their survey replies.

Here is some of what they had to say: “A reference from a lawyer that I have already worked with who did satisfactory work is most important.”

“Our hiring is almost entirely based on personal relationships and personal recommendations from colleagues.”

“Hiring is also based upon amount of business that firms give to us.”

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“Please don’t use your political connections to force us to hire you. Your reputation and skills should be the linchpin, not favors from your political connections. I think it skirts the bounds of ethics to solicit work in this way.”

“I find hiring based on personal relationships becomes a way for business people to cultivate relationships and exert power, frequently without regard to quality of service or any sort of price sensitivity.”

“I realize that firms have put off hiring because of the economy, but I recently ended a relationship with a firm because they just no longer had a back-bench I could trust to give us good advice.”

“I have found that insurance companies negotiate the best rates and drive the best efficiencies from outside counsel.

So even if I am not sure there will be coverage, I obtain the insurance company’s panel counsel list and use it as a starting point for contacting attorneys.”

“We hire lawyers, not law firms. I am not impressed by large firms just because they are large. This can actually mean you

will be getting the project assigned to an over-priced associate whose competency is completely unknown. It all comes down to trusting your particular counsel, and that is as personal as it gets.”

“Many of our lawyers came from socalled ‘Biglaw,’ but in general we find that big law firms have too much overhead, too much waste, and are often unresponsive. We are focusing on firms, regardless of size, that can provide us with what we perceive as value.”

“Bridging the divide between business goals and legal requirements is the biggest cause of friction and waste in corporate relationships with outside counsel.”

“We circulate an RFP for services in a defined area of law to various firms, evaluate their responses and select counsel based on the firm that is best able to fit the company’s needs.”

“Failure to vet conflicts is very likely to get a firm fired.”

“Focus on costs within organizations can be penny wise and pound foolish.”

“For hiring in a very particular subject area, we interviewed three client references from the law firm that we ultimately chose. That process was really enlightening.”

“General counsel want the team they hire. ‘Bait and switch’ is a real problem because as outside counsel are rotated off a project, the knowledge investment the company paid for leaves with them, and we have to pay to educate someone else. I’ve experienced this not only within the mid-level ranks, but with the lead M&A partner, which was inexcusable.”

“Having multiple firms respond to a RFP for a given matter (usually a large one, like a litigation) has been invaluable. We always gain key insights into the case, and realize benefits on the budget.”

“The single best indicator of the skill

of any attorney or firm is prior experience with a specific kind of issue.”

“I engage outside counsel to help review large construction contracts when I don’t have the time to get to them. Most new lawyers want to show how smart they are by making as many changes as possible, which is not what we want to see. I try to teach the new lawyers about the areas we find most important, and encourage them to keep changes to a minimum. Rewriting a contract makes our job harder, not easier, as we negotiate the final terms.

Lawyers should take the time to learn what the client really expects, and what they find important. Client development is important. We had been using an older attorney for labor issues, but a new local firm began to wine and dine us, trying to get their foot in the door.

We relented and gave them a file as a test case. Eventually we found that they did quality work and were pleasant to work with. We didn’t necessarily mind that the prior attorney never spent any non-billable time with us, but when we approached him to participate in a company fund-raiser and he declined, we decided to cut ties with him and give all the labor files to the new firm.”

“When I hire outside counsel, I look for the lead attorney first and the firm second. I want that lead attorney to be someone I trust, and know will be highly responsive and has the technical expertise to either solve my problem or marshal the forces within his or her firm to do so. Personal accountability and responsiveness are essential for the lead attorney.”

“I want my outside counsel to take into account the valuable industry knowledge available within the company. Too often, I find that counsel believe they know it all, and ignore the company’s input. That is when the relationship ends.”

“Outside counsel should think about what they would want if they were

Today’S Gener al CounSel aug/ sept 2014

TGC Surveys

responsible for a legal budget. I don’t think it is complicated. Good communications and good value are the foundations. All hours spent on a matter are not of equal value, despite the billable hour. Good outside lawyers know that and adjust bills accordingly.”

“It’s pretty easy to find good outside counsel these days through the internet and an informal network that most general counsel use.”

“Law firms need to stand by their advice. If it turns out bad, they should do whatever it takes to resolve it for the client.”

“Never hire a large law firm, always hire the individual lawyer. Try to avoid hiring any lawyer with an office in New York or Los Angeles.”

“One way we meet new firms is through acquisition. We acquire a lot of companies and get to know their outside counsel. Those who do well for us after the deal will stay.”

“Outside counsel fail to understand that items such as closing books and final sets of documents are vital to in-house lawyers, who need to use those documents going forward. The instant the transaction closes, they seem to lose interest in finishing up the clean-up work that is often needed. It is a service industry and sometimes that is forgotten.”

“Outside counsel have priced themselves out of business. We try to do as much as possible in-house.”

“Particular rankings (one vs. two or five) do not really matter, but a failure to be ranked indicates a substantive weakness. We mostly rely on personal referrals and prior experiences from past work experiences. Diversity is a very important factor.”

“I’ve seen ‘go-to’ counsel lose their edge too often.”

“Sometimes I can’t work with the lawyer I want because someone else has decided that firm won’t get any more business from this company, even mid-project.”

“The firm model generally is in conflict with what a corporation’s goals are when hiring outside counsel. It is difficult to justify the rates we pay for firms to train their associates, and often the lack of business understanding or even how our company works makes outside counsel interactions very inefficient.”

“This is still a ‘people business.’ My company is very traditional, so I would not engage an attorney who used curse words (even mild ones) or who did not know the basic elements of courtesy and manners. If I take visiting counsel out to eat, and he starts eating off everyone’s plate just to ‘taste’ everything, I don’t hire him. (No kidding, that happened.) We also won’t hire the ‘showboaters’ who assume we are idiots and speak down to us.

Drives my CEO crazy.”

“Unsolicited firm letters are common.

While they can bring a new firm to our attention, they have a negative effect when they are unprofessional.”

“We always interview multiple firms and ask for alternate billing arrangements in exchange for work volume.

Those firms that do not have flexible billing are usually eliminated, unless they offer highly specialized services, such as M & A or specialized litigation services.”

“We have experienced very poor performance from well-known and highly regarded firms. We have learned that, particularly with large firms, you need to specify the attorney you want. I have removed attorneys from cases while retaining the firm.”

“We have hired a number of lawyers (we hire individual lawyers, not law firms) who we have met through professional organizations. Those who

have made topical and interesting presentations are more likely to get the nod than someone who merely fills a chair at those professional organizations. We look for leaders when choosing counsel.”

“We hire lawyers, not law firms. We try to fit the lawyer with the case, balancing rate, geography, experience, competency, etc. to the risks/complexity of the matter.”

“We hire the lawyer, not the law firm.

Consequently, even if I have a good relationship with a transaction lawyer, if I need a litigator my personal relationship with the transaction lawyer is not enough. I need a recommendation for that litigator from someone outside that firm. Law firms always recommend someone within their own firm.”

“We start with professional organizations and referrals. If none work, then we go to the internet to search specialty areas, and then research the specific attorneys’ cases. Then we pick at least three and interview them.

Cost is a big factor in our decision.”

“Long-term relationships will be forgiven for small hiccups or lightly missed deadlines. New relationships will not.”

“With all other factors being equal, we will favor a woman partner over a male partner when selecting a lawyer for a matter.”

“There are many things that outside counsel fail to do that can put their jobs into jeopardy. For instance, failing to learn their client’s business. What does this mean? It means knowing about sensitive issues peculiar to a particular client. For instance, we take great care with Office of Foreign Asset Control reps. A good outside counsel will seek not only to know our positions, but our rationale, so that they can identify problems and propose solutions.” ■

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aug/ sept 2014 Today’S Gener al CounSel

TGC Surveys

Convert and Standardize Data to Analyze Law Firms

by Rees Morrison

O

38

ne of the challenges of analyzing data regarding law departments, or law firms, is making sure that key terms in your data are consistent. You can get all the math right, but if some pieces of text don’t match when they should, your results will be wrong.

To illustrate this point, If you do a client satisfaction survey, you can collect all the scores correctly, but you may need to standardize names of individual clients or names of business groups. Yes, you can create multiplechoice lists or drop-down lists on your survey instrument, but very frequently some text comes along with the metrics that deserves standardization. Dropdown lists in matter management systems reduce the problem of standardizing names and strings of clients, law firms retained, responsible lawyers, and more. They force everyone to use the same name. It’s when you collect data from less-controlled sources that you turn to pattern matching to bring order.

Another situation calling for standardization is when you merge two collections of data. Let’s say your company has acquired another company and you want to understand the law firms used by that company. You will need to clean up their law firm names to be able to match them against the names of your preferred counsel list.

A brute-force approach uses Excel to sort the names of the law firms and drag the chosen name down so that variations become the chosen name.

That approach takes time and is prone to mistakes. Much more powerful tools are at hand.

Many software tools are available for doing this kind of pre-processing, a task sometimes called “pattern matching.” With pattern matching, the software standardizes the survey

responses or law firm names. A similar need would occur if you are comparing types of matters between two different law departments. One might call them “litigation,” the other “disputes,” and you need to have them consistent.

As yet another example to show how text standardization crops up in data analytics, you might want to combine two data sets, where one tells the number of lawyers in a firm and the other tells the number of matters they have handled for you in the past few years. You need to make sure that the law firm names in both match, so that you can merge the data sets accurately.

In one data set the firm may be known as “Archer & Greiner,” while the other refers to “Archer Greiner,” without the ampersand. When you merge the two sets of data by law firm name, your

matching.” With it, the software evaluates how “close” two pieces of text are to each other based on counting the number of changes it would require to convert one to another. “Rees” to “Pees” has a distance of one; “Morrison” to “Florison” has a distance of three.

Standardization of text is part of a broader topic that includes content analysis and text mining. All these software methods focus on converting text into formats that permit calculations and manipulations. Everyone thinks of numbers when they think of data analysis, but if the words that are related to those numbers are irregular, you’ve lost control. As to numbers, we wouldn’t want our data to be “2”, “two”, “zwei” and “II” would we? As to text, we often need to convert and standardize, as in the illustrative table below:

Original Text

Standardized Text

Original Text

Standardized Text

Boies, Schiller & Flexner

Boise Schiller

John Doe

John Doe

Boies, Schiller

Boise Schiller

J Doe

John Doe

Boies Schiller

Boise Schiller

Doe, John

John Doe

Boies law firm

Boise Schiller

john doe

John Doe

software will treat them as two completely different firms.

Data analysts often use a programming language called “regular expressions” to help clean up inconsistent text.

It is a venerable programming language that has been embedded in many applications. Word, somewhat surprisingly, has some robust “regex” capabilities in its Find and Replace function. Regular expressions enable very precise and sophisticated capabilities to locate text strings and replace or change them.

Beyond regular expression pattern matching, there is software that can do something called “approximate string

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

today’s Gener al Counsel aug/ sept 2014

Corporate Governance Special Committees continued from page 31

to do in order to try to qualify for business judgment review?

• Maintain an independent mind-set, and act accordingly. Each member of a Special Committee should at all times maintain the mind-set of an independent third party without any predisposition to accommodate the controlling stockholder. The Special Committee’s objective is not to figure out how to accomplish the controlling stockholder’s proposed transaction, but to decide

gaged with the work being done by the financial adviser, should provide direction to the financial adviser, and should not accept uncritically the financial adviser’s work or analyses. In the Americas Mining decision, the court was highly critical of the financial adviser’s valuation methodologies relied upon by the Special Committee and the Special Committee’s “controlled mindset.”

• Negotiate vigorously with the controlling stockholder. The Special Committee should engage in vigorous negotiations with the controlling stockholder, taking into realistic

The Committee should be actively engaged with the work being done by the financial advisor and should not uncritically accept the financial adviser’s work or analyses. whether and at what price such transaction or an alternative transaction would be in the best interests of the minority stockholders (or whether the Special Committee should just say “no” to the proposed transaction).

• Consider alternatives. The deal proposed by the controlling stockholder is not the only deal that the Special Committee should consider, and a careful consideration of alternative transactions can help the Special Committee assess the attractiveness (or not) of the controlling stockholder’s proposed transaction. The court in Kahn was impressed that the Special Committee carefully considered alternative transactions even though it did not have the practical ability to accomplish such transactions because the controlling stockholder had stated its unwillingness to be a seller of its stake.

• Critically evaluate the financial analyses by the Committee’s advisors.

The Committee should be actively en-

account the fair value of the target company and the parties’ alternatives.

In Kahn, the court rested its approval of the Special Committee’s actions not just on the negotiating process (which resulted in only a $1 per share increase above the controlling stockholder’s original proposal) but also on the court’s consideration of the factual record that underlay the Special Committee’s conclusion.

• Devote sufficient time and effort to the work of the Committee. The Special Committee members must devote substantial time and effort to their work. While they can and should delegate as appropriate to legal and financial advisers, they must remain engaged and involved in the process and must spend the necessary time in reviewing, understanding and critiquing the input from their advisers.

• Maintain good records of the Committee’s work. The Special Committee should direct its counsel

to ensure that adequate records are maintained of the work being done by the Committee. Such records will include minutes of each of the Committee’s meetings, as well as copies of all materials presented to the Committee for its review.

The Kahn decision is a challenge by the Delaware Supreme Court to have Special Committees perform their roles with the kind of arm’slength and sophisticated vigor that will allow the reviewing court to conclude that the Special Committee has been demonstrably effective in negotiating a fair price. The Kahn court makes clear that it stands ready to review the work of Special Committees on the basis of the traditional “entire fairness” standard if the rigorous conditions laid out in the decision are not met. ■

Gary D. Friedman, a corporate partner at Friedman Kaplan Seiler & Adelman LLP, has a broad-based transactional, commercial and counseling practice.

Gfriedman@fklaw.com

Kent K. Anker is a litigation partner at Friedman Kaplan Seiler & Adelman LLP, concentrating in complex commercial and criminal litigation.

Kanker@fklaw.com Friedman Kaplan Seiler & Adelman LLP was not involved in the Kahn case, but has represented affiliates of MacAndrews & Forbes in unrelated matters. MacAndrews & Forbes was a 43 percent stockholder in M&F Worldwide Corp., as discussed in the Kahn decision.

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aug/sept 2014 today’s general counsel

Robust antitRust ComplianCe pRogRam Can Have big payoff Colum n

by Jeffery m. Cross

t

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here are many reasons for ensuring that your company has a robust antitrust compliance program. If a corporation has been convicted of a criminal antitrust violation because of the conduct of a rogue employee, a rigorous and meaningful compliance program can mean a penalty reduction under the U.S. Sentencing Guidelines. These guidelines are applicable for violations of most federal laws, including the antitrust laws.

Mitigation comes through a reduction in a corporation’s “culpability score,” the method used by trial judges under the guidelines to determine the range of the fine that could be imposed.

Another benefit is that, in many jurisdictions, the fact that a corporation had a meaningful compliance program could be introduced at trial to dispute whether the company should be found vicariously liable for the conduct of a rogue employee in the first instance.

Yet another benefit is that a compliance program could assist the company in detecting a violation of the law early, permitting the company to self-report to the Department of Justice. Such prompt reporting and ensuing cooperation with the authorities may result in further reductions to the culpability score.

Prompt reporting may also allow the company to qualify for the leniency program instituted by the Antitrust Division of the Department of Justice.

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

The benefits could be significant, especially because a company qualifying for immunity is subject only to single damages, not the treble damages that could be imposed in follow-on civil class action cases. Furthermore, the single damages are measured by the defendant’s own sales, as opposed to the entire industry’s sales, for which a defendant could be liable under principles of joint and several liability.

Notwithstanding the foregoing, probably the most important benefit of a robust program is avoiding antitrust violations in the first place. A compliance program that effectively nips potential antitrust violations in the bud means the company is going to avoid criminal fines, civil treble damages, and potential debarment from government business, not to mention the damage to its reputation that undoubtedly would follow from a conviction.

Thus, any effective compliance program should include antitrust training.

Indeed, in 2004, following the WorldCom and Enron debacles, Congress in the Sarbanes-Oxley Act requested the U.S. Sentencing Commission to beef-up the Sentencing Guidelines to strengthen the section dealing with compliance programs. In order to receive a sentencing reduction for a compliance program, the program had to be “effective.” The resulting 2004 amendments to the Sentencing Guidelines have become the standard followed by most companies in developing an effective compliance program.

Moreover, there can be no doubt that, under the 2004 amendments to the Sentencing Guidelines, an effective compliance program must include training. Such training, and the dissemination of compliance information, must be a “real” program that will

TODAY’S GENER AL COUNSEL AUG/ SEPT 2014

accomplish its purpose of preventing violations of the law.

I have put together antitrust compliance training programs for many corporations. Such programs have included webinars and training modules available on corporate intranet sites. I’ve also delivered antitrust compliance training in live presentations to corporate boards, executive committees, and groups of marketing and sales employees.

The webinars and training modules on corporate intranet sites have the advantage of reduced costs. Many more employees can view the training materials than would be the case with live programs. There are obvious cost savings in the form of reduced travel.

However, if the goal of compliance training is to prevent violations of the law in the first instance, then live training in relatively small groups is by far the more effective approach.

The antitrust laws are complicated and nuanced. A compliance program that does

nothing but scare employees with threats of going to jail may be easy to present, but could actually cost a company more in lost sales because sales and marketing personnel back away from conduct that could actually be pro-competitive.

Consequently, a compliance training program must teach sales and

counsel presenting such programs to understand better where the risks are, and to better help the sales and marketing employees accomplish their goals without violating the law.

An added benefit of a live presentation is that sales and marketing personnel now have a real person to follow

A compliance training program must teach sales and marketing teams what they can do as well as what they cannot do. marketing teams what they can do as well as what they cannot do. Invariably employees attending the programs ask questions that reveal what they are in fact doing or contemplating.

This allows the in-house and outside

up with in order to discuss what they are doing. Such personal engagement is invaluable in helping the corporation accomplish its goal of preventing antitrust violations from occurring in the first place. â–

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AUG/SEPT 2014 TODAY’S GENERAL COUNSEL

NEW CYBERSECURIT Y FRAMEWORK PUTS LITIGATORS, INFORMATION SECURIT Y OFFICERS, ON SAME PAGE COLUM N

by TOM LAMBAKIS

P 42

icture for a moment the stereotypes one might associate with two professions: litigators and chief information security officers. The litigators of our mind’s eye are persuasive, outgoing, loquacious, polished, maybe even a little brash.

It’s a far cry from how we see our information security techs: introverted, awkward, disheveled, smart but in an inaccessible kind of way.

It’s a good thing the stereotypes don’t always match the reality, because counterintuitive as it may seem, litigation and information security are increasingly overlapping, at least when it comes to managing data.

Consider, for example, the “Cybersecurity Framework” that was formally issued by the National Institute of Standards and Technology in mid-February. These guidelines, a response to President Obama’s executive order to increase the cybersecurity of the United States critical infrastructure, outline the fundamental steps for securing critical networks. Essentially, it’s a standard for good information security practices, though government agencies refuse to call it that, lest it be seen as a regulatory imposition.

Tom Lambakis is vice president of information security consulting for Control Risks, based in Los Angeles. He specializes in communicating complex information security concepts and terminology to technical and nontechnical clients.

The very first measure that the framework calls for is asset management: identifying and cataloguing all the information systems, software, and physical devices that an organization relies on, and documenting how data moves through them. On the surface this seems like an IT directive, but it should strike a chord with litigators.

Mapping corporate data flows is one

of the first steps in preparing to search through a company’s electronic records for anything discoverable, an early phase of an investigation or litigation known as e-discovery.

The parallels go on. After cataloguing corporate data systems, one of an information security officer’s next steps is identifying which parts of those systems are most sensitive and

THE MAGA ZINE FOR THE GENERAL COUNSEL, CEO & CFO AUG/SEPT 2014

limiting who has access to them. Of course, this not only mitigates cyber risks, it also reduces the liability a company might assume when handling sensitive information.

Similarly, in-house and outside counsel alike regularly emphasize the importance of strong governance and clear policies on how companies use corporate data. Should an investigation or lawsuit arise, these measures can ensure a company has access to the data it needs. Good governance is also a fundamental security measure. The Cybersecurity Framework promotes it as a means to establish and align roles and responsibilities for protecting corporate information.

stored information is entirely different from the traditional e-mail and office documents files typically seen during a collection/review. It requires specialized IT expertise for collection and analysis. The companies that are able to handle such cases are likely to be the ones whose legal departments, security directors, and IT departments are able to work in harmony.

Of course there are noted differences to consider between information security and e-discovery. After all, the ultimate aim of e-discovery is to ensure access to data records during an investigation or litigation, whereas the goal of information

The Cybersecurity Framework is a standard for good information security practices, though government agencies refuse to call it that, lest it be seen as a regulatory imposition.

While the framework’s effects on e-discovery aren’t immediately obvious, in-house counsel may be wise to anticipate some. For one, the framework could trigger reviews of existing data movement protocols, ultimately leading companies to create new policies in compliance with the framework to which employees must adhere.

Some experts also speculate that compliance with the framework could reduce a company’s liability in some cross-border intellectual property cases. For example, if foreign hackers were to steal trade secrets but a company can prove it used the Framework to implement its information security systems, it may have a solid argument for reduced liability.

Making such a case could require collection of non-traditional data, such as firewall logs, and access controls. This electronically

security is to prevent unauthorized access to or manipulation of corporate data at any time. But from an information management perspective the pursuit of these goals looks remarkably similar.

Information security and e-discovery professionals face similar challenges.

The information systems they deal with are designed to support business processes and cater to the convenience of users. If they are designed with security or record-keeping in mind, it is usually as an afterthought. In either case, the fundamentals of information management – cataloguing data, setting access controls and fostering good governance – provide a firm foundation. ■

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44

Canada Decision Poses Antitrust Risk For U.S. Manufacturers

L

By Nikiforos Iatrou, Bronwyn Roe & Hayley Peglar ast fall, Canada’s Supreme Court (SCC) released a trilogy of class action certification decisions (the “Pro-Sys trilogy”) that could have wide-ranging implications for U.S. companies supplying goods or product components in Canada.

The Pro-Sys trilogy confirms that indirect purchasers can bring class actions for damages based on violations of Canada’s competition laws. Indirect purchasers are individuals or companies who have acquired products from resellers. While indirect purchasers have no direct relationship with the antitrust violator, they often bear the ultimate costs of anti-competitive conduct.

In coming to its conclusion, the SCC has parted ways with U.S. federal law and the law in many states, where indirect purchaser claims have been prohibited since the 1977 decision

of the U.S. Supreme Court in Illinois Brick Co. v. Illinois. The SCC also held that Canadian courts have jurisdiction over certain antitrust claims brought by indirect purchasers against foreign defendants. This means that Canada’s departure from Illinois Brick will have important ramifications for U.S. manufacturers selling products, whether directly or indirectly, in the Canadian market.

Faced with the SCC’s go-ahead for indirect purchaser class actions, U.S. manufacturers can expect plaintiffs’ counsel to become more aggressive in bringing broad-based indirect purchaser class actions in Canada. It is crucial that U.S. companies doing business in Canada consult with Canadian counsel to develop strategies to minimize exposure and ensure they are compliant with Canada’s competition laws.

“PASSING ON” DEFENSE REJECTED Section 36 of Canada’s Competition Act is the analog of Section 4 of the Clayton Act. It authorizes any person who has suffered loss or damage as a result of certain anti-competitive actions to sue and recover the loss or damage from the person who engaged in the offending conduct. Typically, these follow-on cases (so called because they follow on the heels of antitrust investigations) arise from price-fixing and bid-rigging schemes. Plaintiffs sue to recover the extra amount they paid for a good, as compared to the price they would have paid in the absence of the anti-competitive conduct. This excess amount is typically referred to as an overcharge.

Direct purchasers have long had a cause of action against antitrust violators, even where the direct purchaser has “passed on” the overcharge to its own customers. The “passing-on” defense – invoked by over-chargers at the top of the distribution chain to defend actions brought by direct purchasers where the direct purchasers have passed on the overcharge to their own customers – has been rejected in Canada and in the United States.

The plaintiffs in the Pro-Sys trilogy sought to expand the availability of overcharge claims to indirect purchasers. Though indirect purchaser antitrust claims have been barred in the United States since the Supreme Court’s Illinois Brick decision, since that decision many states have enacted so-called “repealer statutes,” making Illinois Brick inapplicable. In Illinois Brick, an indirect purchaser sought to recover antitrust treble-damages under Section 4 of the Clayton Act by establishing that the direct purchaser, who had paid the overcharge to the antitrust

violator, had passed on the overcharge to the indirect purchaser. The Supreme Court held that because pass-on theory cannot be used defensively by antitrust defendants against direct purchasers, the necessary corollary was that the same theory may not be used offensively by indirect purchasers to ground a cause of action against antitrust defendants.

THE PRO-SYS TRILOGY Pro-Sys Consultants Ltd. v. Microsoft Corporation involved allegations by a class of indirect purchasers that Microsoft Corporation and Microsoft Canada Co./Microsoft Canada CIE engaged in unlawful conduct by overcharging for Intel-compatible PC operating systems and applications software.

In Sun-Rype Products Ltd. v. Archer Daniels Midland Company, a class comprised of direct and indirect purchasers alleged that the defendant companies had engaged in an illegal conspiracy to fix the price of high-fructose corn syrup.

Infineon Technologies AG v. Option Consommateurs involved a proposed class action by direct and indirect purchasers under the Quebec Code of Civil Procedure, alleging that a pricefixing conspiracy had artificially inflated the prices of dynamic random-access memory chips (DRAM) and products containing DRAM sold in Quebec.

While the three cases each raised particular nuances, the SCC’s key holding, applicable to all three cases, is that indirect purchaser actions are available in Canada.

In Pro-Sys, the SCC upheld the principle that defendants in antitrust and other class actions cannot use the defense of passing-on.

The court held that the passing-on defense is contrary to basic principles of restitution. According to the decision, rejecting the passingon defense ensures that “wrong doers who overcharge their purchasers do not operate with impunity,” and prevents defendants from using any complexity in tracing the overcharge through the chain of distribution as a shield from liability.

However, the SCC rejected the U.S. Supreme Court’s holding in Illinois Brick that passing-on cannot be used offensively by indirect purchasers to ground a cause of action. The SCC disagreed with the notion that a prohibition on the offensive use of passing-on is a “necessary corollary” of its rejection of the passing-on defense. The SCC provided four principal reasons for its decision: continued on page 49

45

Nikiforos Iatrou is a partner at WeirFoulds.

He recently finished a three-year special appointment as counsel to Canada’s Commissioner of Competition.

A former clerk of the Court of Appeal for Ontario, he publishes widely, including as co-author of the book Witness Preparation: A Practical Guide, with Supreme Court of Canada Justice Thomas Cromwell and Bryan Finlay Q.C. niatrou@ weirfoulds.com

46

Internal Fraud Investigation:

THE FIRST FIVE DAYS

By Erick O. Bell

S

ooner or later, it happens: an employee or third party defrauds your company. The decisions that you make in the first few days will determine whether you can get your arms around the issues and react appropriately. Poor decisions in these first few days can open you up to criticism for doing too little or too much work, or under or over-reaction to the remediation efforts.

Similarly, errors and delays in the assessment of an allegation can result in either failure to identify a potential issue before a governmental investigation or litigation, or spending too much in money and resources chasing baseless allegations.

This article provides a yardstick for initiating an investigation into allegations of fraud in a structured but rapid manner that will improve the company’s chances of recovering losses. It describes key actions that should occur within the first five days of receiving an allegation in order to secure evidence, organize resources, and evaluate the substance of the allegation.(This article refers to the “first five days,” but keep in mind that an investigation is not a linear process. Our reference to days one through five is not intended to be a strict chronological checklist, but our experience tells us that the approach we outline is typical.)

Day Zero: Develop an Incident Response Plan.

Before discussing how to react to an allegation, we must first address how to be prepared. Your company should develop an incident response plan before there is any allegation. This plan functions as a road map for how to respond in the event an allegation is made. The incident response plan should include information such as: • Who should be informed of the initial allegation, and when they should be notified (senior management, general counsel, human resource, audit committee, external auditors, etc.)

• What professional service firms should be retained and ready to react (e.g. litigation firms, forensic accountants, forensic technologists.)

• How to control the information flow (protection of data, communication to employees, communication to third parties, etc.)

• How to minimize and recover losses incurred (data preservation, insurance policies, etc.)

The incident response plan will serve as a playbook that management can reference during this tumultuous time. The plan should be regularly reviewed and updated to ensure that the appropriate resources remain in place with front-line technology and processes.

Day 1: Consult legal counsel.

Many allegations of fraud involve either crimes or violations of an organization’s policies. In

either case, it is recommended to consult legal counsel at the beginning of an internal investigation. Depending on the nature of the allegation, the organization may need to involve outside counsel.

Early in the investigation, the company should also consider the composition of the investigation team. An investigation team can be internal, external, or a combination.

For example, outside accountants can work with internal audit under the direction of internal counsel.

Seeking consultation in these matters is vital.

Many organizations retain legal counsel and experienced forensic accountants as part of their incident response plan so they have immediate confidential access to experienced professionals.

Day 2: Preserve the data.

In our experience, one of the most common problems encountered in an investigation is a lack of reliable data, because what was available wasn’t properly preserved. The investigation team should consider what data could be relevant to the allegation and secure that information. Data is everywhere and can easily be tampered with or unintentionally altered. When this happens the evidence may not stand up in court. Early in the investigation, data must be properly preserved.

Preserving data does not have to be a costly process. An organization can consider temporarily suspending automated backup and deletion processes until more information is gathered. The organization’s legal counsel can send written requests to a certain department or departments, asking that desk and electronic files related to certain broad topics not be deleted or removed until further notice.

There is a definite distinction between preserving data and collecting and reviewing it: Not all data preserved needs to be collected or reviewed.

Once the data is preserved, a phased collection and review approach can be implemented to effectively manage the cost of the investigation.

Day 3: Communicate with the whistleblower.

Before the investigation team jumps to any conclusions, it is advisable to reset and ensure that the investigation team has a clear understanding of the allegation. The best source for this initial information will likely be a whistleblower. The initial communication with the whistleblower will help your company assess “predication” – or, as defined

47

Aug/ sept 2014 today’s gener al counsel

by the Association of Certified Fraud Examiners, “the totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe a fraud has occurred, is occurring, and/or will occur.”

The investigation team should quickly prepare to meet with the whistleblower to understand his or her perception of the facts. This is strictly a fact finding interview and should not be approached in an accusatory or defensive manner.

An advantage of this interview is to reassure the whistleblower that your company is taking this matter seriously. Additionally, interviewing the whistleblower early in the investigation assists the investigative team in defining the appropriate scope for the investigation, as discussed in the next section.

If there is no whistleblower (or if the whistleblower is unknown or unwilling to provide further information), an experienced investigation team can conduct covert investigative procedures to assess the reasonableness of the allegation. For example: • • • •

Analyze relevant reports or documents.

Conduct preliminary data analytics.

Perform invigilation procedures.

Read relevant customer reviews or complaints.

• Assess accused perpetrator’s lifestyle.

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Erick O. Bell, a managing director with StoneTurn Group LLP, conducts internal investigations, consults on anti-fraud programs, and provides expert witness testimony and non-testifying consulting in litigation matters. He is also an adjunct professor at the University of San Francisco and Golden Gate University, teaching courses in fraud examination, risk based auditing and financial accounting. He is a certified public accountant, certified fraud examiner, and certified in financial forensics. ebell@stoneturn.com

Regardless of the approach selected, the investigation team should undertake some preliminary procedures before assessing whether or not to proceed with an investigation.

Day 4: Prepare preliminary investigation plan.

Once the investigation team has gathered enough evidence to conclude that the predication of fraud exists, it should develop an investigation plan. The investigation plan will leverage the information garnered in the initial assessment of the predication of fraud, to specifically address: • What additional documents (invoices, deposit slips, etc.) should be collected and reviewed.

• Who should be interviewed and the order in which they should be interviewed.

• What further data analysis should be performed.

• Which locations and time periods should be included in the investigation.

An investigation by nature is fluid, and the direction of the investigation will likely

change, so be prepared for the preliminary investigation plan to be modified several times. Interviews and documents that seemed important at the beginning of the investigation may no longer be critical after gathering more evidence. An experienced investigation team will allow the evidence to lead it to the appropriate next steps and eventual conclusions in a timely manner.

Day 5: Review insurance policies.

The best kept secret is that an organization’s existing insurance policies may cover both the actual amount of fraudulent misappropriation and the cost of the investigation. Many organizations carry director and officer liability insurance, but there are other common forms of insurance that can be used to recover fraud losses, as well: • • • • • • •

General liability insurance.

Employee dishonesty policy.

Crime fidelity insurance.

Crime coverage.

Fidelity bond.

Business owner policy.

Cyber-crime policy.

As part of developing the incident response plan, prepare a list of relevant insurance policies that cover potential losses due to fraud.

The investigation team should consult with the appropriate professionals to determine whether the allegation is covered under an existing insurance policy. The first step in recovering fraud loss is understanding the time frame for reporting the alleged fraud and properly notifying the insurance carrier.

An immediate and thorough review of all applicable insurance policies is essential at the outset of an investigation.

This article discusses only the vital first few steps of an investigation. The next steps are equally important and should be approached with the same level of strategy and skill. But by following these initial steps, your company will be in a good starting position to effectuate an investigation that recovers losses, mitigates liability, and prevents recurrence or other forms of misconduct.

The thought of initiating an investigation initially may seem daunting. But with a dependable framework and the right team of experienced professionals, the investigation can be performed in way that’s both effective and efficient. n

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2014

Antitrust Risk

continued from page 45 (1) The risk of double or multiple recovery can be managed by the courts. Recovery will be limited to the aggregate amount of the loss, no matter how it is ultimately shared by direct and indirect purchasers. Where there is a risk of double recovery, the courts can manage this risk through practical means, e.g. by reducing damage awards. However, it will be up to defendants to prove double or multiple recovery.

(2) Indirect purchaser actions should not be barred solely because of issues of remoteness and complexity associated with proving damages. Complex evidence, economic theories, and multiple distribution chains are not new to indirect purchaser actions. These challenges are present in most antitrust cases and should not serve to deny indirect purchasers the chance to make their case, even if the claim ultimately fails at trial.

(3) Indirect purchaser actions further the goal of deterrence. Sometimes, direct purchasers will be reluctant to bring an action against the offending party for fear of jeopardizing a business relationship. In such cases, indirect purchaser actions may be the only means of deterring overcharges.

(4) Indirect purchaser actions are consistent with the principles of restitution. Indirect purchaser actions are consistent with the remediation objective of restitution law, in that these purchasers often bear the cost of antitrust violations.

The SCC also noted that, while Illinois Brick remains good law at the federal level in the United States, the Supreme Court has upheld the “repealer statutes” enacted by many states at the state level.

U.S. COMPANIES AFFECTED In Sun-Rype, the defendants argued that the Canadian courts lacked jurisdiction because the alleged conspiracy was entered into by foreign defendants, outside of Canada, to fix prices for products sold to foreign direct purchasers.

The majority of the SCC agreed with the defendants that conduct cannot be contrary to Part VI of the Competition Act unless there is a “real and substantial connection” to Canada.

Applying the framework from its 2012 decision, Club Resorts Ltd. v. Van Breda, the SCC found

that there is at least some suggestion in the case law that where defendants conduct business in Canada, make sales in Canada, and conspire to fix prices on products sold in Canada, Canadian courts have jurisdiction.

In Sun-Rype, the conduct in question allegedly involved each foreign defendant’s Canadian subsidiary acting as its agent, and the sales in question were made in Canada to Canadian customers and Canadian end-consumers. The SCC held it was “not plain and obvious” that Canadian courts have no jurisdiction over the alleged anticompetitive acts committed in this case. The SCC may well have come to a different conclusion had Canadian subsidiaries not been involved.

Quebec courts appear to have even wider reach. In Infineon, the SCC held that Quebec courts have jurisdiction under the Civil Code of Quebec in respect to an alleged anti-competitive conspiracy which occurred outside of Quebec, so long as there is some injury or economic damage to a Quebec consumer. This suggests that U.S. companies with no presence in Canada may nonetheless be required to defend antitrust class actions brought in Quebec. Whether the expansive approach taken in Infineon will apply to Canada’s common law provinces remains to be seen.

Further, the risk of multiple recovery will not prevent indirect purchasers from suing U.S. companies in both the United States and Canada. In Sun-Rype, the defendants argued that permitting indirect purchaser class actions in Canada would result in overlapping claims for the same loss. In that case, direct purchasers had already reached a settlement in the United States for the overcharge at issue. The SCC dismissed this argument, again noting the court’s ability to modify settlement and damage awards to reflect amounts already received by plaintiffs in other jurisdictions. Proving multiple recovery will require coordinated efforts by counsel across jurisdictions.

In the wake of the Pro-Sys trilogy, U.S. companies must be prepared to defend indirect antitrust class actions in Canadian courts.

Where simultaneous proceedings are brought in the United States and Canada, counsel will confront differing legal standards in the two jurisdictions. U.S. and Canadian counsel will need to coordinate strategy across the jurisdictions, particularly in cases where the defendant must prove double or multiple recovery.

It is more important than ever that U.S. companies doing business in Canada consult with Canadian counsel in order to minimize litigation exposure and ensure they are compliant with Canadian competition laws. ■

Bronwyn Roe is an associate at WeirFoulds, with the firm’s litigation group, focusing on corporate and commercial disputes.

She has experience advising clients with regard to competition litigation and Competition Bureau investigations. broe@weirfoulds.com

Hayley Peglar articled at WeirFoulds LLP and will be called to the bar in Ontario in 2014. She will return to WeirFoulds in September 2014 as an associate in the areas of commercial, leasing and estates litigation. hpeglar@ weirfoulds.com

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AUG/ SEPT 2014 TODAY’S GENER AL COUNSEL

50

Preserving Privilege in

INTERNAL INVESTIGATIONS

By Stephen A. Miller & Brian Kint

T

he U.S. Court of Appeals for the D.C. Circuit recently vacated the district court’s decision in In re: Kellogg Brown & Root, a case that had the potential to radically change the way that companies conduct internal investigations.

A district court judge had ruled that documents created in the course of an internal investigation were not protected by the attorney-client privilege.

Even though the D.C. Circuit’s decision rejected the district court’s reasoning and result, the saga contains valuable lessons for companies that will conduct internal investigations in the future.

The underlying dispute involved the privileged status of documents created during internal code of business conduct (COBC) investigations conducted

by Kellogg Brown & Root, Inc. (KBR). In 2005, Harry Barko Jr., a former subcontract administrator for KBR, brought a qui tam action against KBR under the False Claims Act. Barko alleged that KBR had overcharged the U.S. Army for services performed in Iraq pursuant to contract.

During discovery, Barko demanded that KBR produce documents regarding its compliance with government contracting regulations. In response, KBR produced documents showing that employees had submitted tips to KBR’s ethics and compliance hotline. However, KBR withheld as privileged the documents created during the COBC investigations conducted in response to those tips.

The U.S. District Court for the District of Columbia ruled that the COBC documents were not protected by the attorney-client privilege.

The district court judge, sitting by designation from the Northern District of Ohio, noted that federal regulations required KBR to implement a system of internal compliance controls, maintain an employee complaint system, and timely report any misconduct to the government. The court concluded that the COBC documents were created pursuant to a “compliance investigation required by regulatory law,” and thus were not privileged because they were created “pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”

In making this determination, the court noted that KBR’s in-house counsel did not confer with outside counsel, the investigation was conducted in part by non-attorney employees of KBR, and KBR employees who were interviewed were not informed that the investigation’s purpose was to provide KBR legal advice.

KBR asked the district court to stay proceedings and certify the ruling for immediate appeal under 28 U.S.C. § 1292(b). The district court refused. As a result, KBR filed a petition for a writ of mandamus with the D.C. Circuit asking it to vacate the district court’s ruling. On March 28, 2014, the D.C. Circuit granted a stay of the district court proceedings and scheduled oral argument on the mandamus petition.

THE “BUT-FOR” TEST When oral argument on the mandamus petition was presented on May 7, a three-judge panel of the D.C. Circuit signaled its discomfort with the district court’s ruling. The questions and comments from the panel, comprised of Judges Thomas Griffith, Brett Kavanaugh and Sri Srinivasan, expressed concern that the district court employed the wrong test to determine whether materials were privileged.

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Stephen A. Miller is a member of Cozen O’Connor’s Commercial Litigation Group in Philadelphia. He assists companies and individuals facing potential criminal exposure. Prior to joining the firm he served as a law clerk at the Supreme Court of the United States. samiller@cozen.com

Aug/ sept 2014 today’s gener al counsel

Brian Kint is an associate in Cozen O’Connor’s Commercial Litigation Group in Philadelphia. He joined the firm in 2011 after participating in the Cozen O’Connor Summer Associate Program in 2010. bkint@cozen

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The “but-for” test – seemingly applied by the D.C. district court – dictates that communications are privileged only if the communication was made solely for the purpose of the seeking of legal advice. The “primary purpose” test, on the other hand, treats communications as privileged as long as the primary purpose (among many other purposes) of the communication is to seek or give legal advice. In today’s business world, most communications have multiple purposes, and strict application of a but-for test would sharply limit the scope of the attorneyclient privilege in internal investigations.

The panel’s questions at oral argument demonstrated that it clearly understood the practical implications of the ruling and the significant narrowing of the traditional attorney-client privilege contemplated by the but-for test. For example, Judge Kavanaugh noted that the district court cited four factors in support of its decision that the privilege did not apply: the existence of a corporate policy, the regulatory structure, the lack of involvement of outside counsel, and the fact that employees were not given warnings. He then stated, “I don’t see precedent supporting any of those four factors as being reason to sideline Upjohn ...” (That is, the 1981 Supreme Court decision, Upjohn Co. v. United States.)

Judge Griffith pointedly asked, “Why isn’t the desire of a corporation to comply with regulations – why isn’t that in fact the very core of seeking legal advice?” He then suggested that the district court’s separation of “seeking legal advice” and “seeking to comply with federal regulation” may be the novel legal ruling that would warrant granting the mandamus petition.

A “PRIMARY PURPOSE” TEST The circuit panel delivered its opinion on June 27, 2014. It concluded that the district court’s privilege ruling constituted clear legal error, granted KBR’s petition for writ of mandamus, and vacated the district court’s ruling.

The opinion, authored by Judge Kavanaugh, noted that the “but for” test applied by the district court is “not appropriate for attorneyclient privilege analysis” because such a narrow test “would eradicate the attorney-client privilege for internal investigations conducted by businesses that are required by law to maintain compliance programs, which is now the case in a significant swath of American industry.”

Instead, the panel unanimously held that courts evaluating privilege issues should apply a primary purpose test, as described above. The court cautioned, however, that it would be incor-

rect for a court to presume that a communication can have only one primary purpose. Given the reality of often multiple and overlapping purposes of any modern communication, the court said, “it is clearer, more precise, and more predictable to articulate the test as follows: Was obtaining or providing legal advice a primary purpose of the communication, meaning one of the significant purposes of the communication?”

In other words, for the attorney-client privilege to apply, obtaining legal advice need only be a primary purpose of the communication. It does not have to be the primary purpose of the communication.

IMPACT And LESSOnS Despite the D.C. Circuit’s decision, this case serves as a reminder that reasonable jurists can evaluate privilege issues differently. For that reason, companies should be diligent in protecting their attorney-client privilege during internal investigations. In particular, companies should take the following simple steps to strengthen any assertion of privilege over internal investigation materials: • Have the general counsel direct the strategy and response for internal investigations.

• Ensure that all employee interviews are conducted by attorneys or by employees who make it clear – and to whom it is made clear – that they are working at the direction of attorneys.

• Provide Upjohn warnings before all employee interviews to clarify that the purpose of the interview is to gather facts so that the company can obtain proper legal advice.

• Engage outside counsel to work with general counsel on all internal investigations.

Because outside counsel is only engaged for legal advice, this will strengthen the company’s claim that a “primary purpose” of the investigation is to obtain legal advice.

• Protect attorney-client privilege when providing information and materials to regulators.

This advice must vary in light of each governing regulatory regime, but companies should try to ensure that their regulatory submissions include only non-privileged material.

Finally, in light of the district court’s ruling (and the money and effort KBR had to expend to fight it), companies may want to consider shifting the issue away from the courts. Rather than wait for the next “bad ruling” in this area, companies may want to lobby Congress and certain administrative agencies to clarify that statutory compliance requirements are not meant to disturb the privileged nature of those inquiries. ■

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AVOIDING PERFORMANCE PITFALLS UNDER GOVERNMENT CONTRACTS

By Kara M. Sacilotto

F

ollowing years of record-spending on procurements, government contracting – and government contractors – have become front page news. But failed acquisitions, delayed programs, busted budgets and poor performance don’t just make cringe-inducing headlines. They may also present significant liability to the contractor. What can a contractor and its counsel do to prevent a company from becoming the next headline, or perhaps worse, having to explain to top management why the program was a bust?

BE CAREFUL WHAT YOU WISH FOR During the competition phase, it is easy for a contractor to become laser focused on getting the win, optimistic that performance will go precisely to plan and the contract will turn out successful and profitable, despite concessions and aggressive assumptions.

But little in life or government procurements goes perfectly to plan, and much of contract performance is outside the control of the contractor. When the contract is fixed price, it is especially important that the contractor not be overly optimistic. Before taking a leap of faith with company funds, contractor counsel should have their clients consider the following questions: • If my proposal is incorporated wholesale into the contract, can I perform in accordance with the technical approach and costs that I’ve laid out?

• If the contract is canceled or options are not exercised, is my pricing strategy still viable?

• Does my proposal rely on assumptions that may not be true? If so, how will the failure of key assumptions affect my ability to perform at the (most likely) fixed price I’ve proposed? Did I identify those assumptions to the government?

CHOOSE YOUR TEAMMATES WISELY As a result of provisions of the National Defense Authorization Acts (NDAAs) for Fiscal Years 2013 and 2014, there are more requirements on covered contractors to ensure that the small business subcontractors proposed for performance are actually used in performance. There are also requirements arising from the FY12 and FY13 NDAAs, plus there is a recently issued Department of Defense revision to the DoD Federal Acquisition

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Aug/ sept 2014 today’s gener al counsel

Regulation Supplement (DFARS), requiring that covered contractors ensure that counterfeit electronic parts do not seep into government products.

A recent proposed Federal Acquisition Regulation (FAR) rule would expand the scope of this obligation to more kinds of parts and more contractors. And, of course, subcontractors that will not or do not perform, or teaming relationships that have soured, can be major and costly disruptions.

To reduce the risk of subcontracting marriages ending in divorce, contractors and their counsel should:

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Kara M. Sacilotto, a partner in Wiley Rein’s Government Contracts Practice, has extensive experience in government contracting. She has also taught as an adjunct professor at George Mason University School of Law, testified before Congress on procurement policy matters, and is active in the ABA Section of Public Contract Law. ksacilotto@ wileyrein.com

• Ensure that proposal teams and business development personnel are aware of the most recent requirements for small business subcontracting plans.

• Review their purchasing systems with respect to new counterfeit electronic part requirements and to ensure that less-than-stellar suppliers do not slip through the cracks.

• Pay as much attention to subcontract management as to management of the prime contract.

Just as strong management of the prime contract can head off problems, so too can strong management of the subcontract relationships. Keep in mind, first, that subcontract management is commonly evaluated as part of past performance. Second, that subcontract management is a factor in the assessment of contractor purchasing systems under DFARS 252.244-7001, one of the business systems that DoD contractors must adequately maintain or risk contract withholdings. Third, the FAR mandatory disclosure rule requires covered prime contractors to disclose any “credible evidence” of certain criminal or civil False Claims Act violations by their subcontractors.

• Beyond ensuring that a subcontract includes all the normal or mandatory FAR/DFARS flow-down provisions, be careful to flow down schedule and other performance requirements that apply to subcontractors, as well as key tailored provisions of the prime contract (such as those regarding security requirements or organizational conflicts of interest). Establish clear dispute resolution and limitation-of-liability provisions, and ensure that subcontractors are required to continue performance during the pendency of any disputes.

Heed THe Warning SignS Some typical indicators that contract performance may be heading off course include:

Negative metrics. Many contracts require use of cost and schedule reporting mechanisms. Data generated from those reports can indicate unanticipated cost and schedule growth, and contractor counsel should become familiar with interpreting this data.

Early attention to cost and schedule performance may stave off future problems or assist in identifying areas of cost or schedule growth not attributable to the contractor or its subcontractors, all factors that warrant an equitable adjustment to the contract price.

Similarly, some contracts include performance metrics. For important contracts, counsel should monitor the performance metrics to identify early any need for corrective actions.

Stop work orders. A stop work order is often the precursor to a full or partial termination, whether for convenience or default.

Deductive changes and partial terminations, whereby the government reduces work on a contract. These can indicate dissatisfaction with the contract, contractor or performance, or a budgetary pinch. Like a stop work order, a partial termination or deductive change may be a precursor to a full termination of the contract.

Negative Performance Evaluations. Beyond signaling customer dissatisfaction, a negative performance evaluation can be a warning sign regarding the health of the contract and its management. An adverse performance evaluation also may be a forerunner to the customer declining to exercise options so as to end the contract or terminating the contract outright.

Moreover, an adverse performance evaluation can follow a contractor as it attempts to compete for future business.

Because of the potential long-term impact and the shortened 14-day period for contractor comments dictated in the FY13 NDAA and implementing FAR regulations, counsel should be involved as soon as a negative evaluation is received on important contracts. Counsel can help frame a response that will maximize the chance of a more favorable final evaluation.

If the evaluation is not changed, counsel can assist with escalating the matter above the contracting officer, pursuing a challenge to the evaluation before the Boards of Contract Appeals or Court of Federal Claims, or with developing a response that tells the contractor’s side of the story for use in future procurements.

Show cause notices. Sometimes a government customer sends a show cause notice before issuing a cure notice for a potential default

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO aug/ sept 2014

termination. And sometimes a debarring official will make “inquiries” that are one step shy of a show cause notice, or send such a notice before embarking on the more serious course of a notice of proposed debarment or suspension.

Contractors receiving any type of show cause notice (or any inquiry from a debarring official) should treat the notice with considerable seriousness. This is the contractor’s opportunity, perhaps its only one, to convince the agency that more serious action is not required.

Contract restructuring. If the government wishes to continue a program, but cost and schedule have become so disrupted that performance is at risk, the contractor or the government may suggest “restructuring” the contract to put the work back on track.

Restructuring plans, however, frequently include concessions by the contractor, including releases of claims. Counsel should be involved to navigate the concessions and ensure that important contractual rights are not compromised.

Reviews, investigations, and subpoenas. Any kind of request for information from Congress or agency investigation is a clear sign that trouble is brewing. At this point, hopefully, inhouse counsel is already involved, and outside counsel retained.

More subtle, however, is a GAO inquiry regarding a contract or a programmatic review by the customer. These too may be a sign that the government customer is questioning performance.

Keep the Lines of CommuniCations open In-house counsel are not always the first to know when signs of trouble start to appear in contract performance, even though early involvement of counsel can be important for protecting contractor rights. Note, for example, that most changes to government contracts that adversely affect profitability and schedule performance arise from “constructive” changes relating to the government’s conduct in administering the contract.

Constructive changes can include delays in approving deliverables or providing instruction, interfering with performance, providing defective specifications or instructions, interpreting contract requirements in an unreasonable manner, or other conduct that disrupts a contractor’s reasonable expectations for contract performance and increases costs, schedule, or both.

Constructive changes often sneak up on a program over time, and capturing the impacts is challenging. Involving counsel early will help the contractor prepare for a potential claim by capturing the costs from and evidence of government conduct that are essential to establishing entitlement to an equitable adjustment.

Be aware that program personnel may believe that they can handle a dispute with the government without involving counsel, even though some disputes are legally complex, and rights, such as data rights, can easily be compromised if a contractor is not diligent.

Early involvement of counsel is important to protecting those rights.

Bottom Line Contractors are under the regulatory and political microscope more than ever, competition for contracts is tighter, and budgets are shrinking. To protect your company’s bottom line and avoid being labeled a problem contractor, here are some steps to consider: • Educate yourself on your company’s most important contracts, including pre-award history. Keep apprised of important modifications, key performance reports or metrics, and performance reviews.

• Review teaming and subcontracting agreements to ensure that your rights are protected and important terms flow down to subcontractors.

• Recognize the warning signs that emerge from program metrics, performance metrics, performance evaluations and program reviews.

• Alert your clients to the need to engage counsel whenever there is an inquiry, however informal, from a debarring official or agency investigator, a show cause notice, or even preliminary finding of significant deficiencies by an agency auditor.

• Monitor important or troubled contracts for constructive changes, and ensure that potential changes are identified early so that the impacts can be captured and claims pursued before the impacts of the changes derail contract performance.

By planning for the worst and monitoring performance, a contractor’s counsel can help the company avoid becoming the next big headline. ■

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58

WHO CAN BE A FALSE CLAIMS ACT

WHISTLEBLOWER?

By Marilyn May

Y

ou may be surprised to learn that your compliance officer can file suit against you under the False Claims Act. That’s what happened recently to Halifax Hospital. It cost the hospital $85 million in damages to settle only part of the case, with the rest to be tried this summer.

If you do business either directly or indirectly with the federal government, the False Claims Act may apply to your company and leave you vulnerable not only to claims of treble damages, but also to mandatory penalties of $5,500 to $11,000 per claim.

Last year, the U. S. Department of Justice collected $3.8 billion from suits under the False Claims Act. Whistleblower suits represented the major portion – $2.9 billion – of that recovery. The DOJ opened 846 new False Claims Act cases in 2013, the majority of which (753) were whistleblower suits. By contrast, ten years ago the DOJ opened less than half that number of whistleblower suits. This spike in False Claims Act whistleblower lawsuits effectively drives the Justice Department’s False Claims Act enforcement.

In a False Claims Act whistleblower lawsuit, a whistleblower, called a relator, files suit against an individual or a company, or both. Because the suit, called a qui tam suit, must be filed under seal (which means that it is not public and the court can sanction anyone who violates the seal), if you or your company is the defendant, you won’t know that the suit has been filed.

The relator’s lawyer serves a copy of the sealed complaint on the U.S. Attorney General and the U.S. Attorney for the district in which the suit is filed. Although the seal is in effect for only 60 days, the government almost always asks the court to extend the seal period while it investigates. These requests are usually granted, and frequently the seal is extended for years.

During the time it takes the government to investigate, the relator may still be working for you. The relator may be secretly taping conversations or business meetings and providing that information to the government. The relator also may be providing your business documents to the government, although the government will usually caution relators to provide only documents they see in the normal course of their positions and not

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Aug/ sept 2014 today’s gener al counsel

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Marilyn May, counsel in Arnold & Porter’s healthcare and white collar defense practice groups, focuses on healthcare fraud investigations and defense.

Prior to joining Arnold & Porter, she headed fraud enforcement for the U.S. Attorney’s Office in the Eastern District of Pennsylvania. marilyn.may@aporter. com

play junior G-man, searching for documents they have no reason to have. Also, the government will usually instruct relators not to provide any information protected by attorney-client privilege.

The relator has a huge financial incentive to turn you in. The False Claims Act provides relators 15-30 percent of the government’s recovery. In recent cases, the United States has paid relators as much as $100 million. In 2013, the United States recovered $2.9 billion in relator False Claims Act lawsuits, from which it paid relators $387 million.

Like the fictional Waldo hiding in a crowd in various settings, relators can surface where you least expect it. A relator can be a former employee, or someone who was fired and has an ax to grind. One of your competitors might use information on how you do business to become a relator. Someone you do business with – perhaps a consultant you hired (including a consultant hired to help you determine how to bill the government) – can become a relator. The relator might even be a consultant you hired years ago, upset now because you have hired a competitor.

The relator may work for, or own, one of your subcontractors, or could be a government employee, such as an auditor. The relators may comprise a coalition whose main occupation is to look for fraud to use as the basis for filing relator complaints. A doctor who tape records company employees invited to meet with him under the guise of a business meeting could use those taped conversations as the basis for filing False Claims Act suits. The relator may even be a patient who investigates the services you provided (or failed to provide) and the way you billed the government for those services. Imagine having your former inhouse counsel as a relator, or a convicted felon, or someone who actually participated in the alleged fraud. There is even a company formed by former successful relators who offer to help potential relators with their suits and find them lawyers and experts – all for a share of the proceeds, of course.

What are the limits on who can be a relator?

There aren’t many. Hailing back to the origin of the False Claims Act during the Civil War, when Congress created the statute to address profiteering, Congress recognized that it takes a rogue to catch a rogue. However, if you are convicted of criminal conduct arising from your role in the violation of the False Claims Act, you can’t be a relator.

No matter which category the relator falls into, and often despite how many relators have filed suit on any particular matter, the government is required to investigate the claims – while the case is still under seal and while you may be unaware of investigation. On the other hand,

during the investigation stage even while the case is still under seal, the government may take testimony under oath by your employees or subpoena you for documents, and it may decide to share your subpoenaed documents with the relator.

When the government is ready, or occasionally – but more and more frequently – when a judge gets tired of having the case under seal, it will decide to either join the suit (intervene) or let the relator go forward on his own (decline). A relator proceeding on his own can recover up to 30 percent of the proceeds. If the United States intervenes, the relator can recover up to 25 percent.

While it was more common in the past for relators to dismiss their suits if the government declined to intervene, increasingly relators are proceeding on their own to recover substantial amounts of money for themselves and the government. In 2013, for example, relators recovered $13,498,753 for themselves and $109,229,614 for the United States in cases where they proceeded without government assistance.

What does this mean for you? If you do business directly or indirectly with the government, have systems in place to check on whether you are complying with contractual, statutory and regulatory requirements. If you are a government contractor, depending on the type and value of the contract, the regulations and contract provisions could include mandatory compliance requirements.

Make sure your compliance program is effective and that it includes, at minimum, these basics: • • • • • • •

Written policies and procedures Compliance professionals Effective training Effective communication Internal monitoring and audits Enforcement of standards Prompt response

It should be more than a plan on paper. Monitor and audit programs regularly to make sure they are effective, and get buy-in from the top.

If you do find a problem, consider disclosing it to the government before a relator files suit. It is not the right choice in every situation, but keep in mind that although the consequences of such disclosure may still be substantial, in certain matters it may serve as a vaccination against a later, possibly more expansive (and expensive) relator suit. Depending on the issue, you may be able to self-disclose a problem to administrative agencies, investigative agencies or the Department of Justice. If you are a government contractor, you may be required to self-disclose to the agency with which you have contracted. n

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“There is deep substance behind the Weitz name,” he says. “Together, my father and I have fashioned a reputation that is highly regarded, and my goal is to make sure that the Weitz name continues to carry the weight that it has for the last 40 years.”

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Weitz emphasizes that his family name has much gravitas because of the work behind it, where details, diligence, and creativity on behalf of his clients’ causes have established the foundation for many record-breaking results. The firm has also achieved success for its clients through alternative dispute resolution forms such as mediation and arbitration, which clients often find less stressful than litigation. in recognition of his skill as a trial lawyer, Weitz has been named a Director of the New York State Trial Lawyers Association. he also serves on the Boards of Directors and is General Counsel for the New York Academy of Traumatic Brain Injury and Parents for Megan’s Law and the Crime Victims Center. His public service has resulted in his appointment to the chairmanship of the zoning Board of Appeals for the historic village of Roslyn, New York.

Weitz’s interest in trial law stems from having observed the effect hard work and imagination can have on restoring the balance of justice. He says that while the law cannot offer miraculous cures, it can help provide victims with enough money to live the best possible life in the face of great adversity.

“I’m more interested in my client’s being, comfort, and privacy than I am in publicity. Above all, I want to see my clients smile at the end of the case because they know their grievance has been heard, understood, and fully compensated.”

Andrew L. Weitz & Associates The Woolworth Building 233 Broadway, Suite 840 New York, NY 10279 Phone: 212.553.9300 www.weitzlaw.com

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