Today's General Counsel, V10 N6, December 2013/January 2014 by Today's General Counsel

DEC/JAN 2014 VOLUME 1 0 / NUMBER 6 TODAYSGENER A LCOUNSEL.COM

IP INTERNATIONAL Cross-Border Mergers: Who Owns the IP? IP Protection in Emerging Markets Counterfeiting â&#x20AC;&#x201C; Loss & Liability Three Ways to Challenge a Patent Infringement: Do You Really Want to Litigate? Salvaging Biotech R&D After Myriad Mobile Device E-Discovery Big Data, Big Dreams Million $ Question: Tax Treatment of Fines & Penalties Legal Spend Survey: Trend Is Back Up Long Reach of Hart-Scott-Rodino

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dec/jan 2014 toDay’s gEnEr al counsEl

Editor’s Desk

It takes someone of a certain age to remember when the economy wasn’t global, but multi-national deals and litigation were far less frequent than they are today as recently as the 1980s. The concept of globalization didn’t really take hold until the Berlin Wall was torn down, 24 years ago. Now, of course, cross-border deals and lawsuits are routine. This issue of Today’s General Counsel is loaded with information about the legal issues that arise in those situations. Despite efforts at harmonization dating back decades, global IP laws differ enough to have a major effect on how IP assets are treated in cross-border transactions. On the crucial question of who owns a work or invention created by an employee, nations differ greatly. Anne Cappella, Charan Sandhu and Marisa Geiger discuss how some jurisdictions treat that matter, and advise being aware of the differences when closing covenants are drawn, lest a U.S. company, for example, acquire a French company but not its key patents. Lou Mastriani and Asha Allam explain the complicated considerations the U.S. International Trade Commission uses when it decides whether a company making a complaint about infringement is a “domestic industry.” Pamela Passman writes about the risks – including trade secret theft and unwitting acquisition of counterfeit components – that come with multinational sourcing and production, and she outlines a process for preventing those problems. When it comes to arbitration of multi-national, multi-party contract disputes, the choice of jurisdiction might not matter much for routine commercial purposes, according to Carl Blumenstein and Farschad Farzan. But it can have dramatic consequences if the issue is an anti-trust claim. In that case whether the matter is handled in Singapore or New York, for example,

will be critical. They also discuss the complex interplay between arbitration and litigation, and note that a plaintiff may be able to use arbitration as a “trial run,” testing its case against one defendant so it is better positioned to try the case against others. Check out our website at todaysgeneralcounsel.com for more information vital to lawyers and corporate decision makers, and watch for our daily and weekly newsletters.

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

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Features

FIVE THINGS YOU MAY NOT KNOW ABOUT HARTSCOTT-RODINO, BUT PROBABLY SHOULD Michele S. Harrington The Hart-Scott-Rodino Act has applications beyond M&A.

LIABILITY FOR DBE VIOLATIONS UNDER THE FALSE CLAIMS ACT Robert C. Pearman Jr. The Disadvantaged Business Enterprises program has numerous pitfalls, and violations can subject contractors to stiff penalties.

HBR INTERNAL LEGAL SPEND SURVEY Lauren M. Chung Increases worldwide, work migrating in-house.

WHEN ANTITRUST DISPUTES LOOM, BUSINESSES NEED TO MAKE SAVVY ARBITRATION DECISIONS Carl L. Blumenstein and Farschad Farzan Be careful which forum you choose.

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Departments Editor’s Desk Executive Summaries

2 9

Page 44 INTELLEC TUAL PROPERT Y

16 | Consider Internal Issues Before Litigating IP Andy Cao Maybe you don’t want to sue.

18 | IP is Wildcard in Cross-Border Transactions By Marisa B. Geiger, Charan Sandhu and Anne Cappella Nations’ varying laws on IP rights complicate M&A.

22 | Three Ways to Challenge a Patent Craig W. Kronenthal and H. Wayne Porter Re-examination pros and cons.

24 | Size Matters Before the ITC, But It’s Relative Lou Mastriani and Asha Allam Small investments can loom large in ITC investigations.

28 | Tips For Combating Counterfeit Sales Online Camille M. Miller and Elizabeth Featherman Brand owners should use all the tools the system provides.

32 | IP Protection for Crowdfunding Projects Michelle Mancino Marsh and Ashley Tan New startup source is vulnerable to copycats.

E-DISCOVERY

GOVERNANCE

40 | E-Discovery Cost Drivers

46 | Tax Treatment of Fines and Penalties

John D. Martin and Heyward D. Bonyata The significant drivers of cost, in preservation, process and review, and how to control them.

42 | Get Used to Mobile-Device Discovery Greg Buckles Preparing in advance is the key.

34 | IP Protection in Emerging Markets

44 | Big Data, Big Dreams

Pamela Passman Global sourcing brings new threats to intellectual property.

Dean Gonsowski It can be an asset or liability. Think of a landfi ll that’s full.

36 | Myriad Decision May Invalidate Many Patents Ajay Singh, Marianne Timm-Schreiber, Kathy Kowalchyk and Gary Myles The Myriad Genetics Supreme Court decision potentially invalidated thousands of patents, but in many cases there could be work-arounds.

Abraham N.M. Shashy Jr. and Nathan E. Clukey Fines aren’t tax deductible, unless they aren’t fi nes.

48 | Enhanced Consumer Law Enforcement Alan D. Wingfi eld and Paige S. Fitzgerald Empowered regulators, tougher compliance standards, and the threat of follow-up litigation. HUMAN RESOURCES

52 | A Case for Legal Process Outsourcing Kimberly Williams Do legal outsourcing services set the standard for transparency?

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Michelle Mancino Marsh John Martin Lou Mastriani Camille Miller Gary M. Myles Pamela Passman Robert Pearman H. Wayne Porter Charan Sandhu Abraham N.M. Shashy Jr. Ajay Singh Ashley Tan Marianne R. Timm-Schreiber Kimberly Williams Alan D. Wingfield

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all rights reserved. no part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information or retrieval system, with out the written permission of the publisher. articles published in Today’s General Counsel are not to be construed as legal or professional advice, nor unless otherwise stated are they necessarily the views of a writer’s firm or its clients. Today’s General Counsel (issn 1932-9024) is published six times per year by nienhouse media, inc., 640 park avenue, Hinsdale, il 60521-4644 image source: istockphoto | printed by Quad Graphics | Copyright © 2013 nienhouse media, inc. email submissions to editor@todaysgc.com or go to our website www.todaysgeneralcounsel.com for more information. postmaster: send address changes to: Today’s General Counsel, 640 park avenue, Hinsdale, il 60521-4644 periodical postage paid at Hinsdale, illinois and additional mailing offices.

TODAY’S GENER AL COUNSEL DEC/JAN 2014

Executive Summaries INTELLEC TUAL PROPERT Y PAGE 16

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Consider Internal Issues Before Litigating IP

IP Rights are Wildcard in CrossBorder Transactions

Three Ways to Challenge a Patent: Pros and Cons

By Andy Cao McGlinchey Stafford PLLC

By Anne Cappella, Charan Sandhu and Marisa B. Geiger Weil, Gotshal & Manges

By Craig W. Kronenthal and H. Wayne Porter Banner & Witcoff Ltd.

Before bringing an IP lawsuit a business should consider its goals, the consequences and alternatives. There are two key elements to consider when determining whether a case has merit. Does it involve a valid and existing patent, trademark, or copyright? In respect to trade secrets, is the information actually secret and valuable? Not all important information is protectable IP, and if it isn’t there can be no IP violation. Second, consider the alleged violation. Determining whether a patent or trademark has been infringed can be relatively easy, but a business must assess what it wants to accomplish. For example, does it want to impose an injunction, or collect damages? Does it want to drive the other party out of business, or have them pay royalties? Before a trade secret plaintiff argues about what the other side has done, it must prove it has a protectable secret, which poses some difficulties. Also, trade secrets are by definition secret. If trade secret information winds up in a court transcript or filing without a protective order or sealed record, it is not secret anymore. As with all lawsuits, IP litigation is resource-intensive and a potential distraction from the revenue generating business the IP protects. In all phases, buy-in from the C-suite for the case is mandatory for success. If the internal decision makers are not convinced and fully on board, there is little hope of convincing those outside the organization.

M&A practitioners must cultivate a sophisticated understanding of IP issues because the interplay of differing global IP laws can have a major impact on cross-border transactions. Despite efforts at global harmonization, decentralized global IP laws necessitate a familiarity with local laws that often can only be provided by local counsel. Nevertheless, a general understanding of how variations in local laws can affect IP assets in a cross border deal, and the implications of those variations, is essential for drafting deal terms. For example, in jurisdictions that recognize “moral rights,” an author has rights to a work he or she created regardless of whether they own the economic rights. Jurisdictions have varying laws regarding ownership of a work or invention when it is created by an employee. In the United States, if the work is created on behalf of an employer(“workmade-for-hire”), then the copyright belongs to the employer. Many jurisdictions do not recognize the work-madefor-hire doctrine. In some jurisdictions including France and Germany, in order to establish its ownership of an invention an employer is required to pay additional compensation (beyond salary) to the employee who created it. Covenants and closing conditions are vital to ensure that a seller rectifies deficiencies with IP assets prior to closing. They must be drafted to take into account jurisdictional requirements such as maintenance and enforcement of IP between signing and closing, and to rectify ownership issues regarding employee or third party inventions.

An inter partes review (IPR) is a new mechanism for challenging patent validity through an evidentiary proceeding before the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office. Under the right circumstances, it is a viable option for a party challenging an issued patent. Others include traditional ex parte reexamination and district court litigation. A third party requesting ex parte patent reexamination will have no real discovery opportunities, whereas litigation can go to the other extreme. Nor are motions apart of ex parte reexamination. After it files, a third party is out of the proceedings. One large factor weighing against ex parte reexamination is that it allows the patent holder to add or amend its claims and improve its position. The amended or new claims must be supported by the original application and be narrower in scope. Once a request for ex parte reexamination is ordered, neither the patent owner nor a third party requestor can stop it. The USPTO will reexamine the patent and allow and/or reject claims regardless of any subsequent settlement or agreement. Thus it may be difficult for a third party to negotiate a favorable license while a patent is under reexamination. In contrast, the time, money and resources associated with district court litigation often motivate parties to settle. All three options for challenging patent validity have benefits and drawbacks. The best option will depend on particular circumstances.

DEC/JAN 2014 TODAY’S GENER AL COUNSEL

Executive Summaries INTELLEC TUAL PROPERT Y

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Size Matters before the ITC, But It’s Relative

Tips for Combating Counterfeit Sales Online

A Primer on IP Protection for Crowdfunding Projects

By Lou Mastriani and Asha Allam Adduci, Mastriani & Schaumberg LLP

By Camille M. Miller and Elizabeth Featherman Cozen O’Connor

By Michelle Mancino Marsh and Ashley Tan Kenyon & Kenyon LLP

In intellectual property-based investigations, the U.S. International Trade Commission considers whether a complainant’s domestic activities involve significant investment in plant and equipment, significant employment of labor or capital, or substantial investment in exploitation of the IP. The Commission has emphasized that there is no minimum monetary expenditure required to establish a domestic industry, but in the case of Kinesiotherapy Devices, it relied heavily on evidence of context to justify how arguably small financial amounts could be “significant.” The lesson in the opinion lies in the contextual evidence the Commission cited to find significance. This is paramount because the Commission emphasizes that the domestic industry is not evaluated “according to any rigid formula.” Thus, proving significance hinges on presenting a comprehensive domestic industry story. The Kinesiotherapy Devices opinion suggests a role for analytics in proving significance. The prudent Section 337 complainant can exploit existing data stores to enhance domestic industry evidence. The authors suggest some guidelines for how to proceed. Domestic industry fact collection typically starts with technical personnel in order to identify activities and products involving the asserted IP, and ends with financial personnel, to identify resources dedicated to those activities and products. Weave comprehensive data into a personal and compelling narrative. Given the fact-specific nature of the domestic industry requirement, it is disadvantageous to simply research precedent, present analogous facts, and call it a day. The context that makes an investment significant may be unique and subjective.

In the past, counterfeit goods were sold through layers of middlemen before reaching consumers. Now counterfeit sellers set up an online presence at auction or marketplace sites and ship counterfeit products directly to consumers, or use Internet and social media tools to generate web traffic and divert consumers to rogue e-commerce websites. Brand owners are challenged daily to combat anonymous online counterfeit sellers. The authors provide guidance on how to do so. First and most important: A brand owner should register its trademarks and copyrights. This fundamental step in intellectual property protection provides a springboard from which enforcement measures originate. It is a particularly cost-effective approach when resources are scarce. Trademarks and copyright registrations can be recorded with U.S. Customs online to maximize protection at the border. Brand owners should actively monitor online content that references their brand. Monitoring can be done on any budget, and it can range from self-monitoring to engaging an outside vendor to run and review searches. By carefully screening vendors, brand owners reduce the risk of vendors selling and distributing their goods outside the distribution chain and personally profiting from those sales. At the same time, by way of screening brand owners may demand information about where a vendor has acquired its goods. Brand owners should consider educating consumers about the effects of purchasing counterfeit products, and they should work with ISPs, social media sites, search engines, and law enforcement to combat counterfeit sellers.

Crowdfunding is a new, Internet-driven method of finding the money to start a new business. Unlike traditional funding, crowdfunding does not offer investors a piece of ownership in a start-up. Instead, crowdfunding connects a start-up directly to its customers. The customers pledge money in return for a one-time reward. While crowdfunding can build publicity and customer base, it also makes innovative ideas vulnerable to freeriding copycats. Intellectual property rights can help protect a crowdfunding project with respect to these risks. Such protection may also increase the chances that a project can transition into a healthy business. When considered early on, copyright and trademark registration offer cost-effective and speedy protection. The crowdfunding campaign can be used as evidence of intent to use the trademark, as it shows that the project creator has promised to proceed with the project in exchange for pledges. An intent-to-use application (ITU) can be filed if the trademark is already being “used in commerce” but the applicant is still gathering proof of use, as is often the case for projects seeking to ramp up existing production. The ITU thus is ideal for a crowdfunding project that is launching a new product or expanding a business, since it reserves a trademark ahead of actual sales. Trademark and copyright protection is a cost-effective and quick way to prevent others from stealing innovative ideas. It also demonstrates to potential backers that the project creators are serious about pursuing the project.

TODAY’S GENER AL COUNSEL DEC/JAN 2014

Executive Summaries INTELLEC TUAL PROPERT Y PAGE 34

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IP Protection in Emerging Markets

Myriad Decision May Invalidate Many Patents

By Pamela Passman Center for Responsible Enterprise and Trade

By Ajay Singh, Marianne Timm-Schreiber, Kathy Kowalchyk and Gary Myles Merchant & Gould

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“Informative and worth reading.” Increasingly common sourcing and production from multiple nations exposes global companies and their customers to new vulnerabilities. When goods, materials and parts are coming together from multiple points around the globe, one risk is the intrusion of counterfeit components, some so defective that they can lead to product failure. Far-flung suppliers and business partners also increase the risk of trade secret theft, a problem that has become more acute with digitized information. Even so, companies can address the risks through application of best practices and continual assessment and improvement within their management systems. Ninety-one percent of European companies surveyed by the Trade Secrets and Innovation Coalition reported that they had experienced at least one theft or unauthorized disclosure of trade secrets within the past seven years, and in 44 percent of such cases they believed the information was used to compete against them. Counterfeit software is another source of vulnerability in the IT supply chain. An estimated 59 percent of downloaded counterfeit software harbors malicious or other unwanted code that can expose systems to the risk of data loss, prolonged downtime or outright failure. The author lists areas such as management of the supply chain and contractors, IP compliance team-building, and security and confidentiality training, where most companies can measure and improve their IP protection practices. She advises integrating practices that address these areas into management systems and sharing them with business partners in the global supply chain.

The Supreme Court decision in Association for Molecular Pathology v. Myriad Genetics, Inc. will have a widespread impact on the biotechnology industry. The technology at issue concerns diagnostic methods for detecting genetic changes that predict an increased risk for developing breast and/or ovarian cancer. Public awareness of this testing was greatly increased when actress Angelina Jolie disclosed her test results and subsequent surgery. The Court determined that Myriad’s patent claims on isolated, naturallyoccurring DNAs were invalid because the genes are naturally occurring phenomena. The Court also ruled that claims to artificially-created combinations and synthetic copies of DNA are patent eligible. The decision did not precisely determine whether proteins and antibodies are patent eligible, but according to the authors it would be prudent to expect that claims covering any biomolecule as it appears in nature, regardless of whether it was isolated, are likely invalid. Based on a quick search of patents issued by the USPTO, the authors find there are more than 5,000 patents that claim “isolated DNA.” Accordingly, the Myriad decision potentially invalided over 5,000 patents owned by large and small businesses in the biotechnology industry. From now on the options for claiming biotechnological products will be limited. The authors discuss how to best take advantage of the opportunities presented by the ruling that synthetic combinations are patent eligible. They summarize best practices for drafting specifications and claims, and for amending claims in issued patents and pending patent applications.

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DEC/JAN 2014 TODAY’S GENER AL COUNSEL

Executive Summaries E-DISCOVERY PAGE 40

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E-Discovery Cost Drivers

Get Used to Mobile-Device Discovery

Big Data, Big Dreams

By John D. Martin and Heyward D. Bonyata Nelson Mullins Riley & Scarborough LLP

The discovery phase can represent more than fifty percent of total litigation costs. These costs are driven up by the volume of a company’s electronic data, and also by the strategies that are implemented by in-house and outside legal counsel to preserve, collect, review, and produce documents. In general, parties tend to overpreserve information. This may reduce spoliation risk, but it has its own costs. Shifting from a “preserve everything” to a more targeted preservation strategy can comply with the good faith and reasonableness requirements. Courts have recognized the costs associated with having to maintain large amounts of data and often refuse to require parties to preserve all data. A company considering a targeted preservation approach should involve members of legal, IT, and records management, and it should plan and document all aspects of the process to enhance defensibility. Keep in mind that releasing a legal hold is just as important as issuing one. Accumulation of unneeded data increases data storage costs and creates litigation risk. Data processing typically includes reducing the volume of ESI for review through techniques such as de-duplication, converting ESI to a more suitable format for review and production, and using contextual analytics to group or categorize the ESI. To decrease these expenses, organizations can look at different ways to staff document reviews using lower cost options (e.g., contract resources, LPOs, or a hybrid law firmcontract attorney model) and considering whether technology assisted review is appropriate.

By Greg Buckles eDJ Group

E-discovery of data stored on mobile devices has become part of the civil litigation process. Many organizations when faced with mobile e-discovery – about 40 percent of respondents to a survey from the author’s firm’s – hire a third-party provider to extract data from devices. Another 20 percent simply seize the actual devices. Only about 20 percent of respondents actually use a collection kit to obtain a forensic copy of ESI on devices. Reliance on third party forensic service providers is based on the complexity of the devices combined with the relatively specialized software required to collect the data. To be ready for mobile discovery, it is critical to know what types of data are on mobile devices, how to acquire and process that data, and how to export and produce it if required. Creating an effective, defensible legal hold strategy for mobile devices is especially challenging. Unlike laptops and network shares, mobile devices are designed to manage and expire inactive texts, call logs and other volatile ESI. The author provides a list of minimum requirements for corporate legal departments that are considering conducting mobile device discovery in-house. The system must be able to: collect ESI from the three dominant OS platforms; acquire an image of the device in a two-to-four-hour period, with minimal custodian impact; require minimal user training or software certification for device collection/ authentication of evidence; search and inspect device image/container files; filter by type/date/names; and extract ESI metadata, content items and chain of custody information.

By Dean Gonsowski Recommind

Most organizations are massive data factories. The amount of collected information is growing rapidly, with terabytes of data and metadata (data about the data) filling storage disks to capacity. Big data can be an organization’s best asset or its biggest liability. When data is an asset, it’s easy to find, categorize, and use. It adds value, serving as a business intelligence tool and risk management utility. On the other hand, data that is considered a liability is not easy to uncover, is unwieldy, or holds little value. If outside requests for data from interested parties like regulators, partners and those on the opposing side of litigation take a long time to fulfill, or if they can’t be fulfilled at all, that creates greater liability. Making data difficult to find lowers the productivity of employees and results in lowered efficiency. If data storage costs and costs associated with people looking for data are rising, that’s another kind of a liability. A process called “information governance” is key to turning data from a liability into an asset. It enables a crossdepartmental approach to increasing the value of information while managing associated risks and costs, and it helps keep, catalogue or delete useless data. Information governance begins at the point of data creation. Although implementation details may vary by company, information governance generally consists of “four pillars”: the implementation of comprehensive data policies, data mapping and connectivity, indexing and categorization, and application of predictive governance processes.

TODAY’S GENER AL COUNSEL DEC/JAN 2014

Executive Summaries GOVERNANCE PAGE 46

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Tax Treatment of Fines and Penalties

Enhanced Consumer Law Enforcement: Class Actions Often Follow

By Abraham N.M. Shashy Jr. And Nathan E. Clukey King & Spalding

Examples of jaw-dropping fines and penalties for corporate wrongdoing abound in the recent press. They include reports that JPMorgan Chase has agreed to settle multiple actions for a record $13 billion. Rarely mentioned in these accounts is the tax treatment of the fines and penalties, but the amounts can be huge, potentially 35 percent of the total settlement or judgment. When faced with allegations of impropriety, corporate counsel must not only weigh the risks of litigation, but also determine early on whether any portion of a possible settlement might be deductible. Internal Revenue Code section 162(a) permits businesses to deduct certain everyday expenses, deemed “ordinary and necessary.” Other sections define disfavored expenses. Section 162(f) provides that “no deduction shall be allowed for any fine or similar penalty paid to the government for the violation of any law,” reflecting the wish of Congress that payments in connection with alleged wrongdoing shouldn’t receive what is essentially a taxpayer funded discount. The authors advise that both the payment and the statute at issue be analyzed to determine whether the payment is truly a “fine” or a “similar penalty.” Courts often ignore the label attached to any given payment, meaning that even if the parties have called a particular settlement payment a fine or penalty, that alone doesn’t make it non-deductible. The authors list factors that courts consider in making the tax determination and suggest negotiating settlements with those factors in mind.

By Alan D. Wingfield and Paige S. Fitzgerald Troutman Sanders LLP

Newly empowered federal and state regulators, including the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), the Department of Justice and state attorneys general, are embarking on unprecedented enforcement, investigatory and regulatory actions. Litigation often follows; consumer class actions and shareholder lawsuits are a routine consequence of compliance failures. Meanwhile, what is accepted as adequate compliance is evolving. The CFPB has made clear that a compliance program should be audited, heavily-documented and based on a topdown approach. Businesses that are subject to consumer protection laws – any companies that deals with consumers – need to respond by implementing compliance programs that are crafted to meet these increased risks and responsibilities. Moreover, these programs should be effectively communicated to employees. Success at resolving legitimate consumer disputes is a major concern of regulators during any review of a compliance program. Companies should regularly review their compliance with relevant laws as well as their adherence to internal policies and procedures. Any audit function should be performed by individuals who are independent of the company’s day-to-day compliance program and related business personnel. The end result of an effective compliance audit is regular reporting to the board of directors or its designated committees, accompanied by findings regarding whether policies and standards adopted by the board have been appropriately implemented by the company. A fully-functioning audit process is viewed by regulators as evidence that adopted procedures are more than window dressing.

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Executive Summaries HUMAN RESOURCES PAGE 52

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A Case for Legal Process Outsourcing

5 Things You May Not Know About Hart-Scott-Rodino, But Probably Should

Liability for DBE Violations Under the False Claims Act

By Kimberly Williams RedShift Legal, Inc.

FEATURES

Legal process outsourcing received a big boost in 2006, when the Association of the Bar of the City of New York issued a formal Ethics Opinion providing guidelines on the use of offshore legal support services. It prompted many reluctant corporate departments to consider offshore legal services as an option. LPOs were viewed as solving one problem only, albeit a critical one: getting low complexity work done as cheaply as possible, but the Opinion helped focus the questions about LPOs on transparency concerning matters like client consent and billing. According to the author, lower pricing got LPOS to the table, but the reasons LPOs, domestic and foreign, have been able to convince in-house counsel and law firms to adopt an outsourcing model are the rigorous and transparent processes they apply. She quotes several providers and an in-house e-discovery counsel in support of her argument. She also cites some recent high profile, transparency-related embarrassments, including a major law firm caught up in litigation over overbilling; a Fortune 500 law department and their outside counsel sanctioned for failing to have verifiable discovery processes; and a class action plaintiff firm accused of inflating temporary lawyer bill rates. The author says that competent personnel deploying new technology have made it possible for LPOs to provide high-value service to their clients. This has allowed the top LPOs to move beyond low complexity work, and to create client relationships based on consistent delivery of demonstrated value.

By Michele S. Harrington Hogan Lovells LLP

Deal lawyers generally know that the Hart-Scott-Rodino Act could apply to mergers and asset acquisitions. Many are surprised to learn that it can also apply to other types of transactions, such as certain intellectual property licensing agreements, or even acquisitions of company shares by a company officer or director. The HSR Act applies to the acquisition of assets, voting securities of corporations, or controlling interests in partnerships, or limited liability companies – if the applicable HSR threshold tests are satisfied and no exemption applies. Whether it has anti-competitive effects is irrelevant. There are two primary threshold tests which are adjusted annually by the FTC. The size-of-transaction test would currently be satisfied if the transaction has an HSR value in excess of $70.9 million, but it can apply to acquisitions that appear to be valued at significantly less than that figure. The HSR rules include complex aggregation and valuation requirements, and they can sometimes apply even when no voting security is technically acquired. For example, a person who is instrumental in causing a company to redeem certain of its securities could have an HSR filing obligation if he or she would hold a larger percentage of the company’s voting shares following the redemption than before. Given the complexity of the HSR rules and exemptions, it is prudent to consult with counsel in advance of any acquisition, through any means, of voting securities, assets, or interests in non-corporate entities.

By Robert C. Pearman Jr. Gonzalez Saggio & Harlan LLP

Contractors considering bidding for and performing contract work on state and local public work projects that are partially funded by the federal government are probably aware of possible contract requirements for utilization of Disadvantaged Business Enterprises (DBE) firms. They may not realize that failure to monitor compliance, much less deliberate violations, may result in civil penalties and even criminal sanctions under the federal False Claims Act. A common abuse involves a nonDBE firm partnering with a firm that meets DBE eligibility criteria on paper, but performs little or no actual work. It can also be considered a False Claim violation if you engage DBE subcontractors, but some of your employees provide inaccurate information to help a favored firm obtain DBE certification status, or certify work as having been performed by a DBE when it performed little real work. The consequences may be severe, including a civil penalty of no less than $5,500 and not more than $11,000 per claim, plus three times the amount of damages which the government sustains. Debarment is also a possibility. Violations of the False Claims Act may have to be disclosed to contracting agencies, and failure to do so may be cause for debarment or suspension. The author provides advice on how to avoid DBE violations. It includes establishing a position for an ethics and compliance officer; creating contractor compliance manuals for Disadvantaged Business Enterprises; and having trained personnel observe DBE subcontractors on the job.

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Executive Summaries FEATURES PAGE 58

PAGE 62

HBR Internal Legal Spend Survey: Post-Recession Increase Continues

When Anti-Trust Disputes Loom, Businesses Need to Make Savvy Arbitration Decisions

By Lauren M. Chung HBR Consulting

By Carl L. Blumenstein and Farschad Farzan Nossaman LLP

Send co-branded e-mail announcements to our national database More than 270,000 unique names

The 2013 HBR Law Department Survey found a three per cent increase in the total inside legal spend worldwide. Over the past five years, the change in total legal spending has fluctuated from a one per cent decrease to a five per cent increase. Results from the 2011 and 2010 survey years showed a decrease in total legal spending, mostly due to the economic downturn. Contributing to the recent increase is a five per cent increase in inside legal spending (compensation and operating expenses) and a two per cent increase in outside counsel spending. The higher rate of increase inside is in line with a trend among law departments to keep more work in-house as a cost-containment measure. In-house staffs continue to grow, although at a slower pace than in 2012. Worldwide, between 2011 and 2012, 52 percent of participants reported an increase in their total number of lawyers, down from the 57 percent that had an increase between 2010 and 2011. In the 2013 survey, 57 percent of companies reported an increase in total legal staff. This year’s results indicate that the increase in the number of lawyers is primarily impacted by the growth in general commercial lawyers supporting business units, as opposed to litigation or intellectual property specialists. For 2014, 39 per cent of participants expect an increase in the number of lawyers in the United States, while 47 percent expect to increase lawyers outside the United States.

Arbitration agreements are now commonplace in contracts, and so are global antitrust lawsuits, especially multi-party lawsuits alleging price-fixing cartels. The possibility of antitrust claims raises special concerns in drafting arbitration agreements. Because antitrust claims may encompass a broader time period than the time the contract was in effect, businesses should draft agreements to encompass transactions that occurred both before the agreement was signed and after contract termination. An antitrust plaintiff will typically try to avoid arbitration by filing claims in court where the prospect of jury trial likely yields larger results. Plaintiffs will typically try to avoid arbitration, and the authors outline various options they can consider for doing so. From the defendants’ perspective, a company sued for antitrust violations by a party with which it may have a contractual relationship needs to review all pertinent contracts to determine whether the claim is arbitrable. Cases involving multiple defendants present a “two-front battle” scenario. This can happen where some defendants have arbitration agreements with the plaintiff and some do not. The plaintiff may be able to use the arbitration as a “trial run,” testing its case, so that it is better positioned to try the case against remaining defendants. When a party gets pulled into an antitrust dispute, a preexisting arbitration agreement with an adverse party offers several potential advantages. However, businesses need to carefully consider all angles before proceeding.

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dec/jan 2014 todayâ&#x20AC;&#x2122;s gener al counsel

Intellectual Property

Consider Internal Issues Before Litigating IP By Andy Cao

ntellectual property is often a primary asset for businesses today. Legally protectable IP usually falls in the category of patents, trademarks, copyrights and trade secrets. Like any asset, IP can be vulnerable to theft and misappropriation, but before bringing an IP lawsuit a business should consider its goals, the consequences and the alternatives.

trade secret plaintiff argues about what the other side has done, it must prove it has a protectable secret, and that can pose difficulties. For example, a business may consider the information in its contacts list to be a trade secret, but it is possible that someone else might have the same phone numbers after developing their list independently.

Before a trade secret plaintiff argues about what the other side has done, it must prove 16

it has a protectable secret.

There are two key elements to consider when determining whether an IP case has merit. First, determine if it involves a valid and existing patent, trademark, or copyright. With respect to trade secrets, consider if the information is actually secret and valuable. There is a common misconception that much more IP needs protection than is actually the case. Not all important information is protectable IP. If it isnâ&#x20AC;&#x2122;t, there can be no IP violation. Second, consider the alleged violation. Determining whether a patent or trademark has been infringed can be relatively easy, but a business must assess what it wants to accomplish before embarking on litigation. For example, does it want to impose an injunction, or collect damages? Does it want to drive the other party out of business, or have them pay royalties? When a case involves registered IP, such as patents and trademarks, litigation begins with the presumption that the IP is valid. Trade secret litigation enjoys no such presumption. Before a

Also, trade secrets are by definition secret. Consequently, there is some tension between a business wanting its day in court and not wanting its information out for everyone to see. If trade secret information winds up in a court transcript or filing without a protective order or sealed record, it is not secret anymore. A good step in determining whether pursuing IP litigation is worthwhile is valuing the IP. One measure can be the income generated by the IP, based on what income there would have been without it. Another measure is looking at what sales a potential infringer has generated with its product. Yet another is the cost to develop the IP. The infringer did not incur those costs, and therefore it obtained a free ride at the IP ownerâ&#x20AC;&#x2122;s expense. In patent and trademark cases, much of the evidence comes from the defendant and concerns what the infringing products are and how many have been sold. In trade secret cases, the evidence largely involves what the trade secret consists of, continued on page 21

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DEC/JAN 2014 TODAYâ&#x20AC;&#x2122;S GENER AL COUNSEL

Intellectual Property

IP Rights are Wildcard in Cross-Border Transactions By Anne Cappella, Charan Sandhu and Marisa B. Geiger

today’s gener al counsel dec/jan 2014

Intellectual Property

he growing significance of IP in worldwide economies is illustrated by the fact that Australia, Canada and the United States include business investment in IP development in the calculation of their gross domestic products. As the market interest in IP assets continues to escalate, mergers and acquisitions are increasingly motivated by and structured to address IP concerns. Today, M&A practitioners must cultivate a sophisticated understanding of IP issues, because the interplay of differing global IP laws can have a major impact on cross-border transactions.

France, Italy, and South Korea, prohibit the waiver or assignment of moral rights. In the deal context, if moral rights have not been and/ or cannot be waived, a transfer of economic rights in IP assets will not divorce the assets from the author’s rights of attribution and integrity in the work. Jurisdictions have varying laws regarding ownership of a work or invention when it is created by employees in the context of their employment. For example, U.S. copyright law recognizes a “work-

establish its ownership of an invention an employer is required to pay additional compensation (beyond salary) to the employee who created it. Other jurisdictions permit employees to assign all rights in inventions created during the scope of employment to employers without additional compensation. Thus, to establish ownership of IP assets of a target company, it is necessary to confirm compliance with all applicable laws concerning inventor remuneration. In certain jurisdictions, such as China, a licensor may need to

Knowing a jurisdiction’s approach to ownership of IP created by employees is critical to establishing whether a target possesses the right to transfer IP in the context of an international transaction. 19 Despite efforts at global harmonization, decentralized global IP laws necessitate a familiarity with local laws that often can only be provided by local counsel. Nevertheless, a general understanding of how variations in local laws can affect IP assets in a cross border deal, and the implications of those variations, is essential for drafting deal terms. This article highlights a few issues that commonly arise. MORAL RIGHTS, WORK FOR HIRE

Moral rights laws – which refer to the right of an author to receive credit for a work, and to prevent a work from being altered or revised without permission – vary widely. In jurisdictions that recognize moral rights, an author has rights to a work he or she created regardless of whether they own the economic rights. In certain jurisdictions including the United Kingdom, several states in the United States, and Canada, authors can waive their moral rights. Other jurisdictions, among them

made-for-hire” exception to the general copyright rule that a person who creates a work is the legallyrecognizable author. If the work is created on behalf of an employer in the employment context, then copyright belongs to the employer. Many jurisdictions do not recognize the work-made-for-hire doctrine. In China a copyrightable work belongs to an employee, subject to certain exceptions, such as engineering designs, product designs, and computer software. On the other hand, Chinese patent law does recognize an employer’s right in an “invention to hire,” which is the right to a patentable invention created within the employee’s scope of employment. Knowing a jurisdiction’s approach to ownership of IP created by employees in the scope of employment is critical to establish whether a target possesses the right to transfer IP in the context of an international transaction. In some jurisdictions, including France and Germany, in order to

provide separate consideration to a licensee for ownership rights to improvements made to licensed IP. In such jurisdictions, the licensor’s ownership of improvements made by a licensee may therefore be contingent upon the provision of additional consideration apart from the general licensing arrangement. In cross-border deals, practitioners should also consider other jurisdictional differences pertaining to the other IP issues. Here are a few questions, among many others, to keep in mind: • Must goodwill be transferred along with the assignment of trademarks? • If so, must it be transferred explicitly or is it automatically transferred with a trademark? • What formal registration requirements apply to assignments and license grants? • When and how should changes be made? • Are IP assets subject to any compulsory license grants?

dec/jan 2014 today’s gener al counsel

Intellectual Property DRAFTING IMPLICATIONS

Jurisdictional differences in IP laws require particular consideration in respect to representations and warranties, indemnification provisions, confidentiality provisions, and covenants and closing conditions. Drafting the representations and warranties based on jurisdictional differences in the laws enables a purchaser to accurately describe the

ance with that requirement. Indemnification obligations can be drafted to specifically address failures of a target entity to adequately establish and safeguard its IP rights pursuant to applicable law. In certain instances a purchaser may seek specific indemnification obligations and/or a carve-out for IP indemnification from general liability limitations and damage caps.

A buyer can employ covenants and closing conditions to require a target to remedy any IP asset issues.

target entity’s IP assets. Further, by providing a purchaser with a right to indemnification in the instance of a false representation or a breach of warranty, the representations and warranties serve to establish protection against the target entity’s failure to protect and secure its IP rights pursuant to applicable law. IP representations and warranties in transactional documents must be specifically tailored to address the laws of the jurisdictions in which the target entity is located and conducts its business. Therefore, representations should be worded to explicitly address jurisdictional requirements regarding IP registration, ownership of employee inventions, inventor remuneration, jointly-owned inventions, ownership of improvements made by a licensee, and all other issues pertaining to IP ownership, validity and enforceability that may be unique to a particular jurisdiction. By way of example, in jurisdictions where remuneration is obligated to compensate an inventor for the assignment of all rights in each invention, a representation addressing ownership of such inventions must be worded to include compli-

In jurisdictions that do not have comprehensive trade secret laws – for example, India – a party must have privity of contract in respect to all non-disclosure agreements with a target’s employees and consultants in order to have standing to enforce those agreements. In such a case, for a buyer to enforce the confidentiality, non-solicit, and non-compete obligations of employees and consultants of the target, the target may need to assign the confidentiality agreements directly to the buyer. A buyer can employ covenants and closing conditions to require a target to remedy any IP asset issues identified during due diligence, obtain the necessary consents required for the transaction, and operate the business between signing and closing in accordance with past practices and in a manner that protects the target’s IP. Covenants and closing conditions are vital to ensure that a seller rectifies deficiencies with IP assets prior to closing. They must be drafted to take into account jurisdictional requirements, such as maintenance and enforcement of IP between signing and closing, and to rectify ownership

issues regarding employee or third party inventions. IP rights are an increasingly significant portion of the assets that buyers seek to acquire through M&A transactions. Complex international transactions require a cultivated understanding of the interplay of IP laws across territorial boundaries to safeguard a buyer’s interests in and the value of acquired IP. ■

Anne Cappella is a partner at Weil, Gotshal & Manges. She focuses on patent counseling and patent litigation. She practices in district court as well as at the International Trade Commission and is a registered patent attorney with the U.S. Patent and Trademark Office. anne.cappella@weil.com

Charan Sandhu is a partner at Weil, Gotshal & Manges. She focuses on complex technology and IP transactions. She has extensive experience handling cross-border joint ventures, particularly in China. charan.sandhu@weil.com

Marisa Geiger is an associate at Weil, Gotshal & Manges. She represents clients in matters relating to the licensing, acquisition, development, sale, use, and commercial exploitation of intellectual property. marisa.geiger@weil.com

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Intellectual Property Litigating IP

continued from page 16 whereas in patent and trademark cases that information it is already public. But in all types of IP cases, financial data is ultimately the most important evidence because it determines how the client

knock-off customer was never in the market for the original and therefore no sales were lost. The customer only wanted the look but not the price and was never a potential customer of the authentic product. And, counterintuitively, the fact that a brand is imitated can actually raise its prestige rather than diluting the brand.

Even if there is valid IP, and even if there has been infringement, consider whether litigation would be worthwhile. values its IP and how much the other side has used, profited from, or sold it for. It also determines the size of the case. If it is a $1,000 case, spending half a million dollars on it doesn’t make sense. Even if there is valid IP, and there has been infringement, you still must consider whether litigation would be worthwhile. The goal in IP litigation is to stop infringement and collect damages. If damages cannot be proven by showing that your IP is used to generate income, by showing that income or value is being lost because of the infringement, or by showing the cost to develop the IP, then litigation is a futile exercise. Evaluating damages with respect to trade secrets can be difficult, largely because the plaintiff and the other party, usually a competitor, will be reluctant to open their books in order to measure damages. Determining damages with respect to trademarks can also be challenging, because it is difficult to know if the sales were actually affected by brand confusion. For instance, if a store brand soda with packaging similar to Coke gained sales to Coca-Cola’s detriment, it is probably not because anyone was confused about what they were purchasing. However, buyers might think an imitation designer purse is authentic, and sales of that fake purse could arguably be infringement damages. But the imitator could counter that the

One of the most important things to know is how reliant a business is on its IP. For example, if a business has only one product, and that product relies on patent protection, then a patent infringement case is life-or-death for that company. If the company sells many other products, it may be possible to explore a business solution to the dispute. In any case, know the business’s situation ahead of time to determine the litigation strategy. Also, keep in mind how sensitive the business is about disclosing information, because the defendant is often a direct marketplace competitor and IP litigation may involve disclosure. It is a good idea to be cognizant of sensitive information belonging to the business’s customers, and be aware that they may end up as witnesses. For example, a customer may be the target of improper solicitation using misappropriated trade secrets. That customer may be the key to winning the lawsuit, but the imposition and burden of dealing with someone else’s litigation can be damaging to relations. Some customers may declare, “A pox on both your houses,” causing both sides to lose that customer anyway. Always remember that litigation involves sending information about profits and damages to the competitor, the entity that can hurt the business the most if it is misused. Therefore, ensure there is protection so it can’t be posted

on the Internet or used by the other side to help advance their business. Alternate dispute resolution and other forms of ADR may be better than litigation. ADR can keep sensitive information out of public records and news feeds. Sometimes parties can work out their issues without an intermediary by negotiating the payment of royalties or reaching settlement. The most useful method of identifying challenging IP litigation issues is conducting a thorough client interview, and continuing to re-interview as the case goes on. Follow interviews with independent investigation, and ask various people in the organization the same questions. Determine the hot button issues in the case. For example, if producing documents will be a pressure point, stay ahead of that problem and obtain the documents well ahead of time. Find someone in the organization who can help get those documents. As with all lawsuits, IP litigation is resource intensive and a potential distraction from the revenue generating business. It is always best to work with a client who is engaged, helpful, and can provide access to witnesses and documents. In all phases, buy-in from the C-suite for the case is mandatory for success. If the internal decision-makers are not convinced and fully on board, there is little hope of convincing those outside the organization. ■

Andy Cao is a member of McGlinchey Stafford PLLC. He represents clients from diverse fields of business, including insurance brokerages, maritime lenders and vehicle manufacturers. He has litigation experience in Texas state and federal trial and appeal courts. In IP disputes, his representation covers areas including patent and trademark infringement, non-compete agreements and no-hire agreements, non-solicitation agreements and trade secrets. acao@mcglinchey.com

DEC/JAN 2014 TODAY’S GENER AL COUNSEL

Intellectual Property

Three Ways to Challenge a Patent Pro and Cons By Craig W. Kronenthal and H. Wayne Porter

n inter partes review (IPR) is a newly established mechanism for challenging patent validity through an evidentiary proceeding before the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office. Under the right circumstances, an IPR may be a viable option. Other options include traditional ex parte reexamination and district court litigation. Discussed below are five areas to consider when choosing the best option in any particular case. DISCOVERY

A third party requesting ex parte patent reexamination will have no real discovery opportunities. For example, ex parte reexamination does not allow a third party requestor to depose experts or other parties from whom a patent owner may submit declarations in support of patentability. Litigation can go to the other extreme. Rule 26(b) of the Federal Rules of Civil Procedure permits discovery so long as it “appears reasonably calculated to lead to the discovery of admissible evidence.” As a result, the discovery process often becomes a lengthy and costly component of litigation. Indeed, some believe that the discovery process is used to drive up expenses and consume resources in hopes

of squeezing opponents into a settlement. Although inter partes review discovery lies somewhere between these two extremes, it is still quite limited in scope. The IPR rules establish the right to cross-examine a declarant and require the parties to share information that is inconsistent with their positions. For additional discovery parties must reach an agreement, or seek additional discovery by motion if an agreement cannot be reached. Thus far, motions to the PTAB for additional discovery have been overwhelmingly unsuccessful. Parties have had difficulty persuading the PTAB that additional discovery is necessary in the interest of justice, and the PTAB has often noted that the time constraints of the IPR process do not allow for additional discovery. MOTIONS

Motions are not a part of ex parte reexamination. Once a third party files a request for reexamination, that party may have no opportunity to participate in or influence the outcome of the reexamination proceedings. The third party requestor is limited to a single reply if the patent owner responds to the request for reexamination. In practice, many patent owners do not respond to requests for reexaminations so

that they can deprive third party requestors of that reply. Moreover, the third party is prohibited from communicating with the reexamination examiner, whereas patent holders are allowed to participate in interviews with the examiner. Litigation generally stands at the other extreme in this area, as well. A wide variety of motions may be filed in district court litigation. Individual courts have their own local rules governing motion practice. Such local rules may dictate page limits, content requirements, deadlines for filing and responding, and how motions are to be filed (e.g., whether motions need to be electronically filed). Often local counsel is employed to ensure that the local rules are met. Although motion practice is also a component of IPRs, it is more tightly controlled than in district court litigation. For example, 37 C.F.R. Section 42.20(b) requires prior PTAB authorization before filing a motion. Filing a motion without PTAB approval could result in expungement of the motion with prejudice. This factor can impact costs and expediency of IPRs. Although it is too early to reach conclusions, the preauthorization requirement can be expected to cut down on the number of motions filed, and keep motions narrowly tailored to specific

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Intellectual Property issues. When authorizing motions, for example, the PTAB often provides guidance on the issues to be addressed. CLAIM AMENDMENTS

One of the largest factors weighing against challenging a patent through ex parte reexamination is that it allows the patent holder to add or amend its claims and improve its position. The only restrictions are that the amended or new claims must be supported by the original application and must be narrower in scope than the issued patent claims. The only limit on the number of new claims that may be added is the patent owner’s willingness to pay extra claim fees. In practice, many patent holders use reexamination as an opportunity to amend or add claims that more clearly cover an allegedly infringing product. Although new or amended claims only have prospective effect, they can still be quite valuable if the reexamined patent has a significant remaining term. Indeed, some patent holders request ex parte reexamination to solidify a patent by adding and/or amending claims to improve their position in preparation for litigation. Patent claims cannot be amended during district court litigation. For this reason, parties seeking to invalidate a patent have previously chosen to forego reexamination and pursue only litigation. Patent claims can be amended during an IPR, but the ability is quite limited. In an IPR, as in reexamination, claims may not be amended to enlarge the scope of protection. In addition, claim amendments must be in response to a ground of unpatentability involved in the IPR. When the patent holder amends a claim, the petitioner (the party that requested the IPR) may argue that the amendment represents a concession that the issued claims are invalid. Patent holders may thus be reluctant to amend. Furthermore, 37 C.F.R. Section 42.121(a)(3) limits patent holders to a reasonable number of substitute claims in an IPR. The rule creates a presumption of a one-for-one paradigm, in which one claim can be added when one claim is canceled. On a more practical level, applicable IPR page limits restrict the ability of a patent owner to make amendments.

Amendments are made through a motion to amend, which is limited under 37 C.F.R. Section 42.24(a)(1)(v) to 15 pages. The motion must include a claim listing, a discussion of support for added or amended claims, and how the amended claims distinguish over the asserted prior art. It can be difficult to squeeze all of this into 15 pages if there are more than a few new or amended claims. Although the IPR rules allow patent owners to request additional pages, the PTAB has not been shy about rejecting such requests. TIME

The time frames for district court litigation vary widely. Some venues are considered “rocket dockets,” but it is nonetheless common for patent litigation to last several years. Ex parte reexamination is generally considered to be faster, although this is not always the case. On average, the pendency of an ex parte reexamination from request filing date to certificate issue date is 27.9 months. An IPR is likely to be faster than ex parte reexamination or litigation. The PTAB is required to decide whether to institute an IPR within six months from the filing of a petition and to reach a decision within 12 months, extendable to 18 months upon a showing of good cause. SETTLEMENT

Once a request for ex parte reexamination is granted and a reexamination is ordered, neither the patent owner nor a third party requestor can stop the reexamination. The USPTO will reexamine the patent and allow and/or reject claims regardless of any subsequent settlement or other agreement between the patent owner and the third party. Thus it may be difficult for a third party to negotiate a favorable license while a patent is under reexamination, as the patent owner will have to continue fighting for patent validity regardless of whether a dispute with the third party requestor is resolved. In contrast, the time, money and resources associated with district court litigation often motivate parties to settle. Indeed, most patent suits terminate as a result of settlement. When patent suits do settle, the settlement terminates the trial and the terms of settlement can often be kept confidential. The assurance

that the terms of settlement will be kept confidential can be an influential factor in the willingness of a patent owner or patent challenger to settle. Settlement considerations may play into whether a party chooses to institute an IPR. Unlike ex parte reexamination, the PTAB may terminate an IPR without reaching a decision. However, the PTAB does not have to terminate the trial if the parties settle. As for the terms of settlement, 37 C.F.R. Section 42.74(c) provides for keeping settlement details secret and separate from the file of the IPR. However, the same rule also provides for making such details available to government agencies on written request and to other persons upon a showing of good cause. All three options for challenging patent validity have benefits and drawbacks. The best option will depend on particular circumstances. ■

Craig W. Kronenthal is an attorney in the Washington D.C. office of Banner & Witcoff Ltd. He prepares and prosecutes patent applications in various fields, especially in computers and electronic devices. He is also involved in litigation and reexamination matters, client counseling, and preparing patentability and infringement opinions. Ckronenthal@bannerwitcoff.com

H. Wayne Porter is a partner in the Washington D.C. office of Banner & Witcoff. He concentrates his practice in patent prosecution and related counseling, including evaluation of patent infringement and validity issues. He has prepared and prosecuted numerous patent applications in the software, electronic, and mechanical fields and has substantial experience in design patents. wporter@bannerwitcoff.com

DEC/JAN 2014 TODAYâ&#x20AC;&#x2122;S GENER AL COUNSEL

Intellectual Property

TODAY’S GENER AL COUNSEL DEC/JAN 2014

Intellectual Property

Size Matters before the ITC, But It’s Relative By Lou Mastriani and Asha Allam

onathan Swift wrote of a world where Gulliver discovers he is a colossal giant overpowered by miniature Lilliputians, only to later find himself turned “Lilliputian” himself. Chronicling Gulliver’s Travels, Swift’s most obvious theme is that perceptions of magnitude depend on the surrounding environment. In other words, size requires context. Context is central in the U.S. International Trade Commission’s recent opinion in the Kinesiotherapy Devices investigation, where it found a start-up company’s seemingly Lilliputian investments significant under Section 337 of the Tariff Act of 1930, as amended. Section 337 remedies unfair competition in imported goods if there is proof of a domestic industry, among other things. In intellectual property-based investigations, the Commission considers whether a complainant’s domestic activities involve “significant investment in plant and equipment” or “significant employment of labor or capital” directed to IP-protected articles, or “substantial investment” in exploitation of the IP. The Commission has emphasized that there is no minimum monetary expenditure required to establish a domestic industry. However, in Kinesiotherapy Devices, it relied heavily on evidence of context to justify how arguably small financial amounts could be significant. The Commission’s focus on context is not surprising after the Printing and Imaging Devices investigation. There, complainant Ricoh, a multi-billion dollar global enterprise, which had a U.S. presence since the 1960s, failed to satisfy the domestic industry requirement. Though Ricoh presented evidence of domestic plant, equipment and labor costs, the Commission found its failure to present context for those costs precluded a finding of significance.

The Commission stressed that magnitude “cannot be assessed without consideration of the nature and importance of the complainant’s activities to the patented products in the context of the marketplace or industry in question,” because what may be significant in one context may not be in another. SAME FACTS, DIFFERENT PERSPECTIVE

Context proved dispositive in the Commission’s reversal of the administrative law judge’s domestic industry determination in the Kinesiotherapy Devices investigation. There, complainant Standard Innovation, a young Canadian business with an even younger U.S. subsidiary, based its domestic industry on costs to purchase certain components for its patented “We-Vibe.” The ALJ recognized that, although assembled in China, the components relied upon were manufactured in the United States, were critical to the We-Vibe, and were directly related to claimed features of the asserted patent. Despite crediting these facts, the ALJ found these component costs were “less than 5 percent of the total product raw cost” and declined to find Standard Innovation’s expenditures to be a significant investment in plant and equipment. On review, without challenging any quantitative findings, the Commission reversed the ALJ’s initial determination that Standard Innovation’s expenditures were not significant. The Commission faulted the ALJ’s analysis for failing to give “due consideration to the critical nature of the components to the patented products and in the context of the industry and the company.” Focusing on the qualitative context surrounding Standard Innovation’s “relatively modest proportion of domestic content,” the Commis-

dec/jan 2014 today’s gener al counsel

Intellectual Property sion found significance for several reasons, including: The components were “directly related” to the asserted patent; the components were crucial to the functionality of the We-Vibe; and the We-Vibe represented a remarkable percent of Standard Innovation’s sales.

Businessweek Research Services and the SAS Institute report that businesses increasingly rely on data analytics: the practice of using data analysis to understand business issues in a way that can guide decision-making. Bloomberg’s 2011 survey indicates that 97 percent of companies with revenues of

try facts be developed and disclosed early in an investigation. Still, many complainants scramble when fact discovery closes to perfect their evidence, sometimes uncovering crucial facts too late. Where diligence would have led to earlier discovery of such facts, ALJs rarely forgive delay.

For start-ups and Fortune 500 companies alike, proving significance hinges on presenting a comprehensive domestic industry story.

The Commission concluded that “the importance of the components to the We-Vibe and the importance of the We-Vibe to Standard Innovation weigh heavily in favor of finding a domestic industry.” While the Commission’s Printing & Imaging Devices opinion taught the necessity of context, the lesson in the Kinesiotherapy Devices opinion lies in the character and quantum of contextual evidence the Commission cited to find significance. This is paramount because the Commission repeatedly emphasizes that the domestic industry is not evaluated “according to any rigid formula.” Thus, for start-ups and Fortune 500 companies alike, proving significance hinges on presenting a comprehensive domestic industry story. Many companies already possess the tools to show how their domestic

more than $100 million are using some form of business analytics. The Kinesiotherapy Devices opinion suggests there is also a role for analytics in proving significance. The prudent Section 337 complainant can exploit existing data stores to enhance domestic industry evidence. THREE GUIDELINES

First, survey available data. Bloomberg bemoans companies’ tendencies to build internal data “silos” that thwart the effective use of information. These silos develop where groups within an organization collect and analyze data, unaware of the efforts of others, and therefore are unable to integrate information across the organization. Silos can have a serious adverse impact on the tight deadlines that confront Section 337 litigants.

The prudent Section 337 complainant can exploit existing data stores to enhance domestic industry evidence.

investments are significant. Because today’s global economy demands projects be productive to warrant diversion of resources, companies use various tools for measuring productivity. Bloomberg

Section 337 complainants usually possess all the evidence needed to establish a domestic industry before filing a complaint. ALJs have consequently insisted that domestic indus-

The prudent complainant inventories the type of data it ordinarily maintains before penning its domestic industry story. Typically, domestic industry fact collection starts with technical personnel, to identify activities and products involving the asserted IP, and ends with financial personnel, to identify resources dedicated to those activities and products. But the prudent complainant complements technical and financial data with information from departments like marketing, and business intelligence or public relations material that assesses impact. These sources collect and analyze information about best-selling products, market share, market value, consumer impact, company accolades, and other facts that can show significance. Surveying such data early allows a complainant to catalog domestic industry evidence and avoid late discovery of critical facts. Second, present a complete picture. The Commission evaluates a domestic industry “in light of the realities of the marketplace,” but those realities are often murky. Moreover, complainants often redact insightful facts to protect confidential information. Unless a definitive blueprint for establishing a domestic industry is provided, disclosing every relevant fact is the best fail-safe. Details saved complainant Standard Innovation’s domestic industry claim, for example, in the Kinesiotherapy Devices investigation. The Commission did not rely on one fact alone to find Standard Innovation’s

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Intellectual Property investment significant. As the ALJ’s findings suggest, the dollar value of Standard Innovation’s investment seemed inconsequential, its sales may have appeared meager, and the mere percent domestic content of its product at issue seemed negligible. Sifting through Standard Innovation’s detailed evidence, however, the Commission found an appropriate background for analyzing its domestic investment and sufficient evidence to reverse the ALJ’s determination. The Kinesiotherapy Devices opinion shows how a complete domestic industry picture enables a multidimensional strategy for proving significance. Facts can be credited in isolation, evaluated in the aggregate, or used to enhance the importance of other facts. Facts that independently appear minor can collectively convey a qualitative significance that is outcome-determinative. Alternatively, significance may be lost if details are omitted. Imagine the Last Supper without Apostles. Thus, a prudent complainant presents a comprehensive

account of its domestic contributions, describing all relevant products, activities and investments, and every way in which they matter. Third, be creative. Weave comprehensive data into a personal and compelling narrative. Given the factspecific nature of the domestic industry requirement, it is disadvantageous to simply research precedent, present analogous facts and call it a day. The context that makes an investment significant may be unique and subjective. Using precedent as a template may diminish that significance. Instead, facts historically credited in establishing a domestic industry should be supplemented with metrics meaningful to the complainant, in order to give quantitative facts qualitative support. Like Gulliver’s size, the significance of a domestic industry is relative. It is defined by context, but that context is open-ended. Large companies with incomplete or cursory evidence can fail to prove significance, while small ones can succeed with comprehensive facts. As in

the Kinesiotherapy Devices investigation, any complainant can enhance its evidence by exploiting existing analytics and taking a holistic approach to its domestic industry story. ■

Lou Mastriani is a founding partner of Adduci, Mastriani & Schaumberg, LLP. Prior to entering private practice, he served as an ITC investigative attorney. He assisted in revising and drafting the Commission’s Rules of Practice and Procedure with respect to Section 337 investigations. mastriani@adduci.com

Asha Allam is an associate at Adduci, Mastriani & Schaumberg. She has extensive experience in Section 337 investigations. allam@adduci.com

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Tips for Combating Counterfeit Sales Online By Camille M. Miller and Elizabeth Featherman

n 2012, the U.S. Department of Homeland Security seized 22,848 counterfeit products worth a suggested retail price of about $1.3 billion. Global economies have lost more than two million jobs to counterfeiting and piracy, a million a year in the United States alone. Rogue websites that sell counterfeit goods, such as prescription drugs and luxury items, receive more than 87 million visits per year. In the past, counterfeit goods were often shipped via large cargo containers to the United States and sold through layers of middlemen before reaching consumers. Now counterfeit sellers set up online presences at auction or marketplace sites and ship counterfeit products directly to consumers. Counterfeit sellers also use Internet and social media tools to generate web traffic and to divert consumers to rogue e-commerce websites. Many rogue sites have the same look and feel as the brand owner’s site, and the counterfeit seller may even create phony product reviews, blog entries and rogue social media profiles to bolster its legitimacy. The Internet, in short, presents a serious daily challenge to brand owners who want to prevent counterfeiting and enforce their intellectual property rights. Here are some tips on how to go about doing it: Register Your Intellectual Property. The first and most important thing that a brand owner can do to protect its brand is to register its trademarks and copyrights. This fundamental step in intellectual property protection provides a springboard from which enforcement measures originate. It is a particularly cost-effective approach when resources are scarce. But it does require brand owners to review their intellectual property portfolios, identify gaps, and submit the appropriate applications for federal registration.

The lack of formal protection is not fatal to enforcing one’s rights. In many jurisdictions, trademark rights vest upon use of the mark, and copyrights are effectuated upon creation of the work. Thus, although trademark and copyright registrations are preferable and strongly support enforcement efforts, allowing for a federal copyright cause of action and international enforcement actions, it’s not indispensable. Record with Customs Border Protection. U.S. Customs and Border Protection (CBP) is the primary federal agency responsible for securing U.S. borders. CBP protects IP rights by intercepting counterfeit and pirated goods bound for this country. U.S. trademarks and copyright registrations can be recorded with CBP online to maximize protection at the border. Information about the recorded registrations is then available at the ports to help CBP personnel with infringement determinations. The fee is $190.00 per copyright registration or per class of goods for each trademark. The term is ten years from the date of trademark registration or twenty years from the date of copyright registrations. Work Diligently with Custom Border Protection. Brand owners can educate customs officials on their goods by providing them with product identification guides and/ or product training sessions. There are no specific formats for product identification guides, but they should be brief and include information about the company, the IP registration and record numbers, contact information, physical characteristics of the products, photos of genuine and suspect versions of the goods and manufacturing information. The guides

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Intellectual Property are placed on CBP’s internal websites and linked to the electronic records. Training sessions give brand owners an opportunity to meet face-toface with CBP personnel and convey information about specific brands, and characteristics of the suspect and genuine goods. Brand owners should identify ports where suspected counterfeit goods enter the country and request training sessions with customs officials in these specific ports. Most importantly, brand owners should be responsive and willing to cooperate with customs officials in reviewing seizure notices and seized samples of goods.

Monitor Your Brand Online. Brand owners should actively monitor auctions, websites, “torrent” activities, online advertisements, sponsored links and online content that reference their brand names. Running keyword searches using the brand names or a variation of it usually results in a good list of rogue sites and sponsored links for review. The scope and frequency of the review varies depending on the brand. Monitoring can be done in any budget, from self-monitoring to engaging an outside vendor to run and review searches. Many large search engines recognize the rampant use of online advertising of counterfeit goods and the brand owners’ need to monitor their brand names, and have instituted new initiatives to help brand owners identify and eliminate advertisements that are associated with specific keywords and or ad words. Enforce Your Brand. Regardless of whether brand owners have registered their trademarks and copyrights, they may enforce their IP rights against online infringers by sending cease-and-desist letters, or notice and takedown letters. The brand owner may demand that the infringer discontinue use of the trademarks and copyrighted works. The brand owner may also demand an accounting of profits, and that the infringer reveal where the counterfeit goods were acquired. Brand owners can also target the

Internet service provider (ISP) that hosts the rogue site and demand that it remove or shut down the infringing site. In the demand letter, the brand owner can point to the terms and conditions to which the site owner agreed when registering with the ISP. Often, these include language stating that the domain owner agrees to refrain from posting information on its site that infringes on the intellectual property rights of third-parties. The facts of each case will dictate the best enforcement approach. For example, if the infringing content is copyright protected, the ISP, once it receives notice of infringement, must remove the infringing material in order to avoid liability for copyright infringement under the Digital Millennium Copyright Act. By sending a DMCA notice to the ISP, the brand owner serves notice that the infringing material is on the subject website. DMCA notices provide a safe harbor for ISPs to remove such contents before becoming a contributory infringer.

incentive to continue to expend resources to redesign goods is the knowledge that it makes it more likely that consumers will end up purchasing the authentic product. It’s also necessary to educate consumers as to the effects of purchasing counterfeit products. Incorporate Anti-Copying Mechanisms. By incorporating mechanisms such as encryption, or including a specific tag on the product, brand owners help prevent counterfeiters from accessing and easily replicating authentic goods. Brand owners may, for example, design their products to integrate a tag that allows only the brand owner and enforcement entities to readily discern between counterfeit and authentic products. This is not an exhaustive list. Brand owners must also consider educating consumers about the effects of purchasing counterfeit products, at the same time they are working in coordination with ISPs, social media sites, search engines, and law enforcement agencies to combat counterfeit sellers. ■

Secure the Supply Chain. By carefully screening vendors, brand owners reduce the risk of vendors selling and distributing the goods outside the distribution chain and personally profiting from those sales. With an existing vendor, the brand owner may demand information about where the vendor has acquired the goods bearing the trademark to, first, determine if the goods being sold are authentic or counterfeit and, second, if they are authentic, to determine if they have been acquired from an authorized vendor. Brand owners can also set up regular anonymous buys from vendors or authorized retailers to ensure the goods sold are legitimate.

is a Member of Cozen O’Connor and chair of the firm’s Intellectual Property Practice Group. Her practice encompasses trademark, trade dress, copyright, unfair competition, right of privacy, right of publicity, domain names, counterfeiting, licensing, trade secret and franchising law, and all areas of IP litigation. cmiller@cozen.com

Periodically Change Product Design and Packaging. Modifying the product design and packaging allows the brand owner to more easily track counterfeit products. The brand owner can then monitor online auctions and review the packaging of goods for sale, noting any differences between those and authentic goods. The

is an associate in Cozen O’Connor’s Intellectual Property Practice Group. She represents clients in all areas of intellectual property. efeatherman@cozen.com

Camille M. Miller

Elizabeth Featherman

The Magazine The six-time yearly publication, with strategies, best practices and analysis written by expert practitioners within the legal profession, offers an excellent branding opportunity to 58,000 qualified subscribers.

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Intellectual Property

A Primer on IP Protection for Crowdfunding Projects By Michelle Mancino Marsh and Ashley Tan

rowdfunding is a new, Internetdriven, word-of-mouth method of finding the money to start a new business. Unlike traditional funding, crowdfunding does not offer investors a piece of ownership in a start-up. Instead, crowdfunding connects a startup directly to its customers, who pledge money in return for a one-time reward. The typical crowdfunding platform simply requires the creation of a project webpage, which describes the project’s goals, including the total funding amount needed and various pledge amounts. Each amount corresponds to a “reward,” which can range from a token thank-you to the project’s actual product. Once the project page is created, the creator solicits pledges – collected through the crowdfunding platform – and ensures that rewards are eventually distributed. However, while crowdfunding can build publicity and customer base, it also makes innovative ideas vulnerable to free-riding copycats. In fact, popular crowdfunding platform Kickstarter encourages prospective project creators to emulate successful projects. Intellectual property rights such as patents, copyrights and trademarks can help protect a crowdfunding project with respect to these risks. Such protection may also increase the chances that a crowdfunding project can transition into a healthy business. Moreover, when considered early on, copyright and trademark registration offers cost-effective and relatively speedy protection. A patent protects an invention, so that only the patent owner has the right to exploit it. In the United States, essentially two types of patents are relevant: utility patents for useful products and processes and design patents for ornamental designs. A patent offers strong protection against competitors because it not only

bars duplication of the patented invention, but also the creation of inventions that, while technically different, are functionally equivalent. However, patent protection can be expensive depending on the complexity of the invention or design. So despite the potential expense, it is still worthwhile to consult counsel as to whether patent protection for a crowdfunding project is a viable option. This consultation should be done early on, as once an invention is publicly disclosed, an inventor has a limited time to apply for a patent. Copyright protects the manner in which an idea is expressed, barring anyone from reproducing, distributing,

performing, or adapting the copyrighted work without permission of the copyright owner. Eleven of the thirteen categories Kickstarter offers – art, comics, dance, design, fashion, film and video, games, music, photography, publishing, and theater – fall within fields traditionally covered by copyright. In order for a work to be copyrightable, it must be “original,” meaning independently created, and “fixed” in tangible form. If the work is recorded in a medium that allows the work to be reproduced, it qualifies as “fixed.” An original work is copyrighted the moment it is “fixed,” so it is not necessary to register the work, or even to publish the work, in

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Intellectual Property order to gain copyright protection. However, copyright registration provides important advantages. The registration is a public record and is evidence of when a copyrighted work was created and by whom. More critically, a U.S. copyright must be registered before its owner can sue another in court for infringing it. Copyright registration is fairly straightforward and in most instances can be done without a lawyer. A registration application can be filed online or by paper through the U.S. Copyright Office. The filing fee ranges from $35 to $220, depending on the type of work and method of filing; most types can be registered online for $35. The application consists of a short form and a deposit of copies of the work with the Copyright Office. Both published and unpublished complete works can be registered. Some types of works, such as movies and manuscripts, can be “preregistered” before they are complete, with full registration carried out once the work is finished. Once the Copyright Office has received an application, it determines if all required elements have been submitted. If the application is in order, the Copyright Office will issue a registration certificate. Currently, the average processing time for a copyright registration is 3-6 months. A trademark is a symbol – such as a logo, slogan, distinctive appearance, or product/service name – that identifies the source of a product or service. For example, a crowdfunding project can create a brand and logo for its project, and protect them as trademarks. It can also design its product so that the distinctive, ornamental elements of the product’s appearance will act as trade dress, a variation on trademark. Trademark rights are created through use of the trademark and exist independently of registration. But as with copyright, registration provides important advantages. It removes some of the requirements for a trademark owner to sue for infringement in federal court, and can also make it easier to prove that the trademark is valid. Like patents, federal trademark registration is handled by the Patent and Trademark Office. The trademark is

examined through a process called prosecution before registration is granted. During prosecution, a PTO examiner determines whether the trademark is valid, including whether anyone else has already applied for the trademark and whether the trademark is confusingly similar to existing registered trademarks. Because prosecution “vets” the trademark, a successfully registered trademark gains a legal presumption that it is enforceable. Project creators interested in trademark registration should consult a trademark attorney early on, as the attorney can identify potential prosecution issues when it is still easy and cheap to change the trademark. Although prosecution can be done by non-lawyers, it is highly technical and an attorney’s advice increases the chances of successful registration. One recent study found that applications prosecuted by a trademark attorney were twice as likely to be approved as applications prosecuted by an inexperienced non-attorney. The first step to registration is determining what type of application to file. Two types are available: “use” and “intent-to-use.” A “use” application is available if the trademark is already used on products/ services that have been sold or transported in interstate commerce (“use in commerce”). Many crowdfunding projects exist only as prototypes and will not qualify for “use” applications. Instead, such projects can file an intent-to-use application (ITU). An ITU is available when a trademark has not yet been “used in commerce,” but the ITU applicant genuinely intends to use it in the future. In other words, an ITU can be filed before the trademarked product or service has been publicly released. The crowdfunding campaign can be used as evidence of intent to use the trademark in the future, as it shows that the project creator has promised to proceed with the project in exchange for pledges. An ITU can also be filed if the trademark is already being used in commerce, but the applicant is still gathering proof of use, as is often the case for projects seeking to ramp up existing production. The ITU thus is

ideal for a crowdfunding project that is launching a new product or expanding a business, since it allows a project to reserve a trademark ahead of actual sales. ITU applications are processed as received, so an ITU applicant will get the benefit of the PTO’s opinion on whether the trademark meets all other registration requirements, and can alter its application based on that feedback. However, the PTO will not approve registration of an ITU until the trademark is in actual use. Prosecution of most trademark applications takes about a year, but several factors can extend prosecution. A trademark attorney can help an applicant estimate the time needed and cost for his or her application. Early and careful consideration of patent, trademark and copyright protection for a crowdfunding project can increase the likelihood of a successful transition into a viable, ongoing business. In particular, trademark and copyright protection are cost-effective, quick ways to prevent others from stealing innovative ideas, while also proving to potential backers that the project creators are serious about pursuing the project. ■

Michelle Mancino Marsh is a partner at Kenyon & Kenyon LLP. Her practice is focused on trademark and copyright law, and a wide range of IP and counterfeiting issues in industries including fashion, consumer goods and services, computer software and hardware, media and entertainment and pharmaceuticals. mmarsh@kenyon.com

Ashley Tan is an associate at Kenyon & Kenyon LLP. Her practice is focused on trademark, copyright, unfair competition, false advertising, trade secret and internet law. atan@kenyon.com

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IP Protection in Emerging Markets By Pamela Passman

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lobal supply chains have revolutionized the marketplace, making it possible for businesses to acquire components efficiently, hasten production and offer lower prices to consumers. But sourcing and production from multiple nations also exposes global companies and their customers to new vulnerabilities. This is especially true when supply chains include partners in emerging markets where legal structures, IP enforcement and transparency are often lacking. When goods, materials and parts are coming together from multiple points around the globe, one risk is the intrusion of counterfeit components, some so defective that they can lead to product failure and potentially risk the health and safety of customers, with high costs to profits and reputation. Far-flung suppliers and business partners also increase the risk of theft of valuable trade secrets, a problem that has become more acute with digitized information. Intellectual property theft is always evolving. Like the mythical monster Hydra, as one head is lopped off, it grows others. Even so, companies can put in place meaningful protection through application of best practices and continual assessment and improvement within their management systems. There are myriad cases of intellectual property theft to illustrate why it is critical that global companies in every industry take action to combat IP theft and share their processes to combat it with their supply chain partners. LOSSES CAN BE HUGE

Counterfeit products and components have caused explosions, fires, engine failures, network crashes and, in some cases, physical injury and death. A recent Senate committee report described 1,800 known cases of suspect counterfeit electronic parts in the defense supply chain, originating from more than 650 companies. Counterfeit automobile parts are a massive industry, with sometimes deadly results. In October 2012, the National Traffic Safety Board warned that a Chinese manufacturer had flooded the mar-

ket with counterfeit airbags that pose “an extreme safety risk.” According to the investigator’s report, the products, sold internationally for $50-$70 per piece, and were copies of a genuine automotive airbags valued at about $1,000. Of 11 counterfeit airbags tested, 10 failed to inflate properly and some shot flames or metal shrapnel at the crash dummies. Counterfeit software is another source of vulnerability. An estimated 59 percent of downloaded counterfeit software harbors malicious or other unwanted code, which can expose systems to the risk of data loss, prolonged downtime or outright failure.

Far-flung suppliers and business partners increase the risk of theft of valuable trade secrets, a problem that has become more acute with digitized information. Companies are also reporting a surge in theft of trade secrets. With the digitization of information, it can take remarkably little effort to steal proprietary information such as customer data, business plans, strategy, and production formulas and manufacturing processes that may have cost millions of dollars and taken years of research and market experience to develop. Ford Motor Co. suffered an estimated $50 million in losses when one of its engineers copied thousands of company documents onto an external hard drive and took it with him when he went to work for a Chinese competitor. The perpetrator, Yu Xiang Dong, was sentenced to 70 months in federal prison for the theft in April 2011, but the damage was done.

The theft of trade secrets and other types of intellectual property takes place through “multiple vectors,” according to a 2013 White House paper addressing the problem. “Foreign competitors of U.S. corporations, some with ties to foreign governments, have increased their efforts to steal trade secret information through the recruitment of current or former employees,” it says. “Additionally, there are indications that U.S. companies, law firms, academia, and financial institutions are experiencing cyber intrusion activity against electronic repositories containing trade secret information.” The problem is worldwide. Ninetyone percent of European companies surveyed by the Trade Secrets and Innovation Coalition reported that they had experienced at least one theft or unauthorized disclosure of trade secrets within the past 7 years, and in 44 percent of such cases they believed the information was used to compete against them. IP PROTECTION BUILT INTO MANAGEMENT SYSTEMS

As the magnitude of the problem comes into focus, governments around the world are revising policy and laws as a means of grappling with it. But for the foreseeable future most companies remain vulnerable, and need to be proactive to protect against theft and supply chain adulteration. To be effective, IP matters cannot be confined to the legal department, but instead must be addressed across the company as part of the management system. Beyond that, IP protection must be shared with supply chain companies and business partners to the fullest extent practical. Since 2011, the Center for Responsible Enterprise and Trade, (CREATe. org) has reached out to more than 100 global companies, seeking the current best practices for IP protection and supplier engagement. It has teamed with experts in IP, supply chain capacity building, and risk and compliance programs, and it has forged partnerships with Stanford University, Massachusetts continued on page 39

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Myriad Decision May Invalidate Many Patents By Ajay Singh, Marianne Timm-Schreiber, Kathy Kowalchyk and Gary Myles

he U.S. Supreme Court changed the patent landscape for the biotechnology industry in June when it unanimously held that isolated, naturally-occurring DNAs are not patent eligible, in the case of Association for Molecular Pathology vs. Myriad Genetics. The technology at issue in the case concerns clinically significant diagnostic methods for detecting genetic changes in BRCA1 and BRCA2 genes that are predictive of an increased risk for developing breast and/or ovarian cancer. Many patients testing positive for such changes elect surgical removal of their breasts and/or ovaries. The gen-

ly created exceptions to these categories: abstract ideas, natural laws, and natural phenomena. The Court held that patent claims to isolated DNAs fall within the naturally occurring phenomena exception, and therefore are invalid. The Court found that separating the DNA of a gene from its surrounding genetic material, even though time consuming and valuable, is not an invention. Citing an earlier decision, the Court stated that the test for patentable subject matter is whether the subject matter of the claim “was new with markedly different characteristics than that found in nature.”

The Court found that separating the DNA of a gene from its surrounding genetic material, even though time consuming and valuable, is not an invention.

eral public’s awareness of this testing was greatly increased when actress Angelina Jolie recently disclosed her test results and subsequent surgery. Myriad Genetics was the only source for such testing as they held exclusive rights to the patents on this technology. The Court determined that Myriad’s patent claims on isolated, naturallyoccurring DNAs were invalid because this is not the type of subject matter that can be patented. The patent statute defines four categories of patent eligible subject matter: processes, articles of manufacture, machines, and compositions of matter. There are three judicial-

The Court was not persuaded by Myriad’s argument that isolating the DNA of a gene from its natural state breaks chemical bonds and changes the naturally-occurring DNA into a non-naturally occurring molecule. Some of Myriad’s claims failed this test because the company did not create or alter any of the DNA or any of the genetic information encoded in the BRCA1 and BRCA2 genes. The sequence was the same as that of the naturally occurring molecule. The Court did rule that claims to a type of DNA that is synthetically produced called complementary DNA

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Intellectual Property (cDNA), are patent eligible because these synthetic copies do not have the same sequence as the naturally occurring gene. In its split decision on isolated DNA and cDNA claims, the Court highlighted that exceptions to patent eligible subject matter strike a balance between incentives for innovation and

Going forward, the options for claiming biotechnological products will be limited. When the Myriad decision is viewed in the context of other key court decisions, the collective impact limits the patent eligibility of diagnostic methods and gene sequences. While the court rulings have provided clear direction on the pat-

The Myriad decision potentially invalided over 5,000 patents owned by large and small businesses alike in the biotechnology industry.

impediments to the public availability of information about the basic tools of science and technology. The Court found that claims to subject matter that cover the naturally occurring DNA sequences were in the realm of the basic tools of science and technology which should be available to all. IMPLICATIONS

Medical organizations, doctors, advocacy groups and patients had sought a declaratory judgment against Myriad’s patents, because they hoped such a judgment would expand the supply of commercially available lab test sites and make the tests more affordable and accessible to consumers. However, the decision did not invalidate all of Myriad’s claims. Myriad has sued two other companies who announced they would begin testing of the BRCA1 and BRCA2 genes. It remains to be seen whether other laboratory testing sites will become available to the public. Myriad and other pivotal court decisions will have a widespread impact. Based on a quick search of patents issued by the U.S. Patent and Trademark Office, there are more than 5,000 patents that claim “isolated DNA.” Accordingly, the Myriad decision potentially invalided over 5,000 patents owned by large and small businesses alike in the biotechnology industry.

ent ineligibility of isolated DNA, the decisions did not precisely determine whether other biomolecules, such as proteins and antibodies, are patent eligible. Based on Myriad and related court rulings, it would be prudent to expect that claims covering any biomolecule as it appears in nature, regardless of whether it was isolated, are likely invalid for covering ineligible subject matter. Consequently, these court decisions should be carefully considered when preparing patent specifications and drafting claims that recite nucleic acids, including cDNAs, genomic DNAs, synthetically produced DNAs having nonnatural nucleotide sequences, methods for detecting and using nucleic acids, and new applications of knowledge regarding genetic information. BEST PRACTICES

In the aftermath of Myriad and related decisions, for patent drafting specifications and claims to new biotechnology inventions and for amending claims in issued patents and pending patent applications, attorneys should consider the following: Portfolios of issued patents should be reviewed for claims that cover any isolated molecule or compound found in nature. When such claims have been identified, the patentee should consider pursuing a reissue application with

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claims amended to avoid the exceptions to patent eligibility. Because such claim amendments are typically narrowing amendments, the patentee has until the patent expires to file a reissue and is not restricted to the two-year period in which a broadening reissue must be filed. While conducting the review of issued patents, consider revising claims that recite nucleic acids and ensure that those claims do not “read on” naturally occurring DNA. Beware of claims using open-ended comprising language to broaden the scope of protection for short polynucleotides and other gene fragments. Where supported by the specification, incorporate size limits and other clarifying amendments to ensure that the claim does not cover an isolated DNA gene sequence. It’s critical to review claims that are directed to methods for detection and amend those claims to recite assay components and methods for performing steps of detecting, measuring and observing. If the specification supports assays and systems for using genetic information in methods for detection, then draft claims that specifically recite the components of those assays and systems. For example, a claim to a method for detecting a genetic mutation by comparing one sequence to another is likely not patent eligible. However, a claim that recites the steps of amplifying and sequencing a genetic sequence likely is patent eligible. Pending patent applications also should be reviewed for claims directed to patent ineligible subject matter. Those claims should be amended in the same fashion as described above. It is also advisable to consider alternative claim strategies to broaden the overall scope and range of patent protection. For example, pursue claims in a continuing application that are directed to primer and probe sequences that are used in claims covering methods, and limit the size of those sequences to ensure that the claims do not inadvertently read on the naturally occurring gene sequence. Also, review claims to vectors, plasmids, and host cells that comprise the DNA sequences. As artificially created combinations, these types of claims

are patent eligible. Examine whether a composition or method claim recites a gene sequence that contains one or more naturally-occurring mutations that are linked with a certain disease or phenotype. Then consider amending those claims, or pursuing separate claims, to recite cDNA sequences that contain those mutations. When writing new patent applications, draft specifications that clearly describe structural and functional distinctions about the claimed subject matter that might not be regarded as a natural phenomenon or a law or a product of nature. Describe how newly disclosed biomolecules differ from naturally occurring biomolecules. In the specification, set out definitions for terms such as synthetic, percent identity, complementary, conservative substitution and recombinant, which can be used in claims to differentiate the subject matter over natural products. When drafting and amending claims, avoid certain terms, such as “discovered,” “found,” “identified,” “located,” “isolated,” and “purified,” which were specifically called out as potentially problematic by the Court when discussing Myriad’s patent. Instead, claims should reference cDNA sequences and use terms, such as “created,” “recombinant,” “synthetic,” and “derived,” which were adopted by the Court when discussing why a cDNA is patent eligible. In addition to making explicit composition claims, remember to disclose and claim commercial embodiments of those compositions and to claim methods of detection, use and manufacture. Recent decisions from the U.S. Supreme Court and Federal Circuit will have a tremendous effect on protection of biotechnology inventions. They provide guidance for isolated DNA and cDNA sequence claims but create uncertainty with regard to the patent eligibility of claims to other isolated biomolecules that are the same as naturally occurring biomolecules. Law firms and biotechnology businesses should carefully consider this decision when developing strategies for protecting valuable inventions to ensure that patents don’t run afoul of

the judicially-created exceptions to the patent eligible subject matter as defined by the Myriad case. ■

Ajay Singh is an associate at Merchant & Gould with a focus on patent prosecution in the chemical, biotech, and pharmaceutical industries. He has ten years experience as a medicinal chemist. asingh@merchantgould.com

Katherine M. Kowalchyk, Ph.D., is a partner at Merchant & Gould. She counsels clients on developments in the law related to biologic molecules, patentable subject matter as it relates to gene patents and diagnostic methods, and licensing. kkowalchyk@merchantgould.com

Gary M. Myles, Ph.D., is of counsel to Merchant & Gould. His practice includes patent application drafting and prosecution, and related licensing, evaluation, and dispute resolution. gmyles@merchantgould.com

Marianne R. TimmSchreiber is an associate at Merchant & Gould. Her practice includes patent prosecution, opinion work, and client counseling, including intellectual property portfolio management. mtimm-schreiber@merchantgould.com

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Intellectual Property IP in Emerging Markets continued from page 35

Institute of Technology (MIT) and The Conference Board. Based on this work, CREATe has developed a set of tools for IP protection that can be integrated into management systems, inculcated in employee training and shared with business partners in the global supply chain. While different industries have different requirements, and any program needs to be tailored to those specific needs, this work established eight areas where most companies can measure and improve their IP protection practices, along with some basic protocols:

Policies, Procedures and Records. Guidelines are essential for all types of IP within a company. The full leadership team must be aware of and promote these policies, procedures and recordkeeping. There should also be policies in place for managing IP with employees and among third-party supply chain companies. IP Compliance Team. Companies need a cross-divisional team that includes senior management to be responsible for IP protection. Risk Assessment. Systems must be in place to assess the risks of IP theft by company employees and among third parties. Management of Supply Chain and Contractors. Systems for effective due diligence, contracts, communicating IP protection policies and ongoing management of IP are essential. Security and Confidentiality Management. Computers and corporate networks should be designed to protect IP, as well as confidential and proprietary information kept by employees, contractors and third parties. Procedures should also be in place to ensure networks are secure and not exposed to vulnerabilities via

illegal software downloads or other threats.

Training and Capacity Building. Businesses must offer ongoing IP protection and compliance training for employees and third parties. Monitoring and Measurement. Systems should be in place to monitor the implementation of the IP protection program to ensure that it is effectively managed among employees and third parties. Corrective Actions. Managers must develop a framework for implementing corrective actions and improvement processes when a problem with the IP compliance program occurs. CREATe.org is currently working with companies drawn from a range of industries – including information technology (IT), manufacturing/assembly, consumer goods and the electronics industry – to evaluate the maturity of their IP protection systems in these eight key categories. The initial findings for participating companies with headquarters in Asia suggested plenty of room for improvement. In general, the enterprises had limited documentation of IP protection measures, with the exception of patent application procedures. Employee manuals mention protecting IP, but only in a brief and general fashion. Generally speaking, policies and procedures for IP protection, monitoring and correction of violations are not spelled out in a way that would make the practices routine. The companies achieved higher marks in security and confidentiality management, demonstrating their awareness of the need to protect against IP theft. Despite this, most multinational companies continue to rely solely on contractual provisions with suppliers and business partners to protect IP along their supply chains, in lieu of establishing systems to protect and manage IP. That often means that by the time a problem surfaces, the damage to health, profits or reputation is already done.

Governments around the globe are formulating policies, drafting laws and enhancing enforcement efforts to address trade secret theft, cyberattacks and the adulteration of supply chains by counterfeit parts and fake

An estimated 59 percent of downloaded counterfeit software harbors malicious or other unwanted code. ingredients. The governments of the United States and other countries have stringent procurement contract rules that require vendors to demonstrate integrity on IP practices. Major emerging markets, including China, Brazil, Mexico and Russia, are putting in place or enhancing existing laws to curb IP theft and corruption. How these laws will be enforced remains a question. For now, to a great extent, the onus remains on individual companies to protect their IP and work with partners to see that they do the same. ■

Pamela Passman is President and CEO of the Center for Responsible Enterprise and Trade (CREATe.org), a nonprofit working with companies and supply chain partners to protect intellectual property and prevent corruption. Previously, she was Corporate Vice President and Deputy General Counsel, Global Corporate and Regulatory Affairs, Microsoft Corporation. PPassman@create.org

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E-Discovery

E-Discovery Cost Drivers By John D. Martin and Heyward D. Bonyata

or companies on the receiving end of litigation, understanding key cost drivers can help in-house counsel strike the right balance as they set relationships with outside legal counsel and plan overall case strategy. The discovery phase can represent more than fifty percent of total litigation costs. These costs are driven up by the sheer volume of a company’s electronic data, and also by the strategies – or lack thereof – employed by in-house and outside legal counsel to accomplish the preservation, collection, review and production of documents. Below are some of the more significant cost drivers in e-discovery, and suggestions for controlling them. Preservation

Preservation efforts are measured by the concept of proportionality, as well as reasonableness and good faith. Parties cite a current lack of guidance

about preservation in the Federal Rules of Civil Procedure, at the same time they fear the economic and reputational costs associated with becoming the next spoliation sanctions headline. Thus, they tend to over-preserve in an abundance of caution. While that may reduce spoliation risk, over-preservation has its own costs relating to storage of large amounts of information and the resources needed to manage. It brings increased downstream e-discovery costs associated with collection, processing, and review; and potential litigation risks relating to retaining material not subject to legal hold obligations. Shifting from a “preserve everything” to a more targeted preservation strategy can comply with the good faith and reasonableness requirements, while also taking proportionality into account. Courts have recognized the costs and burdens associated with having to maintain

large amounts of data, and when contemplating preservation orders they often refuse to require parties to preserve “all” data. At least one court has specifically suggested that if it is too expensive to preserve all data, a party can search for relevant data, preserve that data, and delete the irrelevant material. Moreover, in the much-cited Zubulake v. UBS Warburg case (2004), the court suggested the use of keyword searching for preservation purposes. A company considering a targeted preservation approach should involve members of legal, IT, and records management and carefully plan and document all aspects of the process to enhance defensibility. The targeted approach should lead to lower preservation and downstream e-discovery costs over time. However, parties should consider discussing the targeted preservation process with opposing counsel to avoid later challenges.

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In addition to tailoring the scope of preservation, releasing a legal hold is just as important as issuing one. Accumulation of unneeded data increases data storage costs and creates litigation risk. Organizations should regularly inventory their legal matters to determine which holds may be released. When a matter has concluded and there is no need to retain related information (e.g., for business or records retention purposes, or where another legal hold applies), companies should instruct their employees and IT departments accordingly. Processing

Data processing typically includes reducing the volume of ESI for review through techniques such as de-duplication, converting ESI to a more suitable format for review and production, and any contextual analytics used to group or categorize the ESI. Some organizations have invested in technology and perform various processing steps in-house, while others outsource these steps to e-discovery vendors. Vendors typically charge on a per-unit basis (e.g., per expanded gigabyte of data received), and they may also have hourly or other fees for services outside of processing. The size of the per-gigabyte processing fee is directly related to the volume of data exported to the vendor. Organizations that take even a broad cut at the data in-house, by using simple keywords for example, can save on the downstream processing costs. It should be noted, however, that even when outsourcing e-discovery steps to a vendor, the organization remains responsible for supervision. Parties cannot place the burden of compliance on an outside vendor and claim no control over the process. Therefore, there are likely to be internal resource and potential outside counsel costs associated with overseeing vendor processes. review

Document review can account for the majority of a party’s e-discovery costs, and it can take many forms. Typical

focus areas for review are relevance to the matter or responsiveness to discovery requests, confidentiality, attorneyclient privilege and work product, and perhaps issue codes that may help counsel further narrow their analyses of the reviewed materials. The traditional case counsel document review model uses outside counsel handling the case to eye each of the collected and processed documents to make these key decision points prior to production. This approach has been seen as low risk, but typically comes with higher costs for service models that charge hourly rates for attorneys completing the review. To decrease these expenses, organizations can look at different ways to staff document reviews using lower cost options (e.g., using contract resources, LPO providers, or a hybrid law firm/ contract attorney model). Moreover, consolidating document review with centralized e-discovery and document review counsel, rather than having it dispersed among several law firms, can bring consistency across matters and create efficiencies, since the wheel is not being reinvented for each project. In addition to staffing, organizations should consider whether technology assisted review (TAR) is appropriate for their matters. Predictive coding, as one form of TAR, offers an alternative and often times an empowering view of a data set. These technologies allow counsel to “train” the software to recognize documents of a particular sort (e.g., relevant, irrelevant, and privileged). Other forms of TAR include text recognition, contextual analytics and autocoding, which like predictive coding can categorize documents and then be used to streamline workflows and potentially reduce the scope of information requiring analysis by human beings. TAR workflows are not a panacea and are not likely to replace completely the need for human input on all matters. However, it is an option that in-house and outside counsel should become familiar with in order to evaluate the potential efficiencies to be gained.

Better tracking

While it’s easy to understand that e-discovery is expensive, not all legal departments are able to accurately track e-discovery spend and allocate it among different phases of discovery and different resources. Organizations may need to make strategic decisions on in-sourcing versus outsourcing, based on the historical financial impact of certain processes, or they may need to present to a court the burden and cost associated with preserving, collecting, and reviewing a large volume of data. Greater insight into the various cost drivers of litigation and e-discovery helps empower organizations to make important strategic decisions regarding their people, technology, and cases. Including legal, IT and finance in the decision-making will best position the organization to leverage existing tracking capabilities and develop integrated solutions. Organizations that implement practices up front to perform detailed tracking of e-discovery spend are also better positioned to advocate changing the scope of e-discovery, to help achieve real and significant cost efficiencies. ■

John D. Martin is a litigation partner at Nelson Mullins Riley & Scarborough LLP and the practice leader for the firm’s Encompass Division, which provides information governance, litigation readiness and discovery services. john.martin@nelsonmullins.com

Heyward D. Bonyata is an attorney at Nelson Mullins Riley & Scarborough LLP and a member of the Defense Research Institute’s Electronic Discovery Steering Committee. heyward.bonyata@nelsonmullins.com

DEC/JAN 20 14 TODAY’S GENER AL COUNSEL

E-Discovery

Get Used to Mobile-Device Discovery 42

By Greg Buckles

he e-discovery industry as it exists today was born out of a need to collect, preserve, process, review and produce electronic information that was created and stored in an increasingly distributed fashion. First, there was the birth of client-server computing that put information out on local PCs. Next, the introduction of laptop computers made this distributed information much more portable. Combine that with the advent of high-volume user-generated collaboration tools, such as email, and the resulting information explosion creates e-discovery challenges that most corporations still grapple with today. Such challenges will only continue to grow as new forms of content gain mainstream traction and the variety of devices on which to create, store, manage, and share that content proliferate. If there is anything to be learned from the last decade of e-discovery, it is that ignoring the challenges will only exacerbate them. One issue organizations cannot ignore is discovery of mobile device content. Our firm’s research shows that a majority of organizations have had to collect it. The reality is that mobile device civil

discovery is now part of the mix, and organizations need to prepare. Ignoring this development will without doubt lead organizations down a familiar path, one littered with sanctions, out-of-control ediscovery costs, and myriad frustrations. There is no mature consensus on how to approach collecting mobile device information. Many organizations – about 40 percent of respondents to our firm’s survey in the spring of 2013 – hire a third-party provider to extract data from devices when faced with mobile discovery. Another 20 percent simply seize the actual devices. Only about 20 percent of respondents actually use a collection kit to obtain a forensic copy of ESI on devices. In large part, this reliance on third party forensic service providers is based on the complexity of the devices combined with the relatively specialized software required to collect the data. Until recently, collecting data from a mobile phone was the exclusive province of a forensic technical specialist. But our firm currently tracks thirteen providers of mobile device collection technology, and only four or five of them are suitable

for corporate use. Even these require training and constant updates to keep up with the rapidly evolving devices. PREPARING FOR MOBILE DISCOVERY

To be ready for mobile discovery, it is critical to know what types of data are on mobile devices, how to acquire and process that data when necessary, and how to export and produce it if required. Keep in mind that a smartphone is not just a hard drive. There are a variety of mobile devices and a diverse set of information that each type of device stores. You may have to perform collections on each device component. Understanding the types of data that reside on mobile devices will allow you to determine the best approaches to collecting and processing that data when needed for litigation, regulatory action, or internal investigations. Creating an effective, defensible legal hold strategy for mobile devices is especially challenging due to their dynamic storage management. Unlike laptops and network shares, mobile devices are designed to manage and expire inactive texts, call logs and other volatile ESI.

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Custodians under legal hold may refrain from deleting files and other static content, but preservation collections or backups may be required if more dynamic content is potentially relevant. Collection presents another set of issues. The proliferation of mobile devices has occurred very quickly. With several major device providers and fast release cycles, there are numerous device types and a plethora of collection mechanisms. The security on most recent generation devices (iPhone 4s+, Android & Blackberry) requires that the device be unlocked for collection, and even when unlocked, most software can only collect the “logical” data from the device operating system instead of a true “physical” bit-by-bit copy of the storage components. Luckily, most user-deleted content is still accessible from the logical collection. Device backups are relatively easy to collect and process, but they may not preserve critical content without changes to the configuration settings. They also pose a hidden risk when custodians backup corporate ESI onto their home computers. Once mobile device content is collected, the next step is to use the information for its intended purpose – review for legal responsiveness or privilege, or to find information related to regulatory or internal investigations. Most collection software creates one or more forensic container files that must be processed to extract tables and file objects, such as photos, emails and more. A very few mainstream e-discovery platforms have built connectors to directly ingest these packages for search and review. The majority of users extract selective ESI from individual mobile devices container files, using either full index or live crawl searches. A crawl type search usually targets specific tables or files and attempts a pattern match to specific names, numbers or single terms. There are three main types of tools for collecting mobile device content: server platform, desktop software, and appliances. Each approach has unique characteristics that an organization should consider before making a decision. As with any technology investment, the first calculations should be current or potential costs, and time that will be required for the process.

In thinking about how to collect mobile device content, do not overlook the human element. As our survey data showed, many organizations simply bring in a third party expert to conduct mobile discovery. There are certain technical skills that will be required and there will be training and education needs. Not every organization will have the wherewithal to employ that expertise internally. PROCESSING, REVIEW AND PRODUCTION

Once all or selective data is extracted from the collection container files, it will need to be manually reviewed or processed for loading into a review platform. The discovery team should evaluate the relevance scope to determine what can be excluded or included by type, identity or other criteria. For smaller collections, processing and review may be more efficient using investigative software directly on the forensic containers. Conversion of larger collections into more traditional load files with attached files may be more efficient. Most review platforms do a poor job of presenting mobile content, compared to how they handle more traditional email and files. Much of the unique mobile content is stored in tables or logs. Like databases, these content types may be better handled by a technical specialist who can craft searches or reports that retain the context of entries. Analytics such as chronology, social networking and time/location mapping can be exceptionally useful in extracting key evidence, but they will require specialized tools and support. As you might imagine, traditional production of mobile content in load file, TIFF images and text may not be acceptable for requesting parties. We strongly recommend early discussions to agree upon a production format, whether extracted-selective forensic containers, native files or hybrid nativeimage productions. DOING IT IN-HOUSE

The ability to conduct mobile device discovery is certainly a requirement for any organization that wants to be litigation ready. Mobile device data

exists in a corporate environment where many other types of data are scattered across diverse systems. Many organizations struggle with information governance initiatives because of the boil-the-ocean nature of such a broad topic. If you are considering conducting some or all of your mobile device discovery in-house, the following are some minimum requirements for the typical corporate discovery lifecycle. • Ability to collect unique mobile device ESI from the dominant three OS platforms. • Ability to acquire logical image of device in a two-to-four-hour period, with minimal custodian impact. • Minimal user training or software certification for device collection/ authentication of evidence. • Capability for search and inspection of device image/container files. In-house investigation and ECA capabilities are critical to relevance decisions and scope management. • Ability to filter by type/date/names. The vast majority of devices are userowned, and personal data should be filtered out of collections as early as possible. • Capacity to extract ESI metadata, content items and chain of custody information. ■

Greg Buckles, co-founder of eDJ Group, is an analyst covering the e-discovery market for software and venture capital companies, as well as Fortune 500 clients. His career has spanned law enforcement, legal services and legal software design. He has participated in the Sedona Conference, EDRM Committees, the Ledes Oversight Committee and other industry organizations, and he has published widely on many aspects of e-discovery, enterprise search and corporate defensibility. greg@edjgroupinc.com

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E-Discovery

Big Data, Big Dreams By Dean Gonsowski

hen it comes to big data, many business leaders assume that if they accumulate large amounts of information about their customers, new insights and increased return on investment is sure to follow. This is understandable. Many organizations today are massive data factories, generating data in large volumes – sometimes consciously, but more often not. Either way, the amount of collected information is growing rapidly, with terabytes upon terabytes of data and metadata (data about the data) filling storage disks to capacity. Collecting that data is just the first step. Only by making sense of all the collected info can businesses realize their big data dream. Big data can be an organization’s best asset or its biggest liability. When data is truly an asset, it’s usually easy to find, categorize, and use. It adds value, serving as business intelligence tool, risk management utility, or both. On the other hand, data that is considered a liability is not easy to uncover, is unwieldy, or holds little value. Think of it as a digital landfill. For many companies, data is piling up with no place to go. This is where the data dream becomes a nightmare. IDC recently reported that three percent of data today is tagged, but just 0.5 percent is analyzed. That’s a lot of landfill.

SIGNS OF A FAILING SYSTEM

How do you know if your data is becoming a liability? First, if employees are unable to find the information they need to perform their jobs and are resorting to outside data search platforms (e.g. Google or Bing), or if they are sending and receiving data via external email hosts like Gmail instead of internal services, that

free flowing data becomes a liability. Even extremely rigorous security protocols can’t prevent an individual within the organization from breaching them if they feel they have no choice. Next, if outside requests for data from interested parties like regulators, partners and those on the opposing side of litigation take a long time to fulfill, or if they can’t be fulfilled at all, that often creates a greater liability. This year, for example, CVS Caremark paid $11 million to settle bad recordkeeping allegations for violations of the Controlled Substances Act. Cases like this often result in similar penalties – a large cost for an oversight that is easily prevented, and that can be catastrophic for smaller or struggling companies.

In 2008 Qualcomm had to pay Broadcom $8.5 million because it was guilty of stonewalling records evidence for a court case. Finally, if your data storage costs, and the costs associated with people looking for data, are rising due to wasted cycles, that’s also a liability. Making data difficult to find lowers the productivity of the employees that rely on it, and results in lowered efficiency and morale. It also creates an incentive for employees to look for work-around methods that can expose confidential information to unauthorized users. How can you ensure that these problems don’t arise, and you are able to turn data from a liability into an asset? One way is through embracing a process called “information governance.” Information governance enables a cross-departmental approach

to increasing the value of information while also managing associated risks and costs. It helps you keep, catalogue or delete useless data in a way that streamlines how your organization interacts with stored information and improves its overall value. As the amount and variety of data increases and it moves with greater velocity, the capabilities required to govern it must increase exponentially. Information governance helps companies do precisely that. The process is driven by a combination of both technology and people, and it begins at the point of data creation. FOUR PILLARS

Implementation details may vary by company, but information governance generally consists of four pillars: the implementation of comprehensive data policies, data mapping and connectivity, indexing and categorization, and application of predictive governance processes.

Data policies: To oversee the information governance process, you must have policies behind it (think of this as the root structure underneath your information governance tree). Regardless of your company’s level of regulation, it is essential to have policies in place that guide decisions about what data to keep, how long to keep it and what data should be discarded. Like a garbage pick-up schedule, these policies must be kept up to date as the business and regulations change and new compliance measures affect the business even before any new technology is implemented.

Data mapping and connectivity: It sounds simplistic, but many companies struggle with this point. Before being able to do anything with the data, you must first understand where it accumulates and how to find it. A high-level data mapping exercise is critical. As you continue to access your data over an extended period of time, you must be connected to it to ensure accurate monitoring as new data is gathered.

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Indexing and categorization: Now that you know where the data is, you can determine what it is and where it should go. You’ll be deciding what is a keeper, what you’re not quite sure of and what data you can delete. This is how that landfill can be brought down in size.

Predictive governance: This is a combination of machine learning techniques, workflow, and technology that over time automates and streamlines the indexing and categorization process, making more categories or improving the ones you already have.

BENEFITS

After implementing an information governance process, organizations will quickly see savings in their bottom line. Infrastructure and labor costs in particular tend to drop when the processes are integrated with internal enterprise resource planning systems, to create a single unified system of governance. When integrated in this way, information governance improves a

variety of business processes and facilitates understanding of customer insights and general business intelligence. Information governance also decreases legal risk. The importance of the ability to quickly produce data for a regulatory body or for a court case can’t be overstated. Consider, for example, that in 2008 Qualcomm had to pay Broadcom $8.5 million – because it was guilty of stonewalling records evidence for a court case. In its ruling, the court emphasized that “attorneys and clients must work together to ensure that both understand how and where electronic documents, records and emails are maintained and to determine how best to locate, review and produce responsive documents.” This case shows just how important information governance is, not only for business insights and cost savings, but for reputation as well. Transforming your data into an asset is important, but your company’s reputation is the ultimate asset. By maintaining coherent and flexible information governance systems,

companies are able to tackle information glut before it overtakes their systems, eliminating data that is a potential liability and turning the remaining information into a real asset. Only then can the promises of big data be realized. ■

Dean Gonsowski A former litigator, general counsel and associate general counsel, Dean Gonsowski has more than 15 years’ experience in litigation, e-discovery and information governance consulting at companies including Symantec, Clearwell Systems, Daticon, Navigant Consulting, Inc. and Fios, Inc. At Recommind, he works with clients to help them leverage the company’s predictive coding platform, with a particular emphasis on information governance.

DEC/JAN 2014 TODAY’S GENER AL COUNSEL

Governance

Tax Treatment of Fines and Penalties The Elephant in the Room By Abraham N.M. Shashy Jr. and Nathan E. Clukey

he federal government has become more aggressive in extracting substantial fines and penalties from corporations and businesses in cases of civil or criminal violations of the law. Last year the Department of Justice secured $4.9 billion in settlements and judgments in civil cases alleging fraud against the government under one statute alone, the False Claims Act. According to DOJ, that constituted a record recovery for a single year under the FCA, eclipsing the previous record by more than $1.7 billion. Numerous examples of other jaw-dropping fines and penalties abound in the recent press, such as reports that JPMorgan Chase

has agreed to settle multiple, ongoing actions by DOJ for a record $13 billion. Invariably the coverage of such cases focuses on the salacious details of the purported wrongdoing, as well as the perceived total dollar figures at stake. It often omits a major piece of the story – the tax treatment of the fines and penalties. Why is tax treatment of any great moment? Because the dollars involved can be huge – potentially 35 percent of the total settlement or judgment – come tax time. The deductibility of fines and penalties also affects taxpayers in virtually every industry. Indeed, in recent years businesses engaged in healthcare, finance, accounting, defense,

manufacturing, trucking, technology, communications, natural resources and energy, banking, and insurance have been subject to significant fines and penalties for actual or alleged statutory and regulatory violations. They have made payments to the government totaling over $56 billion. With so much at stake both in the public and private sectors, and given the obligation of corporate management to minimize taxes in any way that is lawful, the issue of the deductibility of fines, penalties and settlement payments is an important one. Consequently, it is imperative that when faced with serious allegations of corporate impropriety, corporate counsel weigh not only the risks and hazards of litigation, but also determine early on whether any portion of a possible settlement might be deductible. Internal Revenue Code section 162(a) permits businesses to deduct certain everyday expenses. To be deductible, an expense must be “ordinary and necessary.” Examples include salaries, wages, advertising, insurance premiums and rental costs. Payments made in settlement of legal claims also may constitute ordinary and necessary expenses. Other provisions of the Code, however, bar the deduction of certain disfavored expenses. Section 162(f) provides that “no deduction shall be allowed for any fine or similar penalty paid to the government for the violation of any law.” In enacting 162(f), Congress made a policy decision that those who had paid fines or penalties in connection with alleged wrongdoing should not be allowed to receive what in essence constitutes a taxpayer funded discount. ELUSIVE LABELS

So is a company simply out of luck? As with many issues in the tax arena, it depends. If the payment otherwise qualifies as an ordinary and necessary business expense, one must then analyze both the payment and the applicable statute at issue to determine whether it is truly a “fine” or a “similar penalty” for purposes of section 162(f). In so doing, courts often ignore the label attached to any given payment, meaning even if the parties have called a particular settlement payment a fine or penalty, that alone doesn’t make it non-deductible. The applicable treasury regulations indicate, among other things, that a fine or similar

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Governance

penalty includes an amount paid “pursuant to conviction or a plea of guilty or nolo contendere for a crime,” and “in settlement of the taxpayer’s actual or potential liability for a fine or penalty (civil or criminal).” Legal fees and related expenses paid in defense of a prosecution or a civil action arising from an alleged violation of law are not covered by section 162(f), and therefore ordinarily are deductible. Furthermore, and very importantly, this provision does not bar the deduction of amounts that are not punitive and are paid as compensatory damages. Since the enactment of section 162(f), an extensive body of case law has emerged interpreting the provision and identifying multiple relevant factors. The analyses have been fact-intensive, and have depended upon the statute underlying the liability and the intent of the parties when agreement was reached. Because of the nature of the inquiry, courts have reached conflicting conclusions in similar cases. For instance, in Fresenius Medical Care v. United States, (2013), a False Claims Act case, the taxpayer argued that the plain language of the settlement agreement indicated that the payment was non-punitive, and therefore was compensatory and deductible. In response, the government argued that the disputed language related only to punishment for purposes of double jeopardy. The district court said it was unclear what the language was intended to signify, given the wording and placement in the agreement, and therefore it was not a reliable indicator of the parties’ mutual intent. The court permitted the case to go to trial and, based on further evidence about the settlement negotiations and how the settlement amount was derived, a jury found in favor of the taxpayer that section 162(f) did not apply to the major portion of the settlement payment. By contrast, in Talley Industries v. Commissioner (1999), another FCA case, the Tax Court reached a different result. The settlement agreement in Talley likewise did not characterize the settlement payment for tax purposes. The taxpayer argued that the entire payment was intended to compensate the government for its losses, but this intention was not memorialized in the settlement documents. Additionally, in internal communications a government lawyer characterized a portion of the settlement as a penalty.

This was never articulated in the actual settlement agreement and the taxpayer apparently was unaware of it. Nonetheless, because Talley did not clarify the characterization of the payment in the settlement agreement and could not otherwise prove mutual intent for the payment to constitute compensation, the court found that Talley could not deduct the contested amount. These cases illustrate the attention given by courts to the parties’ intentions in 162(f) cases. They also highlight the importance the factual record when the settlement agreement is not specific about the purpose of the payment. Messy litigation over the intent of the parties could be avoided if the parties agree about the tax characterization of a settlement payment. But that in and of itself can be a negotiation which neither party wants to undertake. ADDITIONAL FACTORS

A study of numerous past cases identifies multiple, additional factors that may be considered in determining the deductibility of settlement payment depending on the context. These factors include: • The severity of the conduct giving rise to the investigation or charges, and the facts surrounding that conduct. • The language of the statutory provision asserted by the government, its legislative history, and interpretations of that law. • The purpose and scope of the particular fine or penalty as punitive or compensatory, and where both purposes may be present, a determination of which purpose the particular payment serves. • Whether there is a criminal investigation and, if so, its relationship to the payment in question. • Whether there is a plea or admission of liability. • The factual record of negotiations, and the language in the settlement agreement. • The potential imposition of double or treble damages. • Correlation between damages and injury to the government, including how the government distributes or applies settlement proceeds. • The nature and intent of any restitution. • Whether the taxpayer received a quid pro quo for the payment and, if so,

what prospective exclusion from government programs/contracts apply. • Government policies regarding settlements with respect to the alleged misconduct. • The presence of double jeopardy provisions. Corporate taxpayers will benefit from negotiating settlements with the above-mentioned factors in mind. They can be used to build a strong factual record. The presence or absence of any of the particular factors may also influence the decision to raise or address the tax treatment of the settlement. The burden of proof rests on the taxpayer to establish that it is entitled to a full or partial deduction for amounts paid in settlement with the government. That makes it essential for corporate management to lay the necessary foundation to support deductibility if it is not addressed in settlement documents. ■

Abraham N.M. Shashy Jr. is the practice group leader of King & Spalding’s Tax Practice Group, which includes the firm’s income tax and employee benefits and executive compensation practices. From 1990 to 1993, he served as Chief Counsel for the Internal Revenue Service. He has served as an adjunct professor of tax at New York University School of Law and at Southern Methodist University School of Law. hshashy@kslaw.com

Nathan E Clukey is a partner in the tax practice at King & Spalding, where he focuses on tax controversy and tax litigation. Prior to joining the firm, he served as a trial lawyer in the DOJ tax division. He is also an adjunct professor in the master of laws in taxation program at Georgetown University Law Center. nclukey@kslaw.com

dec/jan 2014 today’s Gener al counsel

Governance

Enhanced Consumer Law Enforcement Class Actions Often Follow By Alan D. Wingfield and Paige S. Fitzgerald

onsumer protection laws have never posed more risks and burdens for business. Newly empowered federal and state regulators – including the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), the U.S. Department of Justice and state attorneys general – are shaking up industries with historic enforcement, investigatory and regulatory actions. Litigation often follows. Consumer class actions are a routine consequence of compliance failures, and shareholder lawsuits alleging oversight neglect by corporate boards are also becoming part of the high price to be paid by companies upon resolving governmental enforcement actions. Meanwhile, what is accepted as being an adequate corporate compliance program is evolving. Specifically, the CFPB has made it clear that an acceptable compliance program should be audited, heavily-documented and based on a top-down approach. Compliance with consumer protection laws has never been more important, and the bar for an adequate compliance program has been raised substantially. Business of all types and sizes that are subject to consumer protection laws, including any company that deals directly or indirectly with consumers, need to respond by implementing compliance programs that are crafted to meet these increased risks and responsibilities. As a threshold matter, consumerfacing companies should view their regulatory compliance obligations from the perspective of the increased enforcement risks posed by the following bodies and agencies: • The CFPB. Established in 2011 by the Dodd-Frank Wall Street Reform

and Consumer Protection Act, the Consumer Financial Protection Bureau is the newest federal regulatory body responsible for regulating consumer protection issues affecting a broadlydefined area of financial products and services. The CFPB is taking the lead in implementing the major changes in the consumer protection laws enacted by Dodd-Frank, with wave after wave of implementing regulations. Moreover, the CFPB has broad interpretative, supervisory and enforcement powers, and it has been vigorous in use of these powers with a series of novel initiatives, such as ones targeted at reforming aspects of the auto lending, debt buying and consumer reporting industries. Failure to keep apprised of the CFPB’s activity, both in formal rulemaking and in its other varied initiatives, can leave a company continually playing catch-up and exposed to unexpected risks. • The FTC. Until the establishment of the CFPB, the Federal Trade Commission was the primary federal agency responsible for overseeing federal consumer protection laws. While many of the FTC’s consumer protection powers have been usurped by the CFPB, the FTC continues to focus on consumer protection laws with a particular emphasis on the Fair Credit Reporting Act. In addition, the FTC remains the primary enforcement agency for many companies that fall outside of the CFPB’s jurisdiction under the CFPB’s “larger participant rule,” which generally provides for a minimum threshold of $10 million in annual revenue in order for a business to be subject to the CFPB’s primary supervisory authority in areas such as consumer installment loans, money transmitting and debt collection.

• U.S. Department of Justice. The DOJ’s Consumer Protection branch was established in 1971 to enforce and defend the consumer protection programs of several federal agencies, including the FTC. Most recently, the CFPB has partnered with DOJ. Notably, two of the top automobile lenders in the country have received demands for information from DOJ along with the CFPB, in the area of automobile dealers compliance with the Equal Credit Opportunity Act. • State Attorneys General. In their role as enforcers of state consumer protection laws, state attorneys general are charged with protecting the economic interests and concerns of citizens of their states. In addition to routine investigations of companies by a single attorney general, increasingly they become involved collectively in multistate investigations, whereby companies confront a joint inquiry from groups of up to forty or more attorneys general. State attorneys general have been given concurrent authority to enforce many provisions of Dodd-Frank, a regulatory risk that is still in its infancy. • Class Actions by Consumers. In many instances, a consumer-facing company with failures in its compliance programs, especially in instances where non-compliance has been highlighted by federal or state regulators, sets itself up for class action litigation by consumers. Surveys indicate that costs to defend class action litigation have jumped more than 50 percent since 2011. • Shareholder Lawsuits. A public company is at danger of facing a shareholder lawsuit whenever the company’s compliance program has failed in a way that triggers major regulatory action.

TODAYâ&#x20AC;&#x2122;S GENER AL COUNSEL DEC/JAN 2014

Governance

DEC/JAN 2014 TODAY’S GENER AL COUNSEL

Governance

As an example, a shareholder derivative action was brought against the board of directors of American Express, based on claims that the board did not sufficiently oversee certain credit card practices that ultimately resulted in a $112.5 million settlement with various federal regulators, including the CFPB.

designate a chief compliance officer who has ongoing reporting responsibilities to the board or a board committee. With such an approach, the board and management are not only involved in ongoing compliance issues, they also are able to focus on the most important compliance decisions at a high level. Having

the company’s day-to-day compliance program and related business personnel. The end result of an effective compliance audit is regular reporting to the board of directors or its designated committees, accompanied by findings regarding whether policies and standards adopted by the board have been implemented

The CFPB has made it clear that an acceptable compliance program should be audited, heavily-documented and based on a top-down approach.

In light of this set of regulatory and enforcements risks, what are the elements of a state-of-the-art compliance program? The CFPB is at the forefront of shaping the emerging standard for a consumer compliance program, which the CFPB has labeled as a “compliance management system” or “CMS.” This term captures a new standard of care, and any compliance program that addresses the letter but not the spirit of a regulation, will likely be deemed insufficient. Similarly, having correct policies and procedures in place without proper oversight, monitoring, training and implementation also will be inadequate. The CFPB is reviewing efforts by supervised entities to develop and maintain effective compliance management systems. The CFPB has stated that if a formal CMS is not in place, a company simply “has no ability to address risks presented by its lines of business.” In the CFPB’s view, an effective compliance management system has four essential elements: • Board and Management Oversight. The board of directors and company management are ultimately responsible for developing and administering a company’s compliance programs, so as to ensure compliance with federal consumer financial laws and regulations and to address and prevent associated risks of harm to consumers. The board should develop and communicate clear expectations about compliance and ensure that clear policy statements are adopted. It should also

effective board and management oversight is particularly important for companies subject to supervisory authority of the CFPB and those that are publicly held. • Policies and Training. While no one single regulation requires that all of a company’s consumer compliance policies be written down, when all of the various documentary requirements are considered, there might as well be such a rule. Not only must a company develop and maintain comprehensive written procedures, but it is also essential that these policies be effectively communicated to employees. Initial and periodic training for all employees is also crucial. • Response to Consumer Complaints. Successfully resolving legitimate consumer disputes is a major concern of regulators during any review of a company’s compliance program. Resolving complaints internally and promptly can prevent consumers from escalating their complaints to regulators or resorting to litigation. Procedures to determine the “root cause” of complaints, and then to implement necessary changes to procedures, are viewed by regulators as a fundamental part of an overall compliance management system. • Compliance Audits. Companies should regularly review their compliance with relevant laws as well as their adherence to internal policies and procedures. Any audit function should be performed by individuals who are independent of

by the company. A fully-functioning audit process is viewed by regulators as evidence that adopted procedures are not just window dressing. Given the increasing risks that businesses are facing, the old adage that an ounce of prevention is worth a pound of cure requires an update: A pound of prevention is worth a ton of cure. Consumer-facing businesses are welladvised to step up their compliance game to face these new challenges. ■

Alan Wingfi eld is a partner with Troutman Sanders LLP. His practice is focused on compliance issues and litigation under federal and state consumer protection laws. alan.wingfield@troutmansanders.com

Paige Fitzgerald is Of Counsel with Troutman Sanders LLP. She advises clients regarding compliance with state and federal laws, particularly in the area of consumer protection. She also represents clients who are subject to regulation and investigation by state attorneys general. Paige.fitzgerald@troutmansanders.com

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Human Resources

A Case For Legal Process Outsourcing LPOs And The Evolving Business Of Law By Kimberly Williams

n August, 2006, the Association of the Bar of the City of New York issued a formal Ethics Opinion providing guidelines on the use of offshore legal support services. That was not the beginning of what came to be known as legal process outsourcing – one year earlier DuPont had retained Office Tiger for LPO work conducted in the Philippines – but it marked the opening of the flood gates for U.S. attorneys who were inclined to consider using LPOs. The opinion also helped to focus

the conversation regarding transparency and LPOs, setting requirements for rigorous supervision, client consent, and billing clarity. Harkening back to the economic environment in the mid-2000s, it is not hard to understand why this was such a compelling proposition. The heightened level of cost-consciousness in the legal market was then just hitting the industry. LPOs were viewed as solving one problem only, albeit a critical one: getting low-complexity work done as

cheaply as possible. Initially this work was limited primarily to basic contract management and discovery-related document review. The past seven years, however, have shown that accessing relatively inexpensive lawyers in Manila and Mumbai—or, for that matter, Charlottesville and Chicago—is a small part of the story. Lower pricing got LPOS to the table, but the reason they were able to convince in-house counsel and law firms to adopt an outsourcing model

today’s geneR al counsel dec/jan 2014

Human Resources

were the rigorous and transparent processes they applied. According to Google’s eDiscovery Counsel, Pam Davis, any LPO she works with “must be able to adapt to our internal processes so that we have as much consistency and transparency as possible between the external work and our internal teams.” For historic, cultural, and commercial reasons, law firms have been reluctant to embrace the process-driven, technologically savvy approach necessary to achieve consistency and transparency. Until very recently, they have been held largely exempt from these requirements. But failing to adopt these new tools has left many firms unable to respond to the changing market in a way that both mitigates risk and moderates costs. A look at recent legal and business press reveals numerous examples of this failure: a major law firm caught up in litigation over an egregious case of alleged overbilling; another major firm accused by its client of failing to supervise lawyers and technology vendors in privilege review for discovery; a Fortune 500 law department, and their outside counsel, sanctioned for failing to have verifiable discovery processes; a class action plaintiffs’ firm accused of improperly marking-up temporary lawyer bill rates. Each of these highly publicized incidents is, arguably, rooted in a systemic lack of transparency. In short, a business infrastructure would have mitigated, or completely avoided, each of the crises listed above. In order to provide the consistency and transparency that their clients demand, LPOs have made significant investments in people and technology. These investments include ISO certifications, Six Sigma training and project management technology. LPOs have also been among the strongest industry advocates for the informed use of predictive coding, or technology assisted review (TAR) tools, which reduce overall project costs by enabling fewer documents to be reviewed by human beings in the document discovery projects. As noted by Johanny Olmedo, of the legal placement firm Update Legal,

the LPO market they are in requires that they continually “build credibility, and the reporting granularity our technology tools provide help us to do that.” To achieve consistent application of these tools, Olmedo certifies all of Update’s project managers in leading TAR products. LPOs also tend toward greater process and pricing transparency as a means of establishing credibility. Andy Paredes, a senior executive with Epiq Systems, notes that LPOs often have a unique ability to seamlessly bridge “the technology piece and the legal piece, which puts them at a big advantage.” On this front, LPOs rely on tools ranging from out-of-the-box reporting and tracking software like DiscoveryMetrics, to customized tools they build internally, and tailored combinations of the two. Manny Guerrero, co-founder of CaseWerx Development, which owns DiscoveryMetrics, observes that LPOs were the earliest and strongest adopters of project management technology. “LPOs understand that their clients want to see clear metrics on quality and productivity. Transparency is key,”says Guerrero. Leading review software providers, such as Relativity and Ringtail, have begun to include reporting and tracking functions in their products. Many LPOs, however, continue to leverage stand-alone tools, so that the integrity of their metrics is not bound to using any one review software. Technology is not the only differentiator between LPOs and law firms or traditional temporary attorney staffing companies. As Raj Bagga of the LPO Axiom Global puts it, “the LPO technology advantage, is really a project management advantage.” LPOs have been among the first to recognize that project management comprises a distinct skillset not typically addressed by legal training alone. Axiom has made significant investments in training experienced lawyers on staff to function as effective project managers. Other LPOs have also embraced this model, or have partnered experienced project managers with legal experts to lead their delivery teams. The reality is

that without MBAs, Six Sigma black belts, data security experts and programmers working alongside lawyers, LPOs would be hard-pressed to realize the full value of improved technology. This business and technology sophistication has allowed the top LPOs to move up the food chain, to go beyond low complexity work, and to create deep client relationships. It is their non-legal expertise that sets LPOs apart. Law firms will need to follow the same path, not by morphing into LPOs, but by being smart about using technology – and partnering with LPOs as well as other legal industry service providers, to better manage that service which is law firm sovereign territory and on which no LPO can or should hope to encroach: expert legal guidance. In-house clients, not to mention the bench, have a growing expectation that work product, and any attendant bills, be underpinned by documentation demonstrating the effectiveness of the processes used to reach those outcomes and generate those invoices. Looking back at the 2006 ABNYC Ethics Opinion on the use of non-U.S. admitted attorneys by offshore LPOs, it is ironic that the issue then was whether it was possible for LPOs to meet established law firm standards of quality. Seven years later, LPOs are themselves setting standards of quality and defensibility that law firms must now meet. ■

Kimberly Williams is the founder and CEO of RedShift Legal, Inc. She is a Six Sigma Master Black Belt who pioneered the application of Six Sigma processes to litigation review projects, both domestically and offshore (India). She has consulted with in-house and law firm clients on the application of these processes in e-discovery, regulatory investigations, contract reviews and other legal projects. kimberly@redshiftlegal.com

5 Things You May Not Know About Hart-Scott-Rodino, But Probably Should BY MICHELE S. HARRINGTON

Deal lawyers generally know that the Hart-Scott-Rodino Antitrust Improvements Act of 1976 could apply to mergers and asset acquisitions. But many are surprised to learn that it can also apply to other types of transactions, such as certain intellectual property licensing agreements, or even acquisitions of company shares by a company officer or director.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO DEC/JAN 2014

The HSR Act applies to the acquisition of assets, voting securities of corporations, or controlling interests in partnerships or limited liability companies, if the applicable HSR threshold tests are satisfied and no exemption applies. Whether a transaction could have any anticompetitive effects is wholly irrelevant to a determination of whether the HSR Act would apply. If it does apply, the acquiring and acquired persons must each submit notification reports to the Federal Trade Commission and the Department of Justice and observe a waiting period before they may close on the reportable transaction. The waiting period does not start until the required forms have been submitted. There are two primary threshold tests which are adjusted annually by the FTC. Currently, the size-of-transaction test would be satisfied if the transaction has an HSR value in excess of $70.9 million. If the transaction has an HSR value between $70.9 million and $283.6 million (current thresholds), the size-of-person test applies and the transaction would not be reportable if it is not satisfied. If the transaction has an HSR value in excess of $283.6 million, the size-of-person test is not applicable and the transaction is reportable unless exempt. The HSR Act has complex and unique aggregation and valuation rules. As a result, it can apply in unexpected and surprising ways. What deal lawyers do not know about application of the HSR Act can hurt their clients, especially because violations can subject parties to civil penalties of up to $16,000 per each day of the violation, beginning on the day that the reportable transaction closed and ending on the day the HSR waiting period for such transaction actually expired. First time offenders are usually not penalized if their failure was inadvertent and they self-report the violation upon discovery, submit corrective HSR filings and implement a plan not to miss filing obligations in the future. By way of illustration, here are five things you may not but probably should know about application of the HSR Act:

It can apply to acquisitions that appear to be valued at significantly less than $70.9 million. The HSR rules include complex aggregation and valuation requirements. Thus, a buyer who acquires one share of voting securities for one dollar could have a filing obligation depending on, among other things, the HSR value of any voting shares already held in the company by the buyer and

by any entity under common HSR control with the buyer. Similarly, an acquisition of assets for significantly less than $70.9 million could be subject to HSR filing requirements depending on, among other things, the amount and type of liabilities that the buyer would assume.

It can apply to acquisitions by individuals, including acquisitions of company voting shares by a company’s officers or directors through stock-based compensation awards. For example, any officer or director who will hold, following the vesting of restricted stock units or an option exercise, in excess of $70.9 million worth of company voting shares – aggregating the company voting shares already held directly or indirectly by such person with the company voting shares he or she will acquire – could have an HSR filing obligation.

The HSR Act can apply to the acquisition of interests in a foreign entity by a U.S. or foreign buyer. If HSR threshold tests are satisfied, the acquisition of interests in a foreign entity would be HSR reportable unless exempt.

It can apply to distributions of portfolio company voting shares by a venture fund to its partners. This would be the case if, among other things, the fund partner would directly or indirectly hold in excess of $70.9 million worth of company voting shares, aggregating any company voting shares already held directly or indirectly by such person with what would be acquired through the distribution.

The HSR Act can sometimes apply even when no voting security is technically acquired. For example, a person instrumental in causing a company to redeem certain of its securities could have an HSR filing obligation if, among other things, such person would hold a larger percentage of the company’s voting shares following the redemption than he or she held before. Thus a filing could be required even if the person did not technically acquire even one more share of the company’s stock. Given the complexity of the HSR rules and exemptions, it is prudent to consult with counsel in advance of any acquisition, through any means, of voting securities, assets or interests in non-corporate entities. Do not assume that because the acquisition does not have any competitive effects, it would not be reportable under the HSR Act. ■

Michele Harrington a partner in the Antitrust, Competition and Economic Regulation Practice Group of Hogan Lovells LLP, where her practice is devoted to U.S. antitrust issues. She specializes in HartScott-Rodino analysis and filings and U.S. antitrust investigations. michele.harrington@ hoganlovells.com

Liability For DBE Violations Under The False Claims Act By Robert C. Pearman Jr. 56

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO DEC/JAN 2014

re you a contractor considering bidding on state and local public work projects, such as bridge reconstruction or passenger rail lines that are partially funded by the Federal government? If so you are probably aware of possible contract requirements for utilization of Disadvantaged Business Enterprises (DBE) firms in your proposal and the actual performance of the work. What you may not realize is that failure to monitor compliance with such DBE requirements, much less deliberate violations of those requirements, may cause your company to face civil penalties and even criminal sanctions under the federal False Claims Act. Federal DBE programs provide opportunities to businesses owned by minorities and women, as well as socially and economically disadvantaged individuals, to participate in federally funded projects. A number of states have similar programs. Over the years there have been instances of fraud by those trying to take advantage of such programs and the billions of government dollars that flow from them. One common abuse features non-DBE firms that partner with firms that meet DBE eligibility criteria on paper, but perform little or no actual work—or, in the words of DBE regulations, perform no “commercially useful function.” Public prosecutors and agencies have increasingly embraced the use of the False Claims Act as a weapon to attack these types of abuses. It can be considered a False Claim violation if you engage DBE subcontractors, but some of your employees aid in providing inaccurate information to help a favored firm obtain DBE certification status; pass through a payment claim for a first tier subcontractor which wrongly includes certification of usage of DBE second tier subcontractors; or certify work as having been performed by a DBE when in reality it performed little real work. The federal False Claims Act defines the word “claim” broadly, as any request or demand, whether under a contract or otherwise, for payment by or reimbursement from federal money that is presented to an

officer, employee, or agent of the United States, or is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the government’s behalf or to advance a government program or interest.

FALSE CLAIMS False claims may arise when a contractor: • Knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval. • Knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim. • Conspires to commit a violation of the conduct prohibited by the Act. • Knowingly makes, uses, or causes to be made or used, a material false record or statement to conceal, avoid or decrease an obligation (e.g., under a law, regulation or by contract) to pay or transmit money to the Government (also known as a “reverse false claim”). The False Claims Act is comprehensive, extending beyond demands for money that fraudulently overstate an amount otherwise due. It extends “to all fraudulent attempts to cause the Government to pay out sums of money.” For example, if you certify adherence to a statute or regulation but in fact were not in compliance, and your certification was a prerequisite to government payment or influenced government’s decision to pay, that may form a basis for a claim under the FCA. Under the so-called implied certification theory, “[a] contractor who knowingly fails to perform a material requirement of its contract . . . yet seeks or receives payment without disclosing the nonperformance, has presented a false claim to the government and may be liable therefor.” Remember, the knowledge the violator must possess to trigger liability is not the everyday definition of knowledge, but the statutory definition that can mean “deliberate continued on page 61

The HBR Internal Legal Spend Survey POST-RECESSION INCREASE CONTINUES B Y L AU R E N M . C H U N G

The dust appears to be settling among law departments. Total legal spending is up three percent, according to the recently released 2013 HBR Law Department Survey. Over a number of years law departments have been making changes in the way they operate both internally and with outside counsel, and the HBR Survey data reflects the impact of these changes. The economic crisis served, in part, as a wake-up call for many law departments battling rising costs of legal services, triggering a focus on efficiency and effectiveness. SPENDING AND STAFFING TRENDS Over the past five survey years, the change in total legal spending has fluctuated from a one percent decrease to a five percent increase. Results from the 2011 and 2010 survey years were dramatic, with a decrease in total legal

economic recovery, rising outside counsel rates, and significant growth in legal spending and staffing outside the United States. After a few years of rate freezes or rate reductions for outside counsel, fee levels were on the rise again. The dramatic spike in total legal spending in the

S U RV E Y Y E A R S Change in Total Legal Spending Worldwide (Median Values)

2013

2012

2011

2010

2009

Reports 2011 and 2012 data

Reports 2010 and 2011 data

Reports 2009 and 2010 data

Reports 2008 and 2009 data

Reports 2007 and 2008 data

+ 3%

+ 5%

-1%

-2%

+ 4% Source: HBR Law Department Survey

spending worldwide for the first time in the ten year history of the HBR Law Department Survey. Decreases in outside counsel spending levels contributed to these results. But the 2012 survey found an increase in both internal and external spending, attributable to a number of factors, including the

2012 Survey was the beginning of a readjustment period. The more modest growth in total legal spending reported in this yearâ&#x20AC;&#x2122;s results reflects the fact that in recent years law departments have aggressively pursued cost reduction. Contributing to the 2013 Surveyâ&#x20AC;&#x2122;s three

tHe Maga ZIne For tHe gener al counsel, ceo & cFo dec/jan 2014

percent overall increase in total legal spending worldwide is a five percent increase in inside legal spending (compensation and operating expenses) and a two percent increase in outside counsel spending. The higher rate of increase in inside legal spending is in line with a trend among law departments to expand internal capabilities and keep more work in-house, as cost-containment measures. In-house staffs continue to grow, although at a slightly slower pace than in 2012. Worldwide, between 2011 and 2012, 52 percent of participants reported an increase in their total number of lawyers, down from the 57 percent of participants that had an increase between 2010 and 2011. In the 2013 survey, for total legal staff including lawyers and non-lawyers, 57 percent of the companies reported an increase. This yearâ&#x20AC;&#x2122;s results indicate that the total increase in the number of lawyers is primarily impacted by the growth in general commercial lawyers supporting business units, as opposed to litigation or intellectual property specialists.

T h e s u rV e y found a Three per c e n T oV e r a l l increase in T o Ta l i n - h o u s e l e g a l s p e n d. CONTROLLING OUTSIDE COUNSEL SPEND Another key area for cost-containment continues to be outside counsel fees, which makes up 55 percent of total legal department spending, according to the 2013 Survey. Among the survey participants, 95 percent said they are taking measures to reduce spending on outside counsel. According to survey results, law departments are adopting a number of methods to reduce outside counsel spending, per the following chart:

meThods used To conTrol ouTside counsel spending Alternative Fee Arrangements

82%

Keeping more work in-house

80%

Stricter internal guidelines for outside counsel spending

73%

More consistent adoption of matter planning and budgeting

62%

Pushing law firms to use legal process outsourcing Increasing the use of regional and boutique firms

54% 48%

Use of analytics and data to select and improve negotiations with law firms

43%

Use of competitive bidding/ RFP

43%

Tougher enforcement of outside counsel billing guidelines Source: HBR Law Department Survey

37%

dec/jan 2014 today’s gener al counsel

Among these methods, the two that yielded the most savings for law departments were alternative fee arrangements and keeping more work in-house. Among the top five items on the list, four are related to how law departments manage their relationship with outside counsel. ALTERNATIVE FEE ARRANGEMENTS Over the past many years, there has been much discussion of alternative fee arrangements and “the end of the billable hour.” The 2013 HBR

More than 50 percent of companies that used AFAs reported some reduction in worldwide outside counsel spending in 2012. Among this group, the approximate percentage reduction in outside counsel spend was 6 percent. LOOKING AHEAD The 2013 HBR Law Department Survey results point to the following trends: For the year ahead, 39 percent of participants expect to increase the number of their lawyers

T h e h i g h e r r aT e o f i n c r e a s e i n inside legal spending is in line wiTh a T r e n d a m o n g l aw d e pa r T m e n T s T o e x pa n d i n T e r n a l c a pa b i l i T i e s a n d keep more work in-house as c o s T- c o n Ta i n m e n T m e a s u r e s . 60

Survey data indicate that law departments are indeed focusing on this strategy. More than 80 percent of companies used alternative fee arrangements with outside counsel. Among departments that used alternative fee arrangements, the impact on total outside counsel spending was limited. The median company indicated that 10 percent of worldwide outside counsel spend was subject to AFAs.

in the United States, while 47 percent expect to increase lawyers outside the United States. These companies expect to increase their total in-house lawyer staff, in the United States and abroad, by 10 percent. More than 60 percent of companies reported that their law department is actively seeking to increase the use of AFAs. n

lauren M. chung is a senior director in the Law Department Consulting Practice of HBR Consulting and editor of the HBR Law Department Survey. She works with law departments in strategic planning, structure and organization assessments, diagnostic reviews, cost management, benchmarking and outside counsel management. chung@hbrconsulting. com

m o s T f r e q u e n T ly u s e d f e e a r r a n g e m e n T s

42% 20%

% of Companies Reporting

Fixed-fee per matter

Value or incentive billing

16% Flat fee by matter stage Source: HBR Law Department Survey

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO DEC/JAN 2014

THE GOVERNMENT IS NOT REQUIRED TO PROVE A SPECIFIC INTENT TO DEFRAUD. Liability For DBE Violations continued from page 57

ignorance” or “reckless disregard of the truth or falsity of the information.” The government is not required to prove a specific intent to defraud. Falsehoods in a number of documents submitted in connection with federally funded projects can lead to liability under the False Claims Act. These include monthly reports showing dollars paid to DBEs, and self-described “verification” of such payments; forms listing the amount paid to DBE firms on the project stating under penalty of perjury that the statements are true; a DBE monthly progress report listing the amount paid for work performed by a DBE in that time period, including certification by a company official that “the above is a true and correct statement.”

CONSEQUENCES The consequences for violating the FCA may be severe, including a civil penalty of no less than $5,500 and not more than $11,000 per claim, plus three times the amount of damages which the government sustains. Additionally, violators are liable for the costs of a civil action brought to recover any such penalty or damages. For any contractor dependent on public work, federal or state, the risk of debarment and suspension as a result of false claims is an equally potent sanction. Government agencies can in essence engage in de facto debarment to the extent that they can take into account past performance and False Claims Act violations. Violations of the False Claims Act may have to be disclosed to contracting agencies, and the failure to do so itself may be a cause for debarment or suspension. Given that the penalty can be assessed on a per-claim basis, the penalties can become substantial on a project with numerous

invoices over time. The literal language of the FCA indicates that the imposition of the penalties is mandatory. Some courts, however, have ruled this penalty should be disallowed if violative of the Eighth Amendment, which prohibits the imposition of “excessive fines,” or fines that are grossly disproportional to the gravity of the offense. In the recent United States ex rel. Bunk v. Birkard Globistics GMBH, it was stipulated that the defendants filed 9,136 invoices under the contract at issue. In theory, that would call for FCA penalties amounting to between $50,248,000 and $100,496,000 for 9,136 false claims. But the Virginia federal district court awarded no civil penalties because even the minimum penalty would be unconstitutionally excessive.

AVOIDING DBE LIABILITY The following measures will facilitate compliance with DBE program requirements and help avoid FCA liability. • Establish a position for an Ethics and Compliance Officer. • Create contractor compliance manuals for Disadvantaged Business Enterprises. • Provide a code of ethics and business conduct packet. • Incorporate mandatory DBE and ethics compliance courses for your employees. • Establish a DBE advisory group for feedback and support. • Have personnel trained in DBE compliance issues observe and question performance of DBE subcontractors on the job site. Additionally, if you do find yourself under investigation by the government (private persons may also bring actions for violations under so-called qui tam proceedings) for FCA violations, cooperate and be as transparent as possible. That may result, at the least, in a reduction of the trebling of damages to a doubling. ■

Robert C. Pearman, Jr. is a partner at Gonzalez Saggio & Harlan LLP. He concentrates his practice in the areas of transactional, real estate, public works, mortgage finance, redevelopment and litigation. robert_pearman@ gshllp.com

W he n A n t i t ru s t Dis pu t e s Lo om , B u s i n e s s e s n e e d to M a k e s avv y

arB itration dec is ions By Carl L. Blumenstein and Farschad Farzan

rbitration agreements are now commonplace in contracts, and so are global antitrust lawsuits, especially multi-party lawsuits alleging pricefixing cartels. This raises a number of issues that businesses need to consider carefully. Here, we flag key issues in drafting arbitration clauses with potential antitrust claims in mind, and review the strategic decisions to be made when an antitrust claim is lodged. Courts favor arbitration, especially between sophisticated, commercial parties. Generally, courts broadly interpret agreements to arbitrate and will resolve any doubts in favor of arbitration. With that in mind, the possibility of antitrust claims raises special concerns that businesses should focus on when drafting arbitration agreements. An arbitration clause must contain language that is broad enough to encompass antitrust claims. If the parties agree to arbitrate “claims for breach of this agreement,” for example, there is a risk that one party may claim that there was no agreement to arbitrate disputes based on antitrust laws. Parties will want to agree that any dispute arising from their relationship should be resolved. Examples of arbitration clauses that courts have interpreted as broad enough to include antitrust claims are: “all disputes arising from or relating in any way to this Agreement or your Account;” “any claim or dispute (whether in contract, tort or otherwise) in any way relating to the Agreements or such similar agreements for prior years involving the same parties or relating to the relationships of such parties.” Because antitrust claims may encompass a broader time period than the time the contract

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO dec/jan 2014

was in effect, businesses should draft arbitration agreements to encompass transactions and interactions that occurred both before the agreement was signed and after contract termination. Parties to a contract have the right to choose which law will govern a dispute. Choosing the law of New York or Singapore may be of little moment for routine commercial purposes, but that choice could have dramatic consequences if one party asserts an antitrust claim. Under the Sherman Act (as well as numerous state statutes), there are draconian consequences for a company found liable for anti-competitive conduct. If a price-fixing conspiracy is proven, the defendant is subject to a jury damages award (which the court is then required to treble). Further, a liable defendant is jointly and severally liable for damages caused by co-conspirators. For these reasons,

businesses should specify that any dispute be governed by non-U.S. law. For additional protection to cover potential conspiracy claims, parties should consider one more issue: The arbitration clause should not only cover the contracting parties, but also any conspiracy or multi-party claims. This provides an argument to bring all claims, including those for joint and several liability, into the arbitration. Until a dispute arises, arbitration clauses are merely words in a contract with no practical import. But, if an arbitration clause potentially covers an antitrust claim, parties must carefully evaluate a number of issues that can substantially affect the lawsuit’s outcome. PLaintiFF’s PersPective An antitrust plaintiff will typically try to avoid arbitration by filing claims in court where the prospect of jury trial likely yields larger results. If the plaintiff has an existing arbitration agreement with one of its target defendants, the plaintiff needs to consider various options in framing its claims. First, counsel must carefully review all potentially applicable arbitration agreements and evaluate the type of claims that are arbitrable and the time period covered. It may be possible to minimize or avoid arbitration by adding claims (injunctive relief, for example), or to craft a complaint to focus on certain geographic markets, legal claims, time periods or conduct. If there are other proper defendants – such as other cartel members or subsidiary entities – a complaint against multiple parties minimizes the likelihood that arbitration will be ordered. More creatively, a complaint can be filed only against non-arbitrating defendants, thus deferring claims against the party with an arbitration clause. deFendant’s PersPective From the defendants’ perspective, a company sued for antitrust violations by a party with which it may have a contractual relationship needs to review all pertinent contracts to determine whether the claim is arbitrable. Prompt action is required. Even if there is a contractual provision, the right to arbitrate can be waived if a party begins to actively litigate and delays before invoking its right. While there is no hard-and-fast rule, courts will typically find that a party that has initiated motion practice, discovery or other litigation procedures has thereby relinquished its arbitration rights.

dec/jan 2014 today’s gener al counsel

Carl L. Blumenstein is a partner in the San Francisco office of Nossaman LLP. He specializes in complex business litigation, primarily insurance coverage, antitrust, and employment law disputes. cblumenstein@ nossaman.com

Farschad Farzan is an associate in the San Francisco office of Nossaman LLP. His practice focuses on complex class action, antitrust, intellectual property, and commercial litigation matters. ffarzan@nossaman. com

Only some claims are arbitrable. Whether a plaintiff’s antitrust claims are subject to arbitration depends on careful analysis of those claims with respect to the arbitration terms. If the clause only applies to some legal claims, or some time periods, or some geographic areas, a court may order arbitration of only some of the claims. For example, in the widely-followed TFT-LCD antitrust cases, Dell Inc. had entered into a vendor agreement that took effect in 2004. Years later, it sued for antitrust violations, alleging that collusive activity began before 2004. Because the agreement stated that it was effective as of May 1, 2004 (and the arbitration clause was not made retroactive), the court concluded that claims arising from pre-May 1, 2004 purchases were not subject to arbitration. Thus, the court divided Dell’s claims, directing that some should proceed in court and some should be sent to arbitration. Cases involving multiple defendants also present a different “two-front battle” scenario. This can happen where some defendants have arbitration agreements with the plaintiff and some do not. Generally, a party who did not sign an arbitration agreement cannot be ordered to arbitrate. But there can be exceptions. In one recent case, subsidiary companies had signed an arbitration clause, but that was sufficient to require arbitration of antitrust claims alleged against the parent corporation. More typically, if some defendants invoke the arbitration remedy and others do not, part of the case will be sent to arbitration and part will proceed in court. These parallel proceedings raise a host of procedural issues, as the various parties angle for procedural advantages.

defendant should carefully weigh the overlapping and sometimes conflicting concerns. Will all the claims be sent to arbitration? If so, arbitration has distinct advantages: likely a better result for the defendant on liability and/ or damages, and certainly a quicker and less costly procedure. If not, the defendant needs to consider the likelihood that the court will stay the portion of the case that remains in litigation, and the possibility that it may wind up fighting in both forums. If there are other parties that will not be sent to arbitration, will the defendant do better in a joint court proceeding or alone in arbitration? If the liability and damages case against other parties is stronger, there may be advantages of going alone. In an arbitration against one defendant, all attention is focused on that party. If some claims are to be arbitrated, will the court stay litigation until after arbitration, and what are the consequences? In a multi-party case where only some defendants are ordered to arbitration, the non-arbitrating defendants potentially receive the benefit of collateral estoppel if the plaintiff loses in arbitration. If the plaintiff prevails, the remaining defendants typically receive a “credit” or “offset” for the judgment against the arbitrating plaintiff. Consider that the plaintiff may be able to use the arbitration as a “trial run,” testing its case, so that it is better positioned to try the case against remaining defendants. On the other hand, if the court declines to stay litigation, the plaintiff obtains several procedural advantages and the value of the arbitration right is diminished. The plaintiff gets broad discovery (not usual in arbitration) and the separate arbitration may give the plaintiff a “second bite at the apple” to recover damages it did not obtain in trial. These are not simple issues. When a party gets pulled into an antitrust dispute, a preexisting arbitration agreement with an adverse party offers several potential advantages. However, businesses need to carefully consider all angles before proceeding. n

an antitrust plaintiff will typically try to avoid arbitration by filing its claims in court, where the prospect of jury trial likely yields better results.

arBitrate or not? Let’s assume a corporation has been sued in a multi-defendant antitrust cartel case and that the defendant has a contract containing an arbitration clause. The defendant has the contractual right to demand arbitration. But, it is not required to do so. The defendant has a choice: Move to compel arbitration, or waive its arbitration right. The

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