Today's General Counsel, Fall 2018 by Today's General Counsel

FALL 2018 VOLUME 1 5 / NUMBER 3 TODAYSGENER ALCOUNSEL.COM

THE 1ST GLOBAL REGULATION

Litigation Holds and the GDPR GDPR Makes the EU's Regulatory Reach Global

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FALL 20 18 TODAY’S GENER AL COUNSEL

Editor’s Desk

Once upon a time the EU was a trusted trading partner of the United States. That was pre-Brexit and the present administration’s tariff regime, but even if all the problems those two phenomena encompass are worked out, there are more fundamental ones looming. The agreement called the Privacy Shield that has been governing the flow of commercial data between the U.S. and the EU is threatened because of conflicts in how the parties view data privacy, and as two articles in this issue of Today’s General Counsel explain, the EU’s recently enacted General Data Protection Regulation is already affecting risk management and litigation in the United States. Guillaume Bordier discusses the GDPR’s global reach and the significant administrative penalties it can trigger. Aloke Chakravarty and Zaven Sargsian discuss the complications it introduces into the already complicated topic of litigation holds. They note that the GDPR defines personal data more broadly than most U.S. laws. If a hold relates to any such data, then a company must determine whether it has a lawful basis to preserve, given the demands of our courts. The EU does a better job of recognizing the catastrophic threat posed by climate change than the United States, but they don’t do much better at addressing it. In her article, Patricia Dunlap points out that the litigious nature of our culture might yet be our salvation, but portends serious risk for many corporations. Hundreds of climate change lawsuits are working their way through the courts, using arguments grounded in many different legal theories. Even if they don’t succeed the cumulative effect of the revelations they force through discovery can be an important instrument of both change and corporate risk. Two articles address the issue of sexual harassment investigations in the post- #MeToo era. Nancy Pritikin and Reanne

Swafford-Harris discuss the problems posed by overlapping claims and whether the lead investigator should be able to assert a privilege claim. Addy R. Schmitt and Katherine E. Pappas concentrate on defining an investigation and devising a communications strategy that recognizes the elevated risk that publicizing such claims may pose. They advise being wary of impulsive policies that can undermine business objectives and create additional legal liability.

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

FALL 2018 TODAYâ&#x20AC;&#x2122;S GENER AL COUNSEL

Contents 1

Editorâ&#x20AC;&#x2122;s Desk

10 | Executive Summaries

COLUMNS

48 | Workplace Issues Unconscious Bias in the Workplace It informs our everyday decisions. By Yvette Gatling 50 | The Antitrust Litigator Anti-Competitive Effect The impact on an individual competitor is irrelevant. By Jeffery Cross 4

64 | Back Page Front Burner Trend Sharply Up For Securities Litigation Double the average for the past 20 years. By Robert R. Long and Elizabeth Gingold Clark

FEATURES

21 | Everything You Own in a Box to the Left New technologies are driving a shift toward risk assessment. By Samantha Green 42 | What You Need to Get Ahead Using E-Discovery Analytics Project organization is an overlooked benefit of analytics. By Pete Feinberg 52 | You Should Worry About Embedded Leases They are hiding inside of contracts. By Mathew Keshav Lewis 56 | Fresh Perspective on Expert Selection Make them as diverse as the jury. By Miriam L. Fisher, Ann Gittleman and Marisa Abernethy 60 | Hundreds of Climate Suits Being Litigated Following the tobacco script. By Tricia Dunlap and Sarah Edwards

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FALL 2018 TODAY’S GENER AL COUNSEL

Contents

L ABOR & EMPLOYMENT

16 | Investigations Post #MeToo Privilege clashes with demands for transparency. By Nancy Pritikin and Reanne Swafford-Harris 18 | Respectful Investigation of Sexual Misconduct Impulsive acts could increase liability. By Addy R. Schmitt and Katherine E. Pappas

E-DISCOVERY

20 | Best Practices When the Corporate Client is Deposed More document review required for preparation. By Matthew Keenan 26 | Litigation Holds and the GDPR Courts want you to preserve it, EU says you can’t. By Aloke Chakravarty and Zaven Sargsian

INTELLEC TUAL PROPERT Y

CYBERSECURIT Y

30 | Trade Secret Tips for Strategic Buyers Misappropriation claims loom if the deal collapses. By Christopher J. Cox, Kyle C. Krpata and Edric C. Itchon

38 | GDPR Makes the EU’s Regulatory Reach Global Data privacy means something much different in Europe. By Guillaume Bordier

32 | Design Patents Overlooked in Many IP Portfolios Look at Apple v. Samsung. By Peter Lando and Robert Lichter

36 | Protecting Your Company’s Domain Name How to evict a cybersquatter. By Sharon Urias and Todd Langford

40 | Software Patents Still Valuable After Alice A CAFC decision that should hearten tech companies. By Aseet Patel COMPLIANCE

46 | Protecting Investments in IP and People Agreement not to compete for employees risks antitrust action. By Roxann E. Henry and Eric Akira Tate

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EDITOR-IN-CHIEF Robert Nienhouse MANAGING EDITOR David Rubenstein

EXECUTIVE EDITOR Bruce Rubenstein

SENIOR EDITOR Barbara Camm

CHIEF OPERATING OFFICER Amy L. Ceisel VICE PRESIDENT, EVENTS TODAY’S GENERAL COUNSEL INSTITUTE Jennifer Coniglio ASSOCIATE PUBLISHER Tracey Goldvarg

SVP, MANAGING EDITOR OF EVENTS TODAY’S GENERAL COUNSEL INSTITUTE Neil Signore

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DIRECTOR, CONFERENCES & BUSINESS DEVELOPMENT Jennifer McGovern-Alonzo DATABASE MANAGER Matt Tortora

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CONTRIBUTING EDITORS AND WRITERS Marisa Abernethy Guillaume Bordier Aloke Chakravarty Elizabeth Gingold Clark Christopher J. Cox Jeffery Cross Tricia Dunlap Sarah Edwards Pete Feinberg Miriam L. Fisher Yvette Gatling Ann Gittleman Samantha Green Roxann E. Henry Edric C. Itchon

Matthew Keenan Kyle C. Krpata Peter Lando Todd Langford Mathew Keshav Lewis Robert R. Long and Robert Lichter Katherine E. Pappas Aseet Patel Nancy Pritikin Zaven Sargsian Addy R. Schmitt Reanne Swafford-Harris Eric Akira Tate Sharon Urias

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EDITORIAL ADVISORY BOARD Dennis Block GREENBERG TRAURIG, LLP

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FTI CONSULTING

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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, witho ut 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 2326-5000) is published quarterly by Nienhouse Media, Inc., 20 N. Wacker Drive, 40th floor, Chicago, Illinois 60606 Image source: iStockphoto | Printed by Quad Graphics | Copyright © 2018 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, 20 N. Wacker Drive, 40th floor, Chicago, Illinois 60606 Periodical postage paid at Oak Brook, Illinois, and additional mailing offices.

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FALL 2018 TODAY’S GENER AL COUNSEL

Executive Summaries E-DISCOVERY

L ABOR & EMPLOYMENT PAGE 16

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Investigations Post #MeToo

Respectful Investigation of Sexual Misconduct

Best Practices When the Corporate Client is Deposed

By Addy R. Schmitt and Katherine E. Pappas Miller & Chevalier Chartered

By Matthew Keenan Shook, Hardy & Bacon

A company’s immediate reaction to sexual harassment allegations should include defining an investigation and communications strategy that takes into account the elevated risk profile of such claims. But a company must also exercise restraint and refrain from taking actions that could actually increase liability. Businesses have been handling harassment complaints for years. The risk profile, however, has changed. Whether the investigation is managed by in-house or outside counsel, a strategy must be developed that navigates the sensitivities of serious allegations while responsibly maintaining confidentiality. Communications must be carefully crafted according to a strategy that aligns with the overall investigation plan and is implemented from the earliest interactions with the accuser. The first responder must be trained to communicate without creating liability. Companies may consider putting the accused wrongdoer on leave or separating the accused from the accuser during the investigation. If it becomes clear that someone should be fired, consider a number of factors, including the basic question of whether the employee is going to resign or be terminated. In sum, when a company learns of allegations of sexual harassment or assault by an employee, it must quickly move to investigate while also navigating the pitfalls in providing information both internally and publicly, and avoiding impulsive policies that may undermine the business objectives and create additional legal liability.

E-discovery has increased both the demand and importance of corporate witness testimony. After culling, application of keywords, technology assistance and responsiveness review, a general rule of thumb would be for the witness preparation team to expect to analyze between 15,000 and 20,000 produced emails and attachments per custodian. Those at the receiving end of this new wave of discovery — institutional clients and their employees — can benefit from a consistent, cohesive approach to getting prepared and offering testimony. The preparation needs to be visual and needs to be tethered to something already understood by the witness. The author uses the acronym PLEASE: Prepare. Listen. Exercise control. Accept the obvious. Stay in your area. Emotion is O.K. As no one can predict with certainty what documents will be used with the witness, provide a simple framework from which to evaluate documents. Depositions always include “gotcha” questions, so make sure witnesses are prepared. The number one goal is to preserve the credibility of the witness and give him or her the tools to know what types of questions can form an agreement. Jurors demand authentic and, hopefully, captivating storytellers they can identify with. As plaintiffs become more adept at crafting their deposition exams to create jury-friendly nuggets in advancing their narratives, defense counsel must up their game. Employing a simple but successful paradigm that carves out a clear roadmap is the best way to get witnesses prepared for the task of testifying in a case.

By Nancy Pritikin and Reanne Swafford-Harris Sheppard Mullin

Employers, employment attorneys and investigators must consider several factors when they outline a process for a sexual harassment investigation. With respect to scope, determine if the harassment claims will be separately investigated even if there is some overlap with other kinds of claims. Key factors are whether the alleged harasser is in the same work group as the complainant and, if more than one individual was allegedly subjected to harassment, whether they are all in the same work group. In light of increasing demands for transparency, consideration should be given to whether or not counsel will lead the investigation to assert a claim of privilege. The person assigned to investigate workplace harassment claims should be experienced, known for independence and integrity, and present well as a witness. If no one within the organization fits the bill, consider the use of an outside investigator who has experience testifying. Consider whether to have the investigator simply provide a report or make recommendations about action that should be taken. If recommendations are made and not followed, even for sound reasons, the internal disagreement can be a point of contention in litigation. Every situation and employer is different, and there isn’t a “one size fits all” solution that’s appropriate. There is no guarantee that merely following a procedure will result in a flawless investigation. However, having a process that requires consideration of key factors will be useful in developing a useful and clear record.

TODAY’S GENER AL COUNSEL FALL 2018

Executive Summaries INTELLEC TUAL PROPERT Y PAGE 26

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Litigation Holds and the GDPR

Trade Secret Tips for Strategic Buyers

Design Patents Overlooked in Many IP Portfolios

By Christopher J. Cox, Kyle C. Krpata and Edric C. Itchon Weil, Gotshal & Manges

By Peter Lando and Robert Lichter Lando & Anastasi, LLP

More than other form of intellectual property, a buyer’s exposure to the seller’s trade secrets can cause liability and restrict the buyers’ business moving forward. The buyer’s actions in the context of a strategic acquisition can also impact the value of the trade secrets acquired. A buyer should have a broad view of what constitutes a trade secret. Any information that derives independent economic value from remaining secret and is subject to reasonable efforts to maintain secrecy could qualify for protection. For example, negative information, such as initial designs that failed, can be incredibly valuable to a competitor by saving time and resources in an R&D budget. It is important to have a signed nondisclosure agreement in place at the beginning of the due diligence process. Accessing trade secret information carries the risk of misappropriation claims should the relationship become contentious. Be mindful of the stage of the transaction when sharing trade secrets. Often, the seller phases its disclosures so that highly sensitive information is disclosed later. Conversely, the buyer will push for broader disclosures earlier in the process. Be mindful of special considerations where the seller’s material trade secrets include proprietary software. The buyer will want to learn from due diligence where the source code is stored, who has access and whether any audits have been performed. Trade secret litigation could arise following a failed transaction, especially between competitors. The buyer should begin the deal process mindful of this possibility.

Many consumer products companies have long taken advantage of the protection afforded through design patents. Companies in other areas — heavy industry, electronics and, most notably, medical devices — have been slower to recognize these valuable assets. As a general guideline, utility patents protect the function of a device regardless of its appearance, while design patents protect the appearance of the device regardless of its function. Under design patent law, a design is generally viewed as ornamental if it is not purely functional. A jury earlier this year determined that Samsung owed Apple more than $500 million for infringing three design patents, but only about $5 million for infringing two utility patents. Although unusual, this case illustrates that design patents can be effective when used to cover ornamental features of technical products. It also demonstrates the importance of planning and preparing the design application with varied scope and targeted coverage. As the design or appearance of any portion of a device evolves, companies should consider whether to file one or more design patent applications directed to each new iteration of the device. While a redesigned device may be functionally equivalent to the first device in the product line, the redesign may have an inventive ornamental appearance that can be protected by a newly filed design patent application. In this way, companies can extend patent protection of certain aspects or features of a product line beyond the conventional utility patent term.

By Aloke Chakravarty and Zaven Sargsian Snell & Wilmer

The European Union’s General Data Protection Regulation (GDPR) complicates compliance with litigation holds. United States courts expect corporate litigants to properly preserve records and have issued severe sanctions in cases where they aren’t preserved. In the European Union, civil discovery is more limited, and litigation holds are less common. Although every United States company that possesses information about European Union citizens is not automatically subject to GDPR, a company that is targeting European Union citizens or actively tracking their behavior is likely to fall within its ambit. The GDPR defines “personal data” more broadly than most United States laws. If the hold relates to any such data, then a company must determine whether it has a lawful basis to preserve. Under the GDPR, preservation is lawful if it is necessary for the legitimate interests pursued by the data controller or by a third party, except where such interests are overridden by the fundamental rights of the data subject. Some preventive steps are prudent in order to not run afoul of the GDPR. First, establish a high quality GDPR compliance program. Potential legal issues are likely to be exposed in the process. Filling those gaps will show diligence. Try to obtain a prior consent. It signals the transparency that the GDPR encourages. Tailoring a hold narrowly to only that which is necessary and monitoring judiciously will limit risk. This will require training for personnel in both litigation and compliance functions, and can be aided by automated processes.

FALL 2018 TODAY’S GENER AL COUNSEL

Executive Summaries INTELLEC TUAL PROPERT Y

CYBERSECURIT Y

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Protecting Your Company’s Domain Name

GDPR Makes the EU’s Regulatory Reach Global

Software Patents Still Valuable After Alice

By Sharon Urias and Todd Langford Greenspoon Marder

By Guillaume Bordier Capstan Avocats

By Aseet Patel Banner & Witcoff, Ltd.

Nearly all successful businesses maintain an online presence, often incorporating the company’s trademark into the domain name. It is highly advisable to monitor the use of your trademark on the Internet. Other entities may seek to use similar domains to pull unwitting customers from your website (cybersquatting). If you believe that someone is engaging in cybersquatting, the first step is to send a cease and desist letter. If you do not know who owns the domain or the domain owner does not respond, your recourse is arbitration or litigation. An arbitration panel will consider the similarity of the domain name to a trademark or service mark in which the complainant has rights; the rights or legitimate interests of the domain name holder in the domain name; and whether the domain name was registered and is being used in bad faith. Once the panel reaches a decision, the service provider will distribute the ruling. If either party is unhappy with the arbitration’s outcome, it can file a lawsuit against the other party, which may be filed at the location of the registrar or the domain name holder. If you prevail in arbitration, you should be prepared to defend against a reverse domain name hijacking lawsuit. Should you lose in arbitration, you may choose to file your own court action in the appropriate federal district, alleging claims, among others, for violation of the Anticybersquatting Consumer Protection Act (ACPA) and other provisions of the Lanham Act.

The European General Data Protection Regulation (GDPR) expands the scope of the EU’s data privacy regulatory framework to cover companies that process or control the personal data of employees or other individuals residing in the EU, regardless of the company’s location. Depending on local laws, companies may have to inform the relevant data protection authority and data subjects of a data breach, as stipulated by the GDPR. Whether in Europe, the United States or most other jurisdictions, any breach of the GDPR’s provisions concerning the requirement to give notice of a data breach could trigger an administrative penalty of up to four percent of the company’s annual global revenues or €20 million, whichever is greater. In case of a personal data breach, a company — especially a multinational company doing business in Europe or conducting business involving individuals based in Europe — should take the following steps: Assess the risk; contain and mitigate damage; and notify the data protection authority where required. Data protection policies should be implemented so that anyone involved in the process is aware of the rules for avoiding data breach and the measures to be taken in the event of a breach. A slew of recent high-profile incidents have resulted in lawmakers in the United States taking a much closer look at the relevant laws, and the data protection mechanisms that companies have in place today. Whether this will lead to comprehensive national data privacy legislation remains to be seen.

The 2014 United States Supreme Court decision in Alice Corp. Prop. Ltd. v. CLS Bank Int’l imposed a heightened standard for patent eligibility — a two-part test that has led many software patents to be held invalid. In the past several months, however, the pendulum has noticeably swung, with several favorable CAFC holdings, some sharp dissents, and patent bar associations’ call for legislative reform. The future promises more clarity for United States patents involving software innovations, which should improve depressed patent valuations, increase patent licensing activity and raise shareholder value. In 2013, Finjan, Inc. sued Blue Coat Systems, Inc. in the United States District Court for the Northern District of California for infringement of four of its United States patents, including one (the ‘844 patent) directed to identifying and protecting against malware. After losing at the district court, Blue Coat appealed to the CAFC, arguing that the patent was invalid under the two-part Alice test. However, Finjan successfully defended its eligibility in January 2018. The CAFC Finjan decision provides useful guidance for identifying patent eligibility for software-related inventions, including cybersecurity software. Moreover, the USPTO bolstered the effectiveness of Finjan by releasing a memorandum dated April 2, 2018, that reiterated this guidance to its United States patent examiners and patent practitioners. Cybersecurity companies — and technology companies, generally — should feel encouraged by the Finjan decision.

TODAY’S GENER AL COUNSEL FALL 2018

Executive Summaries COMPLIANCE

FEATURES

PAGE 46

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Protecting Investments in IP and People

Everything You Own in a Box to the Left

What You Need to Get Ahead Using E-Discovery Analytics

By Roxann E. Henry and Eric Akira Tate Morrison & Foerster

By Samantha Green Epiq

By Pete Feinberg Consilio

Even if you have no products that compete with another company, that company can be your competitor for employees. And competition triggers antitrust laws. The Antitrust Division took numerous executives and Human Resource (HR) staff by surprise with its intense campaign against no-poach (i.e., employee non-solicitation) agreements. Agreements not to compete can subject a company to criminal fines of up to $100 million or double the loss or gain from the agreement. Individuals involved in such agreements face a statutory maximum of 10 years in prison. The vast majority of states still enforce non-competition agreements that are reasonable in scope. Restrictive covenants with individual employees that are less restrictive than non-competition agreements still appear to be universally enforceable. Employers are still free to require employees to sign confidentiality and non-disclosure agreements. Even the Antitrust Division has recognized that there are situations where employee non-solicitation provisions are permissible. Don’t assume that courts will enforce restrictive covenants simply because an employer and employee agree to them, or that you can avoid antitrust problems by explaining what you are doing to the affected employees. Beware entering into non-solicitation and similar agreements (particularly about setting wage rates) with other companies. It may violate antitrust law. Companies may be vigorously competing for employees, but agreements to set benefit levels could still be criminal. Look at your compliance program; include HR personnel in the antitrust training; and consider whether written materials need updating.

Building legal risk metrics throughout the ordinary course of business provides added value for corporations of all types. It gives leadership better insight into the workplace culture so that harmful behavioral patterns can be exposed, bad conduct can be stopped before it becomes a serious legal problem, and companies can forecast legal spend well before litigation. When weighing whether they should leave well enough alone or seek out underlying problems, these common questions arise: Does this type of analysis expose us to litigation that never would have happened — costing time, money, and manpower? What if patterns of sexual harassment are uncovered, but no one has actually brought a claim? By identifying heightened risk, you may have an obligation to do something about it before it becomes a real legal liability. Nevertheless, new technologies and approaches to data are driving a shift toward risk assessment. As technology advances and risk assessments become more mainstream and affordable, it will likely become standard practice to rely on risk metrics derived from electronically stored information (ESI). Due to the abundance of unstructured data swirling around within company databases, e-discovery methods are becoming more sophisticated and changing how companies find key information. The risk used to be, what penalties would we face if we deleted or couldn’t locate data we actually needed? Now the risk becomes, what underlying issues can we uncover from our own data? As more and more companies embrace this shift, the courts will, too.

The challenge in e-discovery has been to develop technology that accurately collects, processes, searches and presents information. That goal has been largely accomplished. But in just the last few years, the information landscape has profoundly changed in both volume and diversity of data. Reliance on specialists to tame this data surge introduces risk and cost, but next generation e-discovery platforms make the power of analytics readily available to users who are not experts. New terminology has surfaced as the techniques and tools of analytics have evolved. Predictive coding, technologyassisted review, continuous active learning and machine learning are just a few. One of the overlooked benefits of analytics is logical organization of a project. A helpful early approach is to limit data sets to only unique content. Three common forms of analysis are hash values, e-mail threading and textual near-duplicate identification. Courts now embrace analytics and expect that technology will be applied to eliminate irrelevant or unnecessary data, and to make the review process more efficient and consistent. E-discovery software is evolving beyond technical capabilities and is now being designed around users — how they work, how matters are structured, how technology can simplify processes. It lets practitioners focus on the law instead of the technology. The e-discovery process now incorporates analytics at every stage to drive efficiency, cost savings and quality of results. This will move e-discovery out of the exclusive domain of experts and enable the concepts to become mainstream.

FALL 2018 TODAY’S GENER AL COUNSEL

Executive Summaries FEATURES

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You Should Be Worried About Embedded Leases

Fresh Perspective on Expert Selection

Hundreds of Climate Suits Being Litigated

By Mathew Keshav Lewis Axiom Law

By Miriam L. Fisher Latham & Watkins LLP Ann Gittleman and Marisa Abernethy Duff & Phelps

By Tricia Dunlap and Sarah Edwards Dunlap Law PLC

The new lease accounting standards (FASB ASC 842 and IFRS 16) introduce rules as to how companies identify and measure the value of leases, and how they report them on corporate balance sheets. Nearly all off-balance sheet accounting for lessees will be eliminated. Companies will need to account for the present value of all lease liabilities on the balance sheet as debt, while also being able to account for a right-of-use asset. The first step is to gather all contracts that now include a lease — anything that provides use of a physical asset and is valued at more than $5,000 per year. Don’t underestimate how much time it will take to find and review what could be millions of contracts. A common and hidden pitfall: tracking down leases hidden inside larger contracts — otherwise known as embedded leases. The new accounting standards expand the definition of a lease. The general rule is that an arrangement contains a lease if there is an explicitly or implicitly identified asset in the contract, and the customer controls its use. One effective way to uncover embedded lease language is to utilize artificial intelligence and technology-enabled processes to comb through contracts. The new accounting standards are as much about legal as they are about accounting. Contracts intelligence is critical to compliance, as firms look to meet the new accounting standards and financial reporting deadlines, thus strengthening legal’s position as a strategic player within the organization.

An expert can make or break a company’s case and is often a critical component in effective advocacy. It is critical to ensure that the expert is not only the best credentialed available but also able to effectively communicate and connect with the ultimate intended audience, which could include secondary influencers, such as the judge’s clerk and other agency or courtroom personnel. In a diverse world, the ultimate decision makers in dispute resolution and litigation represent a wide variety of backgrounds. Generally speaking, a decision maker may simply connect better with someone who shares certain of his or her own characteristics (e.g., age, gender, ethnicity, geography, history, and so forth), assuming the expert is otherwise credible, qualified and persuasive. Thus, a younger, female or other minority expert enhances the diversity of the entire legal team, possibly making the presentation of the company’s story more relatable to a decision-making audience that is likely to have a similar makeup. In any given case, it is impossible to predict precisely how an expert may resonate with the decision makers. However, legal professionals can enhance their chances of success by considering a variety of expert voices to communicate their opinions in legal disputes, rather than defaulting to the same old expert search pool. Value is added when the expert enhances the legal team’s relatability with the key decision makers. Taking a fresh look at how you select experts may be the difference between winning or losing your next case.

Hundreds of climate change lawsuits are working their way through United States courts, using arguments grounded in several different legal theories: tort, fiduciary duty, securities laws and constitutional law. As a threshold matter, climate change tort claims must overcome displacement by the Clean Air Act, which preempts most tort claims. In the earliest rounds of climate change litigation, courts denied multiple claims because the Clean Air Act displaced them. To avoid this fate, plaintiffs’ attorneys argue state law claims such as nuisance, trespass, negligence and product liability, and demand redress that is outside the scope of the Clean Air Act. Litigation founded on fiduciary duty claims aimed at publicly traded companies has forced them to defend their actions and disclosures to shareholders. Much like tobacco litigants, climate change plaintiffs’ attorneys adapt their tactics and shift strategies as they win or lose on different arguments. From 1986 to 2004, courts grappled with only 24 climate change related lawsuits. Since 2005, the number of claims filed each year has clicked steadily upward, from a low of 13 claims in 2006 to a recent high of 117 in 2016. So far, plaintiffs have filed 45 cases this year. Even if the defendants prevail, they will face costs to defend these claims or countersue, potential exposure of sensitive internal documents that may directly contradict public statements, impact to stock prices and credit ratings, and damage to their goodwill and social license to operate.

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FALL 2018 TODAY’S GENER AL COUNSEL

Labor & Employment

Investigations Post #MeToo By Nancy Pritikin and Reanne Swafford-Harris that a harassment case will end up in full-blown litigation, investigations and investigators will come under greater scrutiny, which will require procedures and documentation relating to the investigation to be comprehensive and understandable to a jury. Cognizant of this trajectory, employers, employment attorneys and investigators should model an investigation using the following seven-step formula:

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orkplace investigations are under scrutiny. Many employees, shareholders and the public have the unreasonable expectation that every time an employee complains of harassment, the alleged harasser will be swiftly terminated. At the same time, employers are obligated to investigate harassment complaints fairly and with due regard for the rights and privacy of those making the report, as well as the accused. Legislative action is requiring greater transparency regarding the outcome of investigations and the resolution of harassment complaints. For example, the California Legislature has bills pending that would make it unlawful to require arbitration of harassment claims, ostensibly in an effort to force employers to publicize their investigation procedures and outcomes. A pending bill would limit the ability of parties to require non-disclosure of facts relating to sexual harassment claims as part of a settlement. Under the new federal tax code, settlements of sexual harassment claims are no longer tax deductible as a business expense.

This article addresses best practices in approaching internal investigations in the current environment and, in particular, on sexual harassment investigations. A few observations about the future of workplace harassment claims: • Harassment claims will be more likely to go to trial where there is any real dispute about the underlying facts. If confidentiality clauses are no longer permitted as part of a settlement agreement, employers and the individual managers accused of harassment will be reluctant to resolve claims for large sums of money. • Individuals who engage in harassment will be dealt with more swiftly and with obvious outcomes — more terminations, demotions or other consequences — that will be clear and made public in the workplace. • Those accused of harassment will be more likely to bring their own claims when they believe that they were unfairly treated and their termination was not warranted. • Because of the greater likelihood

Scope of the Investigation: Some complaints of workplace harassment are focused and specific, but others are placed in the context of other situations, in which harassment is only one of many allegations. There is a range of options when there are multiple claims. This includes separating out and focusing on the harassment claims, since any resolution of those claims will be governed by the new legislation, where other aspects of the investigation will not be taken into consideration. The following should be considered in deciding on the scope of the investigation: (a) Can the harassment claims be investigated separately, even if there is some overlap with other claims? (b) Is the alleged harasser in the same work group as the complainant? and (c) Is more than one individual allegedly subjected to harassment, and are they all in the same work group?

Direction of the Investigation: Historically, in most investigations where there was a high likelihood of future litigation, counsel directed the investigation so that the work product privilege applied. However, in light of the demands for transparency, consideration should be given in each instance to whether or not a claim of privilege will be asserted from the outset of the investigation. In the past, counsel would direct the investigation and assert privilege if the

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Labor & Employment outcome resulted in sensitive or embarrassing information. The privilege would be waived for litigation, if necessary, to show that a prompt effective investigation resulted from the complaint. Given the increased likelihood of litigation and the need for internal transparency, counsel should be involved in the investigation to ensure that it is promptly and correctly handled, with the right investigators. Whether or not privilege should be asserted should be determined on a case-by-case basis.

Selection of the Investigator: The person assigned to investigate workplace harassment claims should be (a) well trained, (b) experienced, (c) known within the organization for independence and integrity, (d) a good listener, and (e) able to speak clearly and present well as a witness. If no one within the organization fits the bill, consider the use of an outside investigator who has experience testifying in investigations. Employers should also consider taking proactive steps, including ensuring that their HR professionals are well trained in workplace harassment investigations. The investigator will certainly be a key witness in the event of litigation.

Documentation of Investigation: Anyone experienced in investigations knows that documentation is key to establishing a fair, thorough and complete investigation. However, documentation is often not reviewed until there is litigation. Busy investigators can become careless with their notes and records. When workplace harassment is the subject of the investigation, best practices call for the following: • Investigators should allow time between interviews to clean up typewritten or handwritten notes to make sure that they are understandable with clear and complete sentences. • Nothing should be discarded or thrown away, even handwritten notes the investigator believes are unreadable. The notes can be annotated and made clear, but should not be discarded in order to avoid even the appearance of evidence destruction.

• Shorthand should be translated and explained so that someone could read the investigation file and understand it years later, especially if the investigator is no longer an employee.

Structure of Recommendations: Many investigators make recommendations to management regarding the outcome of the investigation. However, recommendations are not required. Consider whether to have the investigator simply investigate the facts and provide a report on what happened, or to have the investigator make recommendations about disciplinary or other action that should be taken. Where recommendations are made and not followed, even for sound business reasons, the internal disagreement regarding how to address the situation can be a point of contention in litigation. Once the facts are understood, a combination of legal, HR and management can come to conclusions without an investigator’s recommendation, depending on all of the circumstances.

Communication of Findings: Normally, a complainant is advised of the outcome of the investigation in general terms, e.g., the allegations were substantiated and corrective action has been taken, or the allegations were not substantiated. Additionally, the complainant is reminded of the employer’s anti-retaliation policy. When it comes to workplace harassment, consideration should be given to providing some more detail around how the investigation was conducted, the timing of the investigation, the number of witnesses interviewed and the general nature of the corrective action taken. While employers have obligations regarding the confidentiality of employment matters, it makes sense to demonstrate the seriousness with which these allegations are taken and to explain the thoroughness of the investigation.

Corrective Action: Employers are increasingly facing complaints by employees about workplace behavior that can lead to sexual harassment if not taken seriously and corrected. Rather

than treating the complaints as minor or a reflection of oversensitivity, consider whether the complaint is an opportunity to correct, not only language choice and offensive comments, but to review the work environment to make sure that the employers’ values and principles requiring a harassment-free workplace are being followed in a meaningful way. An ounce of prevention is not only a pound of cure, but it can avoid costly and time-consuming litigation. Every situation and employer is different, and there isn’t a “one size fits all” solution that’s appropriate. Accordingly, this seven-step process should be viewed as a guideline listing various aspects to consider when launching an investigation. There is no guarantee that merely following the steps will result in a flawless investigation. However, having a procedure that requires consideration of key factors will be useful in developing a useful and clear record. ■

17 Nancy Pritikin is a partner in Sheppard Mullin’s Labor and Employment Practice Group in the firm’s Silicon Valley office. In addition to representing a police chief in a highly publicized sexual harassment case and representing the Supreme Court of California in litigation alleging disability discrimination, she has successfully served as counsel for multiple class action cases, including wage and hour and discrimination claims. NPritikin@sheppardmullin.com Reanne SwaffordHarris is an associate in Sheppard Mullin’s Labor and Employment Practice Group in the firm’s San Francisco office. She represents employers in all aspects of employment-related matters in state and federal courts. RSwafford-Harris@sheppardmullin.com

FALL 2018 TODAY’S GENER AL COUNSEL

Labor & Employment

Respectful Investigation of Sexual Misconduct By Addy R. Schmitt and Katherine E. Pappas

n October 2017, The New York Times published their initial article detailing allegations of sexual harassment and assault against producer Harvey Weinstein. In the wake of more news reports and Weinstein’s resignation, the #MeToo movement — a campaign originally started 10 years earlier and aimed at connecting sexual assault survivors — quickly gained momentum, empowering victims to come forward with their accounts of sexual harassment and assault. At the same time, allegations against individuals in positions of power took center stage in the news. Against this backdrop, legal think pieces addressing how employers can combat sexual harassment in the workplace have proliferated, often focusing on crucial policy and training initiatives. However, once you have revised your policies on harassment and discrimination in the work place, and you have

implemented new training for employees, what do you when an employee comes forward to allege sexual harassment, including instances that occurred before the updated policies were implemented? A company’s immediate reaction to sexual harassment allegations should include proactive steps, such as defining an investigation and communications strategy that takes into account the elevated risk profile of such claims. But a company must also exercise restraint, and refrain from taking actions that could actually increase liability. Below we discuss some of the keys to investigating such serious allegations responsibly and in a manner that is respectful to the potential victims while not prejudging the facts. INVESTIGATION STRATEGY

Develop a disciplined investigation strategy and, where necessary, retain experienced internal investigations

counsel. Although businesses have been handling harassment complaints for years, the risk profile has changed; and these allegations now present not only employee relations and litigation concerns but compliance and reputation risks as well. Whether the investigation is managed by in-house or outside counsel, a strategy must be developed that navigates the sensitivities of serious allegations while responsibly maintaining confidentiality. Of course, neither corporate nor outside counsel would represent the accused wrongdoer. Part of the immediate investigation strategy, therefore, must be to avoid reporting lines that might overlap, even inadvertently, with the alleged wrongdoer or employees who directly report to the alleged wrongdoer. Defining communication lines is critical to maintaining the integrity and effectiveness of the investigation. Particularly when the allegation relates to events

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Labor & Employment occurring before the new policies were in place; was previously investigated by the company; when senior management is implicated, outside counsel may be retained to bring full independence and neutrality to the investigation. In those cases, counsel will work with the company to take the crucial step of defining the client and the reporting lines between outside counsel and the company. Whether counsel represents the company or a board committee, correctly identifying the client and the lines of communication serves the dual purpose of maintaining the independence and authority of the law firm in connection with the investigation and protecting the attorney-client privilege by avoiding potential waivers. Communications regarding the allegations must be carefully crafted according to a strategy that aligns with the overall investigation plan and is implemented from the earliest interactions with the accuser. The recipient of the complaint may often be located outside of the legal department. Nevertheless, the first responder must be trained to communicate respectfully and objectively, without creating liability. The company should be careful not to expose itself by engaging in an aggressive communications campaign without knowing the full picture. The risk here is not that the communications violate the alleged wrongdoers’ due process rights, as some supporters of individuals accused of wrongdoing have suggested. In fact, this notion was raised by President Trump in a February 2018 tweet: “People[’]s lives are being shattered and destroyed by a mere allegation. Some are true and some are false. Some are old and some are new. There is no recovery for someone falsely accused — life and career are gone. Is there no such thing any longer as Due Process?” Companies, of course, do not have a legal obligation to provide their employees with constitutional due pro-

cess. Those rights impose obligations on government conduct. Yet these situations can have serious personal and professional consequences for the accused and the accuser. Companies should be careful to avoid making statements that could lead to civil liability, including defamation, or any statements that could be viewed as a violation of company processes regarding the investigation of complaints

saging strategy while not waiving the attorney-client privilege. EXIT STRATEGY

Thoughtfully negotiate the exit of an employee. Companies may consider putting the accused wrongdoer on leave or separating the accused from the accuser during the investigation. But if it becomes clear that someone violated company policies or the law such that they should be fired, consider a number of factors, including the basic question of whether the employee is going to resign or be terminated. How a resignation is structured should be evaluated in light of the seriousness of the misconduct. For example, a bonus or severance package may not be appropriate. The company should keep in mind whether ongoing cooperation in the investigation should be a condition of any severance agreements, particularly where the company may be cooperating with enforcement authorities in the future. In a decision to terminate an employee, the company and its counsel should carefully consider whether the employment contract requires a termination “for cause” and whether those requirements have been met. Avoid reactionary policy changes that harm rather than help. In the wake of misconduct allegations, particularly those that are made public, companies are eager to implement policies that will reduce the potential for harassment in the workplace, or during businessrelated activities outside of the office. Avoid impulsively imposing new policies that would impede productive workplace interactions. Just days after The New York Times broke the Weinstein story, the paper published a report on the “unintended consequences of sexual harassment scandals,” which described anecdotal evidence across industries from Silicon Valley to Wall Street, showcontinued on page 29

The company should keep in mind whether ongoing cooperation in the investigation should be a condition of any severance agreements. against employees. The caution to carefully craft communications holds for both internal communications, between and among company employees, and outward facing communications, such as press releases. Nonetheless, particularly in the case of an allegation made in the public sphere, the company may feel that it is necessary to release a strong statement condemning the alleged conduct. Such communications present risk because the company may not be able to immediately assess the credibility of the allegations. Indeed, the purpose of the investigation will be to reach an understanding of the underlying facts in order to evaluate any potential exposure for the company and determine the appropriate response. Public comments may undermine that objective. Ultimately, where it appears that a communications campaign is a necessary step in the process of investigating and responding to sexual harassment allegations in today’s environment of increased awareness and sensitivity to such claims, the company should consider engaging a communications firm. Ideally, such a firm would be engaged through counsel to allow for a free flow of information between the company, counsel and the team crafting the mes-

FALL 2018 TODAY’S GENER AL COUNSEL

E-Discovery

Best Practices When the Corporate Client is Deposed By Matthew Keenan

y any objective metric, the jury trial is going the way of the dodo bird as the frequency of trials diminishes in state and federal courts. In contrast, suit filings, client advertisements and associated litigation expenses are rapidly escalating. The popularity of the deposition remains unabated. According to Golkow Global Litigation, in the multidistrict litigation (MDL) hormone therapy litigation, for instance, the parties took over 3,600 depositions. In the Vioxx MDL, the total exceeded 600. Although many were plaintiffs and treating doctors, a significant percentage were corporate witnesses; and some of those depositions continued for multiple days. The Merck CEO, for example, was deposed over four days. With more recent MDLs, these numbers are only growing. E-discovery has increased both the demand and importance of corporate witness testimony. “A company witness in a management role will have 80 percent of their entire document collection consist of email and attachments,” says e-discovery attorney Denise Talbert. “After culling, application of keywords, technology assistance and responsiveness review, a general rule of thumb would be for the witness preparation team to expect to analyze between 15,000 and 20,000 produced emails and attachments per custodian.” Those at the receiving end of this new wave of discovery — institutional clients and their employees — can benefit from a consistent, cohesive approach to getting prepared and offering testimony. In my 30 years of practice, I have refined a methodology that I employ with each witness, regardless of his or her expertise or underlying liability themes. This continued on page 24

SPONSORED SECTION

Everything You Own in a Box to the Left By Samantha Green

he flow of an Electronic Discovery Reference Model (EDRM) begins with the information governance box — getting your house in order by efficiently and effectively managing information before litigation begins. But what if we added a new box to this e-discovery framework… all the way to the left? This “box” would be labeled Risk Assessment, a crucial first step companies would take to dig through their data to uncover issues before they arise. By analyzing electronic corporate communications, negative patterns concerning employee

behavior — among a plethora of other workplace matters — can be detected before they escalate. But the question then becomes, do companies really want to know, and what is their responsibility to act once they do know? Proactively assessing and building legal risk metrics throughout the ordinary course of business provides added value for corporations of all types. It gives leadership better insight into the workplace culture so that harmful behavioral patterns can be exposed and bad conduct can be stopped before it becomes a serious legal problem. Rather than waiting for a whistle-

blower to speak up or an employee to file a complaint, by gathering and evaluating electronic intelligence to predict issues, companies can forecast legal spend well before litigation or investigations come down the pike. They can determine when policies and protocols aren’t working as intended and then revamp company communications to ensure compliance. Although the benefits of risk assessment are significant, many companies don’t want to create their own Pandora’s Box scenario by opening themselves up to issues that perhaps they don’t need to know about. They’re hesitant to unnecessarily disrupt their workplace, shake up leadership structure, hinder corporate goals or impact their profitability. When weighing whether they should leave well enough alone or seek out underlying problems, these common questions may begin to arise: Does this type of analysis expose them to litigation that never would have happened — costing time, money, and manpower? What if patterns of sexual harassment are uncovered, but no one has actually brought a claim? Once you know about negative behavior, even if an employee hasn’t explicitly brought it to your attention, how can you pretend it’s not really happening? By identifying heightened risk, you may now have an obligation to do something about it before it becomes a real legal liability. And many companies simply don’t want to put themselves in that position. However, as technology advances and risk assessments become more mainstream and affordable, it will likely become standard practice to rely on risk metrics derived from electronically stored information (ESI). Due to the abundance of unstructured data swirling around within company databases, e-discovery methods are becoming more sophisticated and changing how companies find key information to mitigate risk, going far beyond keyword searches of the past. Artificial Intelligence (AI), also known as cognitive computing, uses machine learning to quickly find patterns, core concepts and similarities that may otherwise have

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been kept under the radar. These methods and software are designed to help companies better organize their data — and uncover stories within it — to assess risk. From sexual harassment to data breaches, fraud to theft, this type of technology detects potential problems, ultimately preventing bigger problems and makes it easier for attorneys to make smarter, data-backed decisions based on the results. While it may seem easier to ignore an issue rather than launching a large internal investigation, being proactive in this way can protect a company’s brand and bottom line over the long term. Although entire datasets can be searched, another approach some companies may consider taking is maximizing data that they have already compiled for litigation purposes, and then running an analysis to notice additional risks that may impact their business in other ways. They can learn even more from data derived from litigation to plan accordingly for

problems they didn’t know were quietly looming. However, this data may not provide the full picture since it’s not an entire dataset from the company, but rather is specific to a case. As the availability and reliability of risk metrics increases, it will become increasingly harder for companies to claim that they shouldn’t have known about risks that are surfaced by their own user-generated ESI. It becomes a matter of corporate responsibility to gather knowledge of risk from corporate ESI and take action. As more companies admit that they do have access to knowledge of risk from corporate ESI, fear of the unknown will no longer be an acceptable way of working. As the industry moves “left” in the EDRM framework, it is important to take a step back and reflect on the fact that the information governance box, which the industry has been comfortable with for quite a while, wasn’t always a common practice. Fifteen years ago, corporations

viewed information governance similarly to how they cautiously perceive risk assessment now. It was cheap and easy to just hold onto all of their data, rather than spending time, money and resources to

LEGAL RISK METRICS THROUGHOUT THE ORDINARY COURSE OF BUSINESS PROVIDES ADDED VALUE FOR CORPORATIONS. organize it and clean house. There wasn’t enough corporate buy-in to prioritize information governance when there didn’t seem to be a strong reason to focus on this area. However, the volume of data that companies began to acquire, especially across digital platforms, grew dramatically. And more data to sift through meant sky-

clarity

TODAY’S GENERAL COUNSEL FALL 2018

rocketing discovery costs in litigations and investigations. Data storage also became more expensive. Other key factors contributed to the shift toward information governance. In 2015, the federal rules changed. Rule 37(e), also known as the Safe Harbor rule, was intended to protect good faith operations so companies could avoid being sanctioned when potentially responsive ESI was accidentally deleted before or during litigation, so long as they had the proper policies for ESI in place. When that rule came out, people started seeing the importance of organizing their data and creating policies for information governance. Additionally, when the economy picked up after the 2008 crash, companies were able to allot budgets for new software, management, and monitoring of their data, especially as their networks grew due to the influx of data being generated by employees. Another key reason behind a push for information governance is the General

turing & Bankruptcy

Data Protection Regulation (GDPR), which introduced a single set of rules across the European Union in May of 2018. An update to the European Union’s 1995 framework data privacy law, it mandates that if you’re doing business in the European Union, you are now responsible for deleting personal data upon the request of that person. To comply with these Data Subject Access Requests (DSARS), you must know where the data is saved. All of these factors led to a shift in thinking. Information governance became a priority that companies and the courts began to take seriously. It was no longer in a company’s best interest to save everything, but rather to institute policies for more effectively storing ESI. And today we’re in a similar situation. New technologies and new approaches to data are driving a shift toward risk assessment. The risk used to be, What penalties would we face if we deleted or couldn’t locate data we actually needed? Now the

risk becomes, What underlying issues can we uncover from our own data? As more and more companies embrace this shift to the left, the courts will, too.

SAMANTHA GREEN is the Manager of Thought Leadership for Epiq. She serves as a subject-matter expert on all aspects of electronic discovery, data privacy and cybersecurity, drawing on her more than 15 years of litigation and consulting experience. As a litigator, she has taken a number of cases from pre-discovery through trial, and has handled a broad spectrum of cases, from government investigations (including FCPA and antitrust matters) to HSR second requests and commercial litigation matters. sagreen@epiqglobal.com

Count on Epiq experts, technologies, and resources to bring clarity and confidence to the complex, costly, and time-consuming administration of legal matters.

Learn more at epiqglobal.com

FALL 2018 TODAY’S GENER AL COUNSEL

E-Discovery

Witness Depositions continued from page 20

method offers a clear pathway to a successful experience for every witness.

THE MEMORY BOOK

Jerry Lucas played basketball for Ohio State in the early 1960s and then later for the New York Knicks. But it was the book he co-authored in the 1970s, The Memory Book, that remains his most enduring legacy. Lucas’s book was about trained memory and the concept of original awareness — if you know something originally, you can’t forget it. The authors wrote that observation is essential to original awareness: “Anything you wish to remember

More harm than good can arise with a witness who quibbles over definitions like “truthful” or “safe.” must first be observed.” And then once observed, it must be connected to something you already knew. I use this concept in witness preparation. The preparation needs to be visual and needs to be tethered to something already understood by the witness. I use the acronym PLEASE and write it on a flip chart. The witnesses see it, understand it and learn from it. The paradigm goes like this: Prepare. Listen. Exercise control. Accept the obvious. Stay in your area. Emotion is O.K.

L E

PREPARE FOR THE DOCUMENTS

No one can predict with any certainty what documents will be used with the witness. So I provide my witnesses with a simple framework from which to evaluate documents. This is what I tell them: “Every document you will be shown will fall into one of three categories, and with every exhibit handed to you, the first thing you need to do is decide into which bucket it falls.” Category 1: The witness authored the document. For this category, the range of questions is virtually without limitation. That said, Category 1 documents offer the witness the opportunity to explain a poor word choice and put isolated statements in a larger context. I wish every exhibit used in a deposition was a Category 1. “You wrote it,” I tell the witness. “You are the best person to explain it.” Category 2: The witness was copied on an e-mail or received a document created by someone else. Category 2 documents can make up well over half of a witness’s production. Here the range of fair questions is much narrower. I help witnesses distinguish the fair questions — for example, “explain what was happening here” — from the unfair ones, such as “what did he mean by saying this?” My experience is that often witnesses are copied on matters with which they have little to no involvement and therefore cannot offer useful testimony. Category 3: Everything else. Category 3 documents may include internal standard operating procedures (SOPs) and department operating procedures (DOPs), federal regulations, or public statements by the company on drugs or devices pertinent to the litigation. These materials pose the biggest challenge for preparation. They could be anything. I try to find examples of materials that fall into this grouping and then give the witness the basic tools for navigating the anticipated questions. Solid preparation includes drafting a brief direct exam. Ideally, it would take less than an hour and include fewer than 10 exhibits; but it should incorporate an organization chart that illustrates the witness’ scope of responsibility. These exams also allow the witness to advance one or two defense themes that conform to his or her role at the company. Building out a direct exam serves as a backdoor way of reminding the witness affirmatively of the topics he or she must own on cross.

LISTEN

Obvious point, to be sure, but the best way to illustrate this challenge is to conduct a mock cross-exam with attendant miscues.

EXERCISE CONTROL

The deposition process can be intimidating. Witnesses are forced to appear in a large conference room with strangers and sit in front of a camera, a stenographer and attorneys they have never met. But witnesses have the most power; and this needs to be explained to them. They need to understand that their role is more important than either defense or plaintiff’s counsel. For example, they need to be told: “We start and stop when you want. Once we begin, you have complete

TODAY’S GENER AL COUNSEL FALL 2018

E-Discovery

control over how questions are answered and when we take breaks. You have the power to answer easy questions directly with a ‘yes’ or ‘no,’ or to answer questions with a more elaborate explanation.” They should be given specific examples, such as “The way I would respond to your question is that…” or “I don’t know anything about what’s described here.” Persistent questioning does not invent new testimony.

S E

ACCEPT THE OBVIOUS

Bill Clinton’s presidency may be forever defined by his now infamous statement: “It depends upon what the meaning of the word ‘is’ is.” The fact that he was parsing the term in an effort to defend his previous sworn testimony involving a former White House intern didn’t help his defense. Witnesses need to avoid becoming a human piñata on these topics. After all, most cases are built on a core set of historical events that cannot be denied. Whether it’s a product withdrawal, a series of deaths or injuries “linked” with the product, or a CDC finding carrying with it the power of epidemiology, the witness needs tools to be prepared. For example, witnesses can accept that companies need to be truthful in their labeling; package inserts shouldn’t mislead doctors; products need to be safe; and promotional materials should be fair and balanced. More harm than good can arise with a witness who quibbles over definitions like “truthful” or “safe.” The number one goal is to preserve the credibility of the witness and give him or her the tools to know what types of questions can form an agreement.

STAY IN YOUR AREA

To help illustrate this point, I borrow from Lucas’s book and use a flip chart. I draw a box, and illustrate what’s in the witness’s box and what’s outside it. Sometimes his or her job description has concentric circles. I try to help the witness navigate what he or she owns exclusively, or not. Then I use that same box with additional witnesses. There may be obvious areas such as medical judgments, regulatory judgments and scientific judgments where the witness may be able to stiff-arm.

EMOTION IS ACCEPTABLE

Witnesses can be guided on the effective use of emotion. The witness can be told, “You are not just the Vice President of Regulatory Affairs. You are part of a team that makes products that improve people’s lives. The jury may see this company as one that is entirely false — that you only care about profits. Juries want to know you care about your company, you care about your job, and you care about this lawsuit and the man or woman who is claiming to be injured.”

Depositions always include “gotcha” questions, so I make sure my witnesses are prepared. These include knowledge of the case itself, the kinds of claims made, the nature of the injuries, and so forth. If the case is a single plaintiff, the witness should know the name of the plaintiff, if possible, as well as hold notices and document retention obligations, corporate integrity statements and other codes of conduct that might arise, and relevant public statements on product safety/recalls/advisories that might impact the plaintiff’s claims. Jurors demand authentic and, hopefully, captivating storytellers who have personal profiles they can identify with. Every witness and every situation poses different challenges for the experienced attorney. As plaintiffs become more adept at crafting their deposition exams to create jury-friendly nuggets in advancing their narratives, defense counsel must up their game as well. Employing a visually simple but successful paradigm that carves out a clear roadmap is the best way to get witnesses prepared for the challenging task of testifying in a case. ■

Matthew Keenan is a partner at Shook, Hardy & Bacon, primarily focusing on the defense of pharmaceutical and medical device manufacturers. He also is chair of the Social Justice Committee of the International Association of Defense Counsel. He has published extensively on the preparation and defense of company witnesses in mass tort. mkeenan@shb.com

FALL 2018 TODAY’S GENER AL COUNSEL

E-Discovery

Litigation Holds and the GDPR By Aloke Chakravarty and Zaven Sargsian

he European Union’s General Data Protection Regulation (GDPR) has complicated the process of complying with litigation holds. Because of GDPR’s extraterritorial reach, companies that hold personal data of European Union data subjects, regardless of their location, must now consider the implications of GDPR when preparing for litigation. GDPR violations carry potential fines of 20 million euros or four percent of global annual revenue, whichever is greater.

Assuming that a company is subject to GDPR, litigation holds present several challenges. Although every United States company that possesses information about European Union citizens is not automatically subject to GDPR, a company that is specifically targeting European Union citizens or actively tracking their behavior is likely to fall within its ambit. Many United States companies have already engaged in an analysis in order to comply with GDPR for business processes and general infor-

must determine whether its preservation of the data for a litigation hold is a separate data process, and whether it has a lawful basis to do so. A separate data process is also defined broadly in the GDPR, referring to “any operation or set of operations which is performed on personal data or on sets of personal data, whether or not by automated means;” and it includes operations such as collection, organization, storage, retrieval and destruction of data. Consequently, preserving and

Companies must tread carefully down a path of unsettled data protection law at the risk of being made an example in a transatlantic tug-of-war. Corporate litigation holds are common in the United States to preserve records relevant to reasonably foreseeable litigation. United States courts have not only come to expect corporate litigants to properly preserve such records, they have also issued severe sanctions, such as fee-shifting and adverse evidentiary rulings, in cases where records have not been properly preserved. Unsurprisingly, the practice in most European Union countries is quite different. In the European Union, the breadth and depth of civil discovery is generally more limited, and litigation holds are much less common. Considering the European Union’s general disdain for United States privacy protections, when a United States company relies on its national law to avoid compliance with the European Union’s privacy requirements, it shouldn’t be a surprise if the European Union Data Protection Authority (DPA) takes notice. Companies must now tread carefully down a path of unsettled data protection law at the risk of being made an example in a transatlantic tug-of-war.

mation security; but may not have fully appreciated how the compliance issue may affect litigation. PERSONAL DATA DEFINED BROADLY

GDPR becomes an issue for corporate counsel seeking to marshal discoverable information in the United States about European Union citizens, and to obtain explicit consent from a European Union citizen authorizing the processing of their data for discovery or other litigation obligations. Litigation holds and discovery involving European Union data subjects may be considered data processes separate from the business processes for which they were obtained. The GDPR defines “personal data” more broadly than most United States laws as “any information relating to an identified or identifiable natural person.” Some identifiers are obviously personal data, such as name, address and ID numbers; but personal data under the GDPR also includes IP addresses, cookie IDs or other unique identifiers. If the hold relates to any such data, then a company

producing this data for discovery purposes are likely to be considered additional data processes under the GDPR, as they were under the data protection standards that the GDPR replaced. The European Union Data Protection Board (EDPB) has yet to opine on this issue. Companies should narrowly tailor their hold, closely monitor compliance and seek initial informed consent in order to comply with a hold. Counsel must determine whether the preservation process would fall within one of the lawful bases to process data under the GDPR. Consent of the data subject is a common lawful basis relied upon by United States companies that collect or process European Union citizens’ information. However, obtaining consent pre-litigation could be difficult or impossible. The most applicable alternative lawful basis to preserve records under the GDPR is that processing is considered lawful if it is “necessary for the purposes of the legitimate interests pursued by the controller or by a third party, except

TODAY’S GENER AL COUNSEL FALL 2018

E-Discovery

where such interests are overridden by the interests or fundamental rights and freedoms of the data subject.” This provision requires a series of judgement calls. At a minimum, the company should determine whether there is a legitimate interest behind the processing; whether the processing is necessary for that purpose; and whether the legitimate interest is overridden by the individual’s interests, rights or freedoms. It has not yet been decided whether a United States litigation hold, especially a prophylactic one prior to a court action, is a “legitimate interest” under the GDPR.

Even when legitimate, the scope of the processing must be narrowly tailored to the specific requirements of the litigation hold. Under the old standard, data retention and processing were supposed to be guided by proportionality, relevance to the litigation and importance to the data subject. Demonstrating strict and consistent compliance mechanisms (such as anonymizing or pseudonymizing data) that show consideration for individual privacy rights can go a long way toward reducing European Union oversight risk. In the case of a preservation directive

in which personal information is not produced in discovery, it seems unlikely that an individual’s rights would override the company’s legitimate interest; but it is uncertain where the line will be drawn. Tacking closely and consistently to the minimal retention and processing of only the data necessary, for only as long as necessary, will generally put a company in a good posture to defend its legitimate preservation of data. INDIVIDUAL RIGHTS UNDER THE GDPR

Even when on firm legal ground, a litigation hold or discovery production

FALL 2018 TODAY’S GENER AL COUNSEL

E-Discovery

could be complicated by individuals’ assertion of rights, which are many under the GDPR. They include the right to have their data erased, transported and changed for accuracy. Balancing these individual rights against the rights of the company has generated a lot of discussion.

transport European Union personal data to the United States. This situation poses special complications because under the GDPR, an international transfer of European Union personal data is a specially governed process that should only occur under strict data transfer protocols. For import to the United

Even when legitimate, the scope of the processing must be narrowly tailored to the specific requirements of the litigation hold.

A company could, for example, set aside records pursuant to a legal hold in a carefully measured way, perhaps with the consent of a data subject — only to receive an erasure request from a data subject. If the company complies with the erasure request, it may violate the legal hold; and if it complies with the legal hold, it may violate GDPR. This predicament could be further weaponized by a data subject who submits an erasure request, even as he or she pursues litigation in a United States court against the company. Accordingly, a company may have multiple bases for rejecting a request for erasure. If the erasure request is received after the company has processed the data under a legal hold, the company can argue that the personal data is still necessary for the purpose for which it was originally collected. The GDPR also carves out an exception to the individual right of erasure “to the extent that processing is necessary . . . for the establishment, exercise or defense of legal claims.” Thus, a company could argue that a request for erasure should be denied, as it needs the personal data to either exercise or defend against legal claims. Marshalling European Union data for potential discovery could pose a special problem. In some cases, in order to comply with a litigation hold or to otherwise assemble data for production in discovery, a company may have to

States, these protocols typically include compliance with the EU-U.S. Privacy Shield Framework; having individual data protection agreements containing standard contractual clauses specified by the GDPR; or enacting binding corporate rules that govern data transfer within a unitary corporate structure. A potential safe harbor provision in the GDPR, which allows exceptions for legal claims, remains untested in the litigation hold scenario. PREVENTIVE STEPS

To prepare in this environment, some preventive steps become prudent. The first is to establish a high quality GDPR compliance program. In the process of understanding the data flows in a company and incorporating privacy by design, potential legal issues — such as migrating data from the European Union to the United States — are likely to be exposed. Filling those gaps will show diligence that can provide the company some inoculation to regulators, and may address a litigation issue if it later emerges. Second, although a priori consent may be challenged as inadequate, seeking it explicitly will signal the kind of transparency that the GDPR encourages. By informing a data subject at the time of collection that his or her personal data may be retained for a distinct legal process under specific conditions, until litigation concludes or is no longer reasonably foreseeable, a company establishes a

potential defense to regulatory scrutiny. Third, providing consistent internal mechanisms to comply with a hold, tailoring it narrowly to only that which is necessary and monitoring judiciously, will limit risk. This will require training for personnel in both litigation and compliance functions, and can be aided by automated processes. Third-party service providers may prove helpful in carrying out these obligations. ■

Aloke Chakravarty is the co-chair of Snell & Wilmer’s White Collar Defense and Investigations Practice Group. A former federal prosecutor, he also focuses on cybersecurity, data protection and privacy. He represents corporations, boards of directors and corporate management with a broad range of preventative services in the event of crisis, security vulnerability and liability, government investigations, enforcement actions, internal investigations and white collar assistance. achakravarty@swlaw.com Zaven Sargsian devotes his practice to commercial litigation, privacy and data security, and appeals. He is a member of the firm’s Cybersecurity, Data Protection and Privacy Practice Group. He represents public and private companies in complex litigation matters at both the trial and appellate levels in federal and state courts. zsargsian@swlaw.com

TODAY’S GENER AL COUNSEL FALL 2018

Labor & Employment Respectful Investigation continued from page 19

ing that men were declining to meet one-on-one or behind closed doors with women due to a fear of facing harassment allegations. The Washington Post similarly detailed instances in which employers are prohibiting or discourag-

employees cannot be trusted to behave professionally. Crucially, these practices also risk exposing the company to claims of workplace discrimination or a hostile work environment. Any largescale policy changes should be taken in consultation with employment law subject-matter experts to avoid this risk of additional liability, and to ensure that the policies are appropriate, fair

Defining communication lines is critical to maintaining the integrity and effectiveness of the investigation. ing business travel, one-on-one meetings, and even dinners between employees of different genders. Such practices impose needless and often impractical limits on business activities and stifle opportunities for women in the workplace. They demonstrate a lack of trust and respect for employees because they assume that

and conducive to the company’s business objectives. In sum, when a company learns of allegations of sexual harassment or assault by an employee, it must quickly move to investigate while also navigating the pitfalls in providing information both internally and publicly, and avoiding impulsive policies that may under-

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I S S U U . C O M / T O D AY S G C

mine the business objectives and create additional legal liability. ■ Addy R. Schmitt is a partner at Miller & Chevalier Chartered, and Vice Chair of the firm’s Litigation Department. She practices in the areas of criminal and civil litigation, and complex civil litigation involving the federal government, including qui tam and administrative procedure cases. She served as an Assistant United States Attorney in the Civil Division of the U.S. Attorney’s Office for the District of Columbia. aschmitt@milchev.com Katherine Pappas is Counsel at Miller & Chevalier Chartered. She focuses her practice on white collar and internal investigations, and complex civil litigation. She has conducted internal investigations on behalf of corporate clients stemming from allegations of fraud, anti-competitive practices and violations of the Foreign Corrupt Practices Act. kpappas@milchev.com

FALL 2018 TODAY’S GENER AL COUNSEL

Intellectual Property

Trade Secret Tips for Strategic Buyers By Christopher J. Cox, Kyle C. Krpata and Edric C. Itchon

rguably, more than with other forms of intellectual property, a buyer’s exposure to the seller’s trade secrets can cause potential liability and restrict the buyers’ business moving forward. The buyer’s actions in the context of a strategic acquisition can also impact the value of the trade secrets being acquired. Whether the strategic buyer is a serial acquirer or making its first major acquisition, the following seven tips help ensure that the buyer protects and preserves not only the trade secrets being acquired but also the buyer’s own business.

Think Broadly When Assessing What Is a Trade Secret. A buyer should have a broad view of what constitutes a trade

secret. Common trade secrets include confidential business plans, product designs, cost and pricing information, customer lists and source code. Any information that derives independent economic value from remaining secret and is subject to reasonable efforts to maintain its secrecy could qualify for trade secret protection. For example, negative information, such as initial designs that failed or failed process recipes, can be incredibly valuable to a competitor by saving time and resources in an R&D budget. A company may also presume that products or processes covered by issued patents no longer qualify for trade secret protection, but certain non-public, product-related information held by the company could still qualify as trade

secrets. As a general rule, don’t presume a lack of trade secret protection.

Sign a Non-disclosure Agreement That Contains a Residuals Clause. It is important to have a signed nondisclosure agreement in place at the beginning of the diligence process. This may seem counter-intuitive for a buyer, because it usually will have fewer trade secret exposure concerns than a seller. However, accessing trade secret information carries the risk of potential trade secret misappropriation claims from the discloser should the relationship become contentious. A buyer should try to ensure that any non-disclosure agreement contains a residuals clause that provides the recipient of trade secret information

TODAY’S GENER AL COUNSEL FALL 2018

Intellectual Property (usually the buyer) some protections against breach of contract and trade secret misappropriation claims, particularly where the buyer’s current or future business activities could be seen as competitive to the seller. Residuals clauses typically define residuals as non-tangible information

to understand the circumstances under which the interests and goals of the buyer and seller align or diverge with respect to trade secrets. Each party desires to preserve the confidential nature of the trade secrets being assessed. This is especially true where the buyer and seller can be viewed as competitors. In that context,

to track and control the flow of information that includes, for example, limiting certain access to clean team members. For the buyer, online data rooms enable all members of its deal team to access large volumes of sensitive information simultaneously. Of course, the interests of the buyer and the seller do not entirely

Negative information, such as initial designs that failed or failed process recipes, can be incredibly valuable to a competitor by saving time and resources in an R&D budget. retained in the unaided memories of the recipients of confidential information. They authorize recipients to use such residuals in any manner and for any purpose, including a competitive purpose. The seller will typically push back on residuals clauses, and at least seek to narrow the scope of what constitutes a residual, as well as the scope of rights granted. Additionally, it is in both the buyer’s and the seller’s interests to preserve the seller’s trade secrets for the buyer if the deal is consummated, and for the seller if the deal falls apart. Both parties should therefore focus on defining clearly the scope of protected trade secret information, the disclosure and use rights being granted under the non-disclosure agreement (including the permitted duration of such rights, typically 18 months to three years within a deal context), and who among the recipient’s personnel are granted such use and disclosure rights. If the buyer and seller already have a preexisting commercial relationship governed by a non-disclosure agreement, it is a better practice not to rely on it for the contemplated transaction. That would likely involve very different considerations, such as sharing of a much higher volume of information, disclosure of significantly more sensitive trade secrets and the existence of far greater financial consequences.

Use “Clean Teams” and Secure Data Rooms. It is always important

the trade secrets being shared may include competitively sensitive information, which has great potential for misuse. The exchange of trade secrets could also be viewed as anti-competitive behavior. Each party, therefore, has an interest in limiting the risk that the exchange of trade secrets could create restrictions on its ongoing and future business and operations. In such circumstances, the parties should establish clean teams to limit the risk of future misappropriation claims, business restrictions or adverse regulatory findings, while facilitating exchange of information. A buyer will often staff such a clean team with relevant outside advisers, including outside antitrust, intellectual property and commercial counsel capable of understanding the red flag issues uncovered in the review of sensitive agreements. Ideally, the buyer should avoid staffing clean teams with employees who are involved in the daily operations of businesses and products competitive with the seller. The parties can further define clean team processes and procedures as part of the non-disclosure agreement or as a standalone document. Both parties to the transaction also want to share information in a secure, timely and cost-efficient manner. These days, buyers and sellers commonly coordinate diligence for major deals via secure, password-protected online data rooms. For the seller, online data rooms provide the added benefit of being able

align with respect to the sharing of trade secret information, as discussed below.

Time Disclosures for Appropriate Stage of the Transaction. The buyer and the seller need to be mindful of the stage of the transaction when sharing trade secrets. The seller may want to withhold particularly sensitive trade secrets, or limit the scope of its disclosures. Often, the seller may seek to phase its disclosures so that highly sensitive information is disclosed later in the deal process. Conversely, the buyer will push for broader disclosures earlier in the process. While the buyer should be reasonable with respect to the scope and relevance of its disclosure requests, the seller should also be mindful that red flag issues provided too late in the process without the details necessary to assess their materiality could disrupt the momentum of the deal, or jeopardize the deal entirely. This arises frequently when the seller belatedly realizes that it is unable to make certain representations in the acquisition agreement.

Think Broadly When Conducting Trade Secret Due Diligence and Negotiating Representations, Warranties, Covenants and Closing Conditions. The buyer should cast a wide net with respect to trade secret due diligence and negotiate equally broad trade secret representations and warranties — as well as any applicable continued on page 35

FALL 2018 TODAY’S GENER AL COUNSEL

Intellectual Property

Design Patents Overlooked in Many IP Portfolios By Peter Lando and Robert Lichter

tatistics from the United States Patent and Trademark Office indicate that both utility and design patent grants increased over five percent in 2017. A review of the patent counts by industry and product field is informative. For example, a survey of patents issued to medical device companies over the past 12 months reveals that design patents represent only a small part of their patent portfolios. Collectively, design patents made up just over two percent of the total patents awarded to the top medical device firms, and a majority had no design patents issued during this period. Most companies in the competitive medical device industry consider only utility patents to protect research and development investments in their devices, systems and methods. Yet design patents remain a valuable tool that should be considered in patent portfolios in any field. Many consumer product companies have long taken advantage of the protection afforded through design patents. Companies in other areas — heavy industry, electronics and, most notably, medical devices — have been slower to recognize these valuable assets. In many instances, the non-functional, sometimes ergonomic or other ornamental features of a medical device are the result of significant research and/or marketing investment. Design patents are a cost-efficient complement to utility patents and other intellectual property,

and are particularly well-suited to cover unique aspects of medical devices — including minor portions of the devices, surfaces, surface texture, contours, packaging, disposable components, and even two-dimensional displays or graphical user interfaces. COMPREHENSIVE PROTECTION

It is important to keep in mind that utility and design patents protect different aspects of inventions. Collectively, they provide the patent owner with more comprehensive coverage and present competitors with a greater challenge. As a general guideline, utility patents protect the function of a device regardless of its appearance, while design patents protect the appearance of the device regardless of its function. Under design patent law, a design is generally viewed as ornamental if it is not purely functional. There are both functional and ornamental aspects for typical medical devices — such as surgical tools, drug delivery devices, testing or diagnostic tools, prosthetics and implantable devices, garments and many other devices and interfaces — any of which can be covered in part or entirely. Even must-fit parts (for example, a uniquely designed head of a bone screw) or replaceable parts can be protected by design patents. The invention in a design patent is defined primarily by the figures and associated figure descriptions. Generally, a design patent includes a single claim

Design patents are a tool that should be considered in any field, but heavy industry, electronics and medical devices have been slow to recognize these valuable assets.

TODAYâ&#x20AC;&#x2122;S GENER AL COUNSEL FALL 2018

Intellectual Property

FALL 2018 TODAY’S GENER AL COUNSEL

Intellectual Property for the device “as shown and described.” A short statement may also be included to describe lines that depict surface shading, color, texture or patterns. The figures of the design patent may be line drawings, photographs or computeraided design drawings, which may be tailored to broadly claim a specific aspect of the design.

A jury determined that Samsung owed Apple more than $500 million for infringing three design patents.

An applicant may strengthen its design patent application by filing multiple sets of drawings and/or applications highlighting various features or combinations of features of the design. The figures and short descriptions lessen the costs of design patent applications, which can generally be prepared, filed and prosecuted to grant much more cheaply and quickly than utility patent applications. There are relatively low barriers to patentability. Presently, design patent application pendency is only slightly more than 18 months. DESIGN PATENTS KEY IN APPLE V. SAMSUNG

Recent design patent litigation has underscored the continued value of strong design patents. In the United States, whoever sells an “article of manufacture” to which a patented design is applied may be held liable to the patent owner to the extent of their total profits. The recent Apple v. Samsung litigation underscores the potency of this remedy. In 2011, Apple sued Samsung for patent infringement in relation to various Samsung phones released after the first Apple iPhone® was released. On appeal, the Supreme Court held that the relevant “article of manufacture” need not be the entire end product sold to the consumer, but may be only a component of that

product. Damages would then be calculated based on the profit earned from sales of that article of manufacture. On remand, a California district court judge adopted four factors for determining the relevant article of manufacture, based on a test advocated by the United States government to the Supreme Court. These are the four factors: the scope of the design claimed in the plaintiff’s patent including the drawing and written description; the relative prominence of the design within the product as a whole; whether the design is conceptually distinct from the product as a whole; and the physical relationship between the patented design and the rest of the product. Applying this test, a jury earlier this year determined that Samsung owed Apple more than $500 million for infringing three design patents, but only about $5 million for infringing two utility patents. Although this is an exceptional case, it illustrates that design patents can be broadly effective when used to cover ornamental features of technical products. Further, this case demonstrates the importance of strategically planning and preparing the design application with varied scope and targeted coverage. Design patents also derive some of their value from their patent term. Design patents are enforceable for a term of 15 years from the date of issue, and no government maintenance fees are due during this period. The patent term for a design patent is not based on the filing date; however, it remains a best practice to file a design patent application prior to any disclosure of the invention. This is particularly important when an applicant wishes to pursue patent protection abroad, because in many countries a prefiling disclosure precludes patenting. In the United States, applicants may delay the decision to file for up to one year from the first disclosure of the design. In some instances, if the applicant first files a utility patent application, the applicant may subsequently decide to file a design patent application and claim the benefit of the utility patent application filing date. Thus, it may be beneficial to include supportive design drawings

in a utility application so that a design application including those figures may be subsequently filed anytime during the pendency of the utility application. To obtain design patent protection abroad, parties with an active marketing or competitive presence may consider using an international filing regime called the Hague System. In this system, an applicant may file a design application with the USPTO, and that application may be transmitted and filed abroad. Through another international treaty, a United States design patent application may be filed internationally within six months of the United States filing while claiming the benefit of the earlier filing date. As the design or appearance of any portion of a device evolves, companies should consider whether to file one or more design patent applications directed to each new iteration. While a redesigned device may be functionally equivalent to the first, it may have an inventive ornamental appearance that can be protected by a newly filed design patent application. In this way, companies can extend patent protection of certain aspects or features of a product line beyond the conventional utility patent term. ■

Peter Lando is a founding partner of Lando & Anastasi, LLP, an intellectual property boutique law firm. His practice involves all areas of intellectual property and related transactions. He has also provided creative trademark counsel resulting in unique registration and enforcement strategies. plando@lalaw.com Robert Lichter is an associate at Lando & Anastasi, LLP. He focuses his practice on a wide range of services including design patent applications and provides technical guidance as it relates to the fields of mechanical engineering, medical devices and electromechanical systems. rlichter@lalaw.com

TODAY’S GENER AL COUNSEL FALL 2018

Intellectual Property Trade Secrets

continued from page 31 special indemnities, covenants and closing conditions—in the acquisition agreement. Through the due diligence process, the buyer should gain a solid understanding of what trade secrets are material to the seller, the adequacy of the seller’s trade secret protections (including the training of employees, adequacy of information security, and the quality and consistent use of nondisclosure agreements), the existence of

the source code for such proprietary software is stored, how securely it is stored, and the persons and entities that have had access or rights to it, as well as the scope of such rights. The buyer will also want to know if any audits have been performed on the source code, and, if so, should review all such reports. Many buyers require a third party audit of source code as a condition to signing; this process should be coordinated early with the seller due to the lead time required for large source code repositories. Such audits help expose open source issues of which even the seller may be unaware, including copyleft licenses that could require the seller to grant proprietary source code and patent licenses to its licensees for no or nominal fees. For particularly egregious open source issues, the buyer may consider requiring the seller to remediate those issues prior to closing. That is usually met with strong resistance by the seller due to the expense of remediation, and the potential delay of closing.

Some buyers brazenly exploit the seller’s trade secrets after the parties have already walked away from the deal. any offensive or defensive trade secret misappropriation claims, and the existence of any known security incidents. The buyer should negotiate trade secret representations and warranties in the acquisition agreement that are broad enough to track these lines of inquiry. For any material issues uncovered, the buyer should consider pressing for greater protections, for example, special indemnity for known issues that could expose the seller to liability, such as a security breach involving personally identifiable information of consumers. The buyer may also require covenants or closing conditions involving the remediation of such issues prior to the closing of the contemplated transaction, as well as covenants to ensure that trade secret protections are preserved.

Software Requires Special Attention. It is important to be mindful of special considerations where the seller’s material trade secrets include proprietary software. The buyer will want to learn from diligence where

Be Prepared for the Deal to Fall Apart. Trade secret litigation could arise following a failed transaction, especially between competitors. The buyer should begin the deal process mindful of this possibility. Buyers who are serial acquirers often have wellhoned practices and procedures in place for deals to avoid the mishandling or unauthorized disclosure or use of trade secrets, and to document measures put into place to establish compliance with the various confidentiality obligations. On the other end of the spectrum, some buyers fail to appreciate such obligations and brazenly exploit the seller’s trade secrets after the parties have already walked away from the deal in a manner that invites costly and resourceconsuming litigation. The trap for the unwary is for the buyer who does seek to protect confidentiality, but cannot properly document compliance or fails

to identify individuals in its organization who do not comply with the buyer’s obligations. Although it is impossible to avoid all litigation, a buyer’s mindfulness of the foregoing trade secret tips at the onset of the deal process helps ensure that the buyer maximizes deal value while minimizing exposure, important goals that should be part of any strategic acquisition. ■

Christopher Cox is a Litigation partner in Weil, Gotshal & Manges’ Silicon Valley office, where he leads the firm’s California complex commercial litigation practice. He counsels domestic and international clients on a wide variety of intellectual property, employment and other litigation matters. chris.cox@weil.com Kyle Krpata is a partner in Weil, Gotshal & Manges’ Silicon Valley office. His practice emphasizes private equity transactions, public and private mergers and acquisitions, distressed and bankruptcy acquisitions, and venture capital and growth equity transactions. kyle.krpata@weil.com Edric Itchon is an associate in Weil, Gotshal & Manges’ Silicon Valley office. His practice focuses on transactions involving the transfer, licensing, development and commercialization of technology, including complex crossborder transactions. edric.itchon@weil.com

FALL 2018 TODAY’S GENER AL COUNSEL

Intellectual Property

Protecting Your Company’s Domain Name By Sharon Urias and Todd Langford as Zambezi Technology Solutions, is engaging in cybersquatting, the first step generally is to send a cease and desist letter. It is important to proceed without delay, as recent court decisions have affirmed that a lack of diligence in policing and enforcing your marks may support a potential infringer’s defense of laches. But what if the domain registration is private and you do not know who owns the domain? Or what if the domain owner does not respond to your letter? At that point, your recourse is arbitration or litigation. UDRP ARBITRATION

ou are the general counsel of Zambezi.com, a giant online retailer named after the longest east flowing river in Africa. Your employee responsible for monitoring the Zambezi trademark on the Internet has notified you there is a new online business called Zambezi Technology Solutions, which advertises its technology services at zambezitechnology.com. You are concerned that Zambezi Technology Solutions is infringing on your Zambezi trademark, and its use of Zambezi will cause consumer confusion and dilute the strength of the Zambezi mark. How can you stop Zambezi Technology Solutions from using zambezitechnology.com? This article will discuss cease and desist letters, domain name disputes, cybersquatting and brand protection on the Internet. POLICE YOUR MARK

Nearly all successful businesses maintain an online presence in one form or another, often incorporating the company’s trademark into the domain name. It is highly advisable to monitor the use of your trademark on the Internet, including

e-commerce websites, social media sites, blogs and other sites that may be relevant to your company’s business. Although other entities cannot use your company’s specific domain name, they may seek to use similar domains to pull unwitting customers from your website. For example, you may encounter a cybersquatter who acquires the domain zambezi.biz. Or you may encounter a subset of cybersquatting referred to as “typosquatting” (e.g. registering “zambozi.com” to trick users attempting to visit your website at zambezi.com). Some businesses combat cybersquatting by acquiring some or all top-level domains (e.g. .com, .biz, .org), acquiring misspellings of their domain name and acquiring related domains (e.g. shopzambezi.com). While this is advisable, registering all possibilities may not be practical due to the vast number of permutations. If you engage in this strategy, you will need to avoid inadvertent cybersquatting, as the misspelling or related domain may be another entity’s brand without a good faith basis to use that domain. If you believe that someone, such

Registrars that are accredited with the Internet Corporation for Assigned Names and Numbers (ICANN) are governed by ICANN’s rules and procedures. As such, domain names registered with ICANNaccredited registrars are subject to mandatory arbitration under the Uniform Domain Name Dispute Resolution Policy (UDRP) to resolve disputes over the domain names. Although mandatory for the domain name holder, a complainant has the option to seek court relief without first going to arbitration. Nevertheless, a UDRP arbitration may be preferable because it is relatively quick and inexpensive compared to litigation. Formal notification of the domain name dispute may be achieved by sending the appropriate documents to the email address associated with that domain name. This is practical in instances where the alleged cybersquatter is in a foreign country or its identity is unknown. Drawbacks to arbitration include no monetary damages, and the arbitration decisions are non-binding. You still may end up in court. All approved dispute-resolution service providers must follow the UDRP, which maps out the rules for arbitration. Under the UDRP, an injured party may

TODAY’S GENER AL COUNSEL FALL 2018

Intellectual Property electronically submit a formal complaint through a service provider, requesting that the disputed domain name be cancelled or transferred to the complainant. The complaint must, among other things, identify the domain name relevant to the action and state the grounds for bringing the action. Once the service provider receives the complaint, it must notify the registrar to lock the domain name (prevent its transfer to another entity) and will forward the complaint to the domain’s registrant, or owner. The defending registrant will have 20 days to respond. Forum (formerly known as the National Arbitration Forum, or NAF), which has been administering domain name administrative hearings since 1999, is one commonly used forum for resolution of domain name disputes. Another commonly used forum is the World Intellectual Property Organization (WIPO). An arbitration panel will consider the similarity of the domain name to a trademark or service mark in which the complainant has rights; the rights or legitimate interests of the domain name holder in the domain name; and whether the domain name was registered and is being used in bad faith. While the question of “bad faith” is complex and highly fact-dependent, paragraph 4(b) of the UDRP lists four non-exclusive circumstances as evidence, including registering the domain name primarily for the purpose of selling it to the complainant, and attracting users for commercial gain by creating a likelihood of confusion with the complainant’s trademark. Once the panel reaches a decision, the service provider will distribute the ruling. From there, the parties can choose to comply, or bring a legal action in court. ROUND TWO: LITIGATION

If either party is unhappy with the arbitration’s outcome, it can file a lawsuit against the other party. Pursuant to the UDRP rules, the legal action may be filed at the location of the registrar or the domain name holder. Given that disputed registrations often are private and list the registrar’s address, the registrar’s location often is the most appropriate jurisdiction

for challenging a transfer or cancellation. For example, if your domain name is registered with GoDaddy.com, then the legal action likely will be filed in Arizona District Court because GoDaddy. com’s principal place of business is in Scottsdale, Az. If the ruling orders transfer or cancellation of the domain name, the registrar will send an email to the parties advising them that the transfer will occur within

Once served with a lawsuit, the registrar will not transfer or cancel the domain until final resolution. 10 days unless it receives a file-stamped complaint in the applicable judicial district. As such, to stay transfer or cancellation, the losing party will need to immediately file its action and properly serve the registrar. Once served with a lawsuit, the registrar will not transfer or cancel the domain until final resolution. While a court may take the prior arbitration decision under consideration, it is non-binding in the court action. The parties may introduce further evidence, and engage in all discovery and other motion practice available. This is an opportunity for a losing party to get a second bite at the apple, even if it failed to participate in the arbitration proceeding. If the domain holder loses the UDRP arbitration and initiates a lawsuit, its primary claim likely will be “reverse domain name hijacking,” also known as reverse cybersquatting. This typically occurs when a trademark owner files a UDRP proceeding in bad faith or in order to harass the holder who has legitimate rights to use the domain name. If the trademark owner such as Zambezi.com loses the UDRP arbitration, its primary claims likely will be violation of the Anticybersquatting Consumer Protection Act (ACPA), in addition to other violations of the Lanham Act such

as trademark infringement, trademark dilution and unfair competition. HOW TO PROCEED

To protect the Zambezi.com domain name, you first should seek to locate the owner of zambezitechnology.com, and send a cease and desist letter demanding the owner cease use of the domain and/ or transfer the domain name to Zambezi. com. If you cannot locate the domain name owner and/or the owner will not cooperate, then you should initiate a UDRP arbitration proceeding against Zambezi Technology Solutions with the service provider of your choice. If you prevail in arbitration, you should be prepared to defend against a reverse domain name hijacking lawsuit in the federal district where zambezitechnology.com is registered, understanding that the transfer or cancellation order will be stayed until resolution of the lawsuit if Zambezi Technology Solutions files a complaint and follows protocol. Should you lose in arbitration, all is not lost. You may choose to file your own court action against Zambezi Technology Solutions in the federal district where zambezitechnology.com is registered, alleging claims, among others, for violation of the ACPA and other provisions of the Lanham Act. ■

Sharon Urias is a partner in Greenspoon Marder’s Litigation practice group. She is experienced in business and intellectual property litigation, including trademark, domain name disputes, patent and copyright matters. Sharon.Urias@gmlaw.com Todd Langford is Senior Counsel in Greenspoon Marder’s Intellectual Property practice group. He prepares and prosecutes patent applications before the United States Patent and Trademark Office in a wide range of fields. Todd.Langford@gmlaw.com

FALL 2018 TODAY’S GENER AL COUNSEL

Cybersecurity

GDPR Makes the EU’s Regulatory Reach Global By Guillaume Bordier

ompanies increasingly collect, process and transfer personal data about their employees, customers, partners and suppliers, and others with whom they are in contact. As a result, there is a corresponding increase in the risk of data breaches, financial losses and damage to reputations. The European General Data Protection Regulation (GDPR), which came into force in the EU in May 2018, expands the scope of the EU’s data privacy regulatory framework to cover companies that process or control the personal data of employees or other individuals residing in the EU, regardless of the company’s location. Depending on the data breach and local laws, companies may have to inform the relevant data protection authority and data subjects of the breach, as stipulated by the GDPR. Chinese legislation provides for similar obligations of notification to relevant authorities and data subjects. Failure to comply with these rules may expose a company to heavy administrative sanctions, as well as civil and criminal liability. In Argentina, there is currently no

legal requirement to notify a data privacy breach to the Data Protection Agency; however, this will change if a proposed new law is passed. The bill defines a security breach of personal data as “any incident occurring in any phase of the treatment that implies unauthorized loss or destruction; theft, loss or unauthorized copying; unauthorized use, access or processing of data; or damage, alteration or modification not authorized.” Whether in Europe, the United States or most other jurisdictions, any breach of the GDPR’s provisions concerning the requirement to give notice of a data breach could trigger an administrative penalty of up to four percent of the company’s annual global revenues or €20 million, whichever is greater. The company may also be exposed to civil claims for damages from individual data subjects. The GDPR permits class actions, whereby data subjects appoint a not-for-profit body, organization or association to exercise their right to receive compensation, where such actions are permitted by the laws of the member state. In France, a recent data protection law provides for this possibility.

Non-compliance with data protection laws can also expose companies to criminal liability, depending on member states’ laws. In France, failure to comply with data protection rules is a criminal offence. For individuals, this is a criminal offence punishable by a fine of up to €300,000, up to five years’ imprisonment, and by various other sanctions including restrictions on civil rights and limitation on the exercise of certain professional activities. For legal entities, this is a criminal offence punishable by a fine of up to €1,500,000 and by other sanctions. In China, government authorities can order a company to rectify a data breach, issue a warning or fine, confiscate illegal income, and impose a fine or detention on the person responsible. If the circumstances are serious, the authorities can also order companies to suspend or cease operations and have their licenses revoked. Lastly, the misuse or improper disclosure of personal data will expose the company in question to civil claims, financial damages and criminal liability. Depending on the company’s operations and infrastructure abroad, complying with a notification deadline could be challenging, particularly if an investigation is being led from outside the jurisdiction where the breach occurred. As a result, it is important for companies to understand GDPR at the outset, and ensure they have a competent plan in place for timely investigation and handling of allegations or evidence of a data privacy breach. This is particularly true in the United States. Therefore, in case of a personal data breach, a company — especially a multinational company doing business in Europe or conducting business involving individuals based in Europe —should take the following steps:

TODAY’S GENER AL COUNSEL FALL 2018

Cybersecurity

STEP 1 ASSESSMENT OF RISKS

First, an immediate analysis must be made of the risks. This assessment must address the following points: • What type of data is involved? What are the risks for individuals (i.e., reputation, physical safety, financial loss, and so forth)? • Who may be affected by the breach? Staff, customers or clients, suppliers? • How many individuals are likely to be affected by the breach? • How did the breach occur? Did it occur when data was being processed by a data processor? This step is critical. It will allow the company to understand what happened to the data and thereby to ensure compliance, including any need to inform the relevant data protection authority and/or data subjects of the breach. STEP 2 CONTAINING AND MITIGATING DAMAGE

At this stage, immediate consideration should be given as to how to contain matters and limit damage — for example, isolating or closing a compromised section of the network, or replacing lost data from a backup. This step requires significant involvement by the company’s IT and legal departments to define the appropriate technical measures to be taken. STEP 3 NOTIFYING THE DATA PROTECTION AUTHORITY WHEN REQUIRED

In case of a personal data breach, the company may have to notify the relevant local authority. Local regulations may specify a deadline for this notification. The GDPR provides that, subject to very limited exceptions, this notification must be made within 72 hours after having become aware of the breach. In China, and in Argentina’s proposed bill, companies must report a breach to the competent government authority “in a timely manner.” To meet this obligation, it is important to put in place a protocol allowing companies to detect and trace any breach of the

systems within their organization containing personal data. The content of this notification also depends on local laws. For example, the GPDR provides that the notification must include the nature of the personal data breach, the categories of personal data concerned and the measures that the company has taken or proposes to

• The company has taken subsequent measures to ensure that the risks are no longer likely to materialize. • It would involve disproportionate effort for the company; instead, there needs to be a public notice or similar measure whereby data subjects are informed in an equally effective manner.

In France, failure to comply with data protection rules is a criminal offence.

STEP 5 AVOIDING DATA PROTECTION BREACHES

take. The GDPR and the proposed Argentine bill also provide that companies must document and keep a record of all personal data breaches. STEP 4 NOTIFYING INDIVIDUALS AFFECTED

Depending on local regulations, companies may have to give notice of a data breach to the data subjects affected. In the United States, for example, companies must report the breach to the impacted individual(s), depending on the level of risk posed to the person’s rights. The GDPR and the proposed Argentine bill stipulate that this notice to data subjects must be made in clear and simple language. The Argentine bill states that such notice must be given at the same time as notice to the authorities, while the GDPR provides that the notice to data subjects must be given “as soon as possible.” The GDPR provides that this notice is not required if any of the following conditions are met: • The company implemented appropriate technical and organizational protection measures, and those measures were applied to the personal data affected by the personal data breach — in particular, measures such as encryption that render the personal data unintelligible to any person who is not authorized to access it.

To avoid data protection breaches, companies should implement appropriate policies or update them as needed. For example, data protection policies should be implemented so that anyone involved in the processing of personal data would be aware of the applicable rules, as well as the measures to be taken in the event of a data breach. These policies should be communicated to employees who should also receive special training to further reduce the companies’ risk of a data breach. In the United States, data protection has typically received much less attention than in the EU or elsewhere in the industrialized world. However, a slew of recent high-profile data privacy cases and incidents have resulted in lawmakers taking a much closer look at data privacy law and the data protection mechanisms that companies have in place today. Whether this will lead to comprehensive national data privacy reform legislation remains to be seen. ■

Guillaume Bordier is a partner at the French law firm Capstan Avocats and a member of Ius Laboris, the global HR and employment law firm alliance. The author would like to acknowledge the contributions from Ius Laboris member firms for providing valuable national input to the article, including Eduardo Juan Viñales of Argentinian law firm Funes de Rioja, Bo Zhou of Chinese law firm Fangda Partners, and Jeremy Corapi of United States law firm FordHarrison. gbordier@capstan.fr

FALL 2018 TODAY’S GENER AL COUNSEL

Cybersecurity

Software Patents Still Valuable After Alice A Case Study By Aseet Patel

he June 2014 United States Supreme Court decision in Alice Corp. Prop. Ltd. v. CLS Bank Int’l imposed a heightened standard for patent eligibility — a two-part test that has led many software patents to be held invalid. Two years after Alice, the pendulum had barely shifted back from an impulse to invalidate. Except for two decisions, the Court of Appeals for

the Federal Circuit (CAFC) had held all non-life science patents challenged under 35 U.S.C. §101 to be patent ineligible. In the past several months, however, the pendulum has noticeably swung back toward center, with a changing of the guard at the United States Patent and Trademark Office (USPTO), several favorable CAFC holdings, some sharp

dissents, and patent bar associations’ call to action for legislative reform. The future promises more clarity for United States patents involving software innovations, which should improve depressed patent valuations, increase patent licensing activity and raise shareholder value. Alice did not limit its disruption to software patents. In the face of a “big

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Cybersecurity

data” revolution, traditional manufacturing companies have embraced and integrated software technologies —industrial Internet of Things (iIoT), cloud computing, machine learning (ML) and predictive analytics — into their manufacturing processes to stay

amounts to significantly more than the abstract idea itself). The two-part Alice test effectively reigned in the broad interpretation of patent-eligible subject matter under which the CAFC operated since its inception in 1982. For almost two years

been attributed to its patent enforcement and licensing activities. According to CEO Phil Hartstein, Finjan has 22 licensees and is in negotiations with nearly 20 more. With its portfolio of more than 40 U.S. patents, Finjan filed nearly 20 patent infringement

In the highly competitive cybersecurity industry, restraining copycats and extracting licensing revenue is critical to a company’s survival. relevant. Many left their patent rights on the table under the false impression that no software innovations are patent eligible after Alice. This article showcases an exemplar cybersecurity company that has pivoted and thrived after Alice. “ABSTRACT IDEAS”

United States patent law states that a patent can be obtained for “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” The United States Supreme Court has long recognized, however, that 35 U.S.C. §101 implicitly excludes “abstract ideas” from the realm of patenteligible subject matter, as monopolization of these “basic tools of scientific and technological work” could stifle the innovation it aimed to promote. The CAFC interpreted Alice as mandating a two-step framework to distinguish patents that claim abstract ideas from those that claim patent-eligible applications of those concepts. At the first step, the test requires determining whether the claims at issue are “directed to” a patent-ineligible concept. If they are, then the test considers the elements of each claim individually and as an ordered combination, to determine whether the additional elements transform the nature of the claim into a patent-eligible application. This is sometimes referred to as the search for an “inventive concept” (that is, something sufficient to ensure that the claim

after Alice, it was unclear whether an invention that ran on a generalpurpose computer would be patent eligible. Some companies overreacted and assumed that Alice meant the end of software patents and stopped filing United States patent applications. The European Patent Office (EPO) reported an increase in European patent applications filed in 2015, while the USPTO reported for the first time in recent history a slight decline in filings, possibly the result of inventors opting to skip the USPTO after Alice, and instead file in the EPO. CASE STUDY: FINJAN, INC.

In the highly competitive cybersecurity industry, restraining copycats and extracting licensing revenue is critical to a company’s survival. At the heart of cybersecurity companies are software and cloud-based patents. And the four years after Alice have proven difficult. Acquiring patents was a challenge, and the equity market charged a stiff premium for the risk imputed by Alice. Nevertheless, some IP companies have embraced and overcome Alice to amass profits and shareholder value. Finjan, Inc. is an exemplar. When the Internet was nascent, Finjan developed and sold cybersecurity technology. But in 2009, Finjan sold its hardware and software divisions. The terms of the divestiture prohibited Finjan from re-entering the product development arena until 2015. As a result, most of the company’s revenue has

lawsuits against companies like Sophos, Inc. and Palo Alto Networks, Inc. In 2013, Finjan sued Blue Coat (Finjan, Inc. v. Blue Coat Systems, Inc.) in the United States District Court for the Northern District of California for infringement of four of its United States patents, including one (the ‘844 patent) directed to identifying and protecting against malware. After losing at the district court, Blue Coat appealed to the CAFC, arguing that the patent was invalid under the two-part Alice test. However, Finjan successfully defended its eligibility in January 2018. The CAFC Finjan decision provides useful guidance for identifying patent eligibility for software-related inventions, including cybersecurity software. Moreover, the USPTO bolstered the effectiveness of Finjan by releasing a memorandum dated April 2, 2018, that reiterated this guidance to its United States patent examiners and patent practitioners. Finjan’s ‘844 patent is directed to providing computer security by attaching a security profile to a downloadable (that is, a downloadable that is an executable application program), which is downloaded from a source computer and run on the destination computer. Julie Mar-Spinola, Finjan’s chief intellectual property officer and vice president of legal operations, has described the ‘844 patent as the behavior-based approach to virus scanning pioneered by Finjan. continued on page 45

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What You Need to Get Ahead Using eDiscovery Analytics By Pete Feinberg

he challenge in eDiscovery has been to develop technology that reliably and accurately collects, processes, searches and presents information efficiently. With the latest wave of tools and workflows, that goal has been largely accomplished. But in just the last few years, the information landscape has profoundly changed in both data volume and complexity. Unfortunately, reliance on specialists to tame this data surge introduces risk and cost. But there is a path forward by leveraging analytics. In this article, we’ll explore just what we mean by analytics and show why you need analytics to get ahead in modern eDiscovery. You’ll learn how next-generation eDiscovery platforms make the power of analytics readily available.

Syntactic Analysis

Conceptual Analysis

Machine Learning

Segment content based on specific text or metadata

Find and cluster content that is similar in meaning

Define similarities based upon previous human interaction with data

email thread detection, gap identification, determining language and geographical groupings and detecting duplicate or near duplicate content.

TYPES OF ANALYTICS

New terminology has surfaced as the techniques and tools of analytics have evolved. Predictive Coding, Technology Assisted Review (or TAR), Continuous Active Learning (or CAL) and Machine Learning are just a few of the naming permutations. But more fundamentally, there are some key details about how the technology works that can help us further understand how analytics plays within eDiscovery. Syntactic Analytics Syntactic analysis segments content into subgroups based upon defined structural elements within the content-specific text, domains, locations, and dates. These techniques are used to filter data and determine pieces of content that are related. This enables

Conceptual Analytics Conceptual analysis uses the meaning of words and content — not just the letters in the text — to find documents with similar meaning to search terms or sample documents. Examples of conceptual analytics are keyword expansion, concept searching, concept clustering and categorization. Machine Learning A Machine Learning platform is trained to learn directly from the data and previous human interaction with that data. Techniques like Technology Assisted Review and Continuous Active Learning teach the system based on positive and negative feedback from human analysts and can reliably “predict” how

TODAY’S GENERAL COUNSEL FALL 2018

a human analyst would code for the rest of the collection. The systems are also now commonly used for analysis that requires a level of “judgement” to determine next steps, such as privilege review, compliance monitoring, contract review and uncovering hidden relationships within collections of documents. ADOPTION OF ANALYTICS

The recent 2018 CTRL survey reported that “the overwhelming majority of respondents agree that data analytics ‘will be very important, will be considered indispensable, and [their] use will be widespread’ among the legal profession over the next 10 years.” And yet, in a study from FTI and Ringtail, the actual adoption of eDiscovery analytics hovers at around 50%.

But examining duplicate content at an early stage is a drain on resources. It is best to start small, identify key individual documents as quickly as possible and then build context around those items later. One helpful early approach is to limit data sets to only unique content. Achieving the smallest, most unique starting data set can be accomplished via a layering of analytics tools and metadata culling techniques. Three common forms of analysis are hash values, e-mail threading and textual near-duplicate identification.

Hope Cycle and Technology Adoption Lifecycle Plotted Together

Peak of Inflated Expectation

Technology Trigger

Analytics Today

Plateau of Productivity

Trough of Disillusionment

Innovators

Early Adopters

Early Majority

Time

Late Majority

Laggards

“The Chasm”

Adoption Rate

Expectation

Slope of Enlightenment

Analytics has moved past the earliest stages of adoption but is still mostly in the hands of experts. Classic technology adoption theory tells us that increasing the usability of analytics will be key to broadening the user base for the technology.

Casting a Wide Net — Confidence in Completeness Moving efficiently through the starting set of data is only half of the battle. It is also important to establish confidence in the completeness of efforts. The identification of key documents should serve as a foundation for a more exhaustive effort that overcomes the deficiencies of standard keywords and the inconsistencies of human judgment.

PRACTICAL IMPACTS OF ANALYTICS IN eDISCOVERY

Some types of analytics reduce data volumes, some help uncover patterns and relationships and some group similar documents in an efficient manner. Let’s look at three important areas where analytics benefits eDiscovery. Making Sense of It All — Organizing the Chaos One of the overlooked benefits of analytics is logical organization of a project. Analytics tools excel at organizing documents by both textual and conceptual similarity. The ability to group documents into e-mail thread groups, near duplicate groups or clusters is incredibly valuable as work is planned and early estimates of effort are made. Narrowing the Field — Making the Most of Your Time It is generally relatively easy to assess any single piece of content.

There are a variety of analytics tools available that empower us to do just that. For example, conceptual analytics tools can be leveraged to suggest pockets of undiscovered information, identify inconsistent treatment of similar content and offer insights for improving our keyword search efforts.

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FACTORS DRIVING SUCCESS IN ANALYTICS IMPLEMENTATIONS

It is no longer what systems do but rather how they do it that is defining eDiscovery platform success. This aligns with wellproven technology adoption models that combine perceived usefulness with perceived ease of use. Systems that deliver required functionality and lower the barrier to accessing and using that functionality are the new benchmarks in analytics. Experience

Voluntariness

Subjective Norm Image

Perceived Usefulness

Job Relevance Intention to Use

Output Quality Result Demonstrability

Perceived Ease-of-Use

Usage Behavior

Original TAM Model

Perceived Usefulness and Analytics The factors that contribute to perceived usefulness are the functional elements that contribute to solving the user’s problem — that delivery quality results relevant to the user’s jobs. The technical requirements that define the functional needs have become table stakes.

ensure that analytics tools are readily available in the system at the point where they are most likely to be used. This enables users to easily and quickly organize content into related clusters making it easy to get a big-picture view of data landscapes and target areas for priority analysis. LAST THOUGHTS

eDiscovery software is evolving beyond technical capabilities and is now being designed around users — how they work, how matters are structured, how technology can simplify processes — and lets practitioners focus on the law instead of the technology. The entire eDiscovery process is becoming more user-friendly. It incorporates analytics at every stage to drive efficiency, cost savings and quality of results. This will change everything by moving eDiscovery from the exclusive domain of experts and enabling the concepts of modern eDiscovery to become mainstream.

PETE FEINBERG is Senior Vice President, Product and Marketing at Consilio. He is principally focused on bringing the voice of clients, the discovery market and operations into Consilio’s products and services line.

Perceived Ease of Use and Analytics Analytics must be both easy to access and easy to use. If users must hunt for the tools — if they are not included as a core part of the eDiscovery platform — then it is unlikely the users will become familiar with analytics and unlikely that they will make any effort to include analytics in their workflows.

NEXT GENERATION eDISCOVERY AND ANALYTICS

Courts now embrace analytics and expect that some level of technology will be applied to eliminate completely irrelevant or unnecessary data and to make the review process itself more efficient and consistent. eDiscovery systems must meet these key functional requirements. But the next generation tools are also designed with users in mind — to be easy to implement, easy to use and provide transparency and predictability. Modern eDiscovery platforms, such as Consilio’s Sightline,

Pete.Feinberg@consilio.com

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Cybersecurity

Software Patents

continued from page 41 Claim 1 of the ‘844 patent, which the court held to be representative, read “A method comprising: receiving by an inspector a Downloadable; generating

tions can make non-abstract improvements to computer technology and can be held patent-eligible at Step 1 of the two-step framework set forth in Alice, without even needing to proceed to Step 2. The court holding also seemingly contributed to a sizable financial boon for Finjan. Around the time of

gibility as well. At the recent Black Hat USA conference, several panels stressed that artificial intelligence and machine learning will play an important role in the security aspects of future products of all types, including iIoT, self-driving cars and financial trading products. The Finjan decision provides useful

The CAFC framed the question at issue as whether the behavior-based virus scan of the ‘844 patent constitutes an improvement in computer functionality. by the inspector a first Downloadable security profile that identifies suspicious code in the received Downloadable; and linking by the inspector the first Downloadable security profile to the Downloadable before a web server makes the Downloadable available to web clients.” The CAFC framed the question at issue as whether the behavior-based virus scan of the ‘844 patent constitutes an improvement in computer functionality. In holding that it does, the Finjan court looked to the patent specification after first construing two claim terms. As construed, the court noted that the patent claims describe “behavior-based” virus scanning in contrast to traditional “code-matching” virus scanning. Moreover, the court noted that the claimed “security profile” approach recited specific steps that allowed better filtering over prior art methods. The court rationalized that Finjan’s claims recite more than a mere result; instead, they recite specific steps that accomplish the desired result. The Finjan court found that the patent claims employ a new kind of file (or data structure) that enables a computer security system to do things that it could not do before, such as accumulating newly available, behavior-based information about potential threats to tailor for different users and identifying threats before a file reaches a user’s computer. More generally, the Finjan court affirmed that software-based innova-

this article, Finjan’s stock price traded more than 65 percent higher than its price just before the CAFC Finjan decision. Cybersecurity giant Symantec Corporation had acquired Blue Coat Systems, Inc. in 2016. Ultimately, the parties settled out of court in an agreement in which Blue Coat/Symantec paid Finjan a lump sum of $65 million, and potentially another $45 million if Symantec acquires “certain entities” within the next four years. According to Finjan company disclosures, their licensing revenue for the first half of 2018 skyrocketed from $5 million to more than $80 million. It will be interesting to see which “certain entities” Symantec might acquire, further consolidating the cybersecurity market and also boosting Finjan’s royalties’ revenue. Tellingly, Finjan seems to have doubled down on patents. In its most recent 10-K filing with the SEC, Finjan subsidiary, Finjan Blue, Inc., announced a Patent Assignment and Support Agreement with IBM in which Finjan Blue acquired select IBM security patents for $8.5 million, and IBM agreed to share institutional knowledge and resources with Finjan Blue in its licensing efforts. Cybersecurity companies — and technology companies, generally — should feel encouraged by the Finjan decision. Other recent events promise to improve the certainty of patent eli-

guidance about how companies can formulate a strategy to protect their software security innovations incorporating AI and ML. ■

Aseet Patel is a principal shareholder in the Chicago office of Banner & Witcoff, Ltd. He concentrates on patent prosecution and litigation matters primarily in the electrical, computer and business method arts. He also provides opinion counseling services to clients, including various types of clearance opinions on patents. apatel@bannerwitcoff.com

FALL 2018 TODAY’S GENER AL COUNSEL

Compliance

Protecting Investments in IP and People By Roxann E. Henry and Eric Akira Tate April 3, 2018, the Antitrust Division announced a civil settlement regarding a no-poach agreement that had come to light in the context of a merger review. Only 13 days later, the first of followon antitrust treble damage class actions was filed. To give some sense of the incentive for lawyers bringing these claims, $604 million in civil settlements from the earlier follow-on civil cases involving Silicon Valley companies garnered two of the biggest payouts in class counsel attorneys’ fees and costs in federal courts in California in the last eight years. Most importantly, in announcing an April 3, 2018, no-poach agreement settlement, the Antitrust Division reiterated that “it intends to bring criminal, felony charges against culpable companies and individuals” and that it has instituted “a broader investigation into naked agreements not to compete for employees.”

EMPLOYEE MOBILITY

ou’ve invested a lot in your employee base. At considerable cost, you’ve found the right people, developed and trained them, and disclosed to them some or all of your treasured intellectual property. Now you want to keep some other company from reaping the benefits of your investment. And you know which other companies would be most interested in your employees and would like to protect their investments rather than engage in a bidding war over employees. So.... STOP THERE! That last thought can lead to disastrous consequences. Even if you have no products that compete with another company, that company can be your competitor for employees. And competition triggers antitrust laws. The Antitrust Division took numerous executives and Human Resource staff by surprise with its intense campaign against no-poach (i.e., employee non-solicitation) agreements. The

Division followed its civil enforcement actions against prominent Silicon Valley companies by creating the Antitrust Guidance for Human Resource Professionals in October 2016. The Antitrust Division continues to expand the antitrust risk related to agreements about employees. Agreements not to compete can subject a company to criminal fines of up to $100 million or double the loss or gain from the agreement. Individuals involved in such agreements face a statutory maximum of 10 years in prison. The Guidance explicitly notes the availability of such criminal sanctions. The antitrust laws also provide for victims to sue for treble damages and recover their attorneys’ fees. Shareholder suits have challenged boards and executives who do not implement adequate compliance programs, or misstate earnings reports due to antitrust violations. Follow-on consequences from government enforcement arrive swiftly. On

The Antitrust Division’s current focus is consistent with a growing movement to limit the use of non-competition agreements and restrictions on employee mobility. In April 2018, Congress announced the introduction of bills in both the House and Senate that included the Workforce Mobility Act of 2018 (WMA) and the End Employer Collusion Act (EECA). The WMA would make it unlawful for an employer to enter into a covenant with an employee not to compete; and it creates a private right of action allowing a prevailing employee to collect damages, including punitive damages, and reasonable attorneys’ fees and costs. The WMA does permit agreements barring the employee from disclosing trade secrets. The EECA would bar any agreement between two employers that prohibits or restricts one employer from soliciting or hiring another employer’s employees or former employees. The EECA would offer the same remedies as the WMA

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Compliance

but does not include any exceptions. Similar bills are being considered in several states. This is not the first time bills of this nature have been proposed in Congress or state legislatures, and the likelihood of any passing into law is uncertain, but they are examples of the interest in reducing restrictions on employee mobility. Courts also appear to be applying greater scrutiny to non-competition agreements. For example, in Delaware,

The vast majority of states still enforce non-competition agreements that are reasonable in scope. a state long known for having some of the most supportive laws favoring corporations, recent state court decisions suggest greater recognition for employee mobility considerations. In Ascension Insurance Holdings v. Alliant Insurance and Roberts Underwood (January 2015), a Delaware company sought to enforce a noncompetition provision with a California employee when the parties had consented to Delaware venue and application of Delaware law. The Delaware Chancery Court, however, declined to enforce the Delaware choice of law provision, holding that California had a greater interest in the action, and California public policy would be violated if Delaware law were applied, as the non-competition provision would be enforceable.

with individual employees that are less restrictive than non-competition agreements (e.g., employee non-solicitation agreements) still appear to be universally enforceable. Employers everywhere are still free to require employees to sign confidentiality and non-disclosure agreements to protect their most sensitive information. Further, even the Antitrust Division has recognized that there are situations where employee non-solicitation provisions are permissible, including when: • Contained within existing and future employment or severance agreements; • Reasonably necessary for mergers or acquisitions, investments or divestitures, including related due diligence; • Reasonably necessary for contracts with consultants or recipients of consulting services, auditors, outsourcing vendors, recruiting agencies, or providers of temporary employees or contract workers; • Reasonably necessary for the settlement or compromise of legal disputes; or • Reasonably necessary for contracts with resellers or original equipment manufacturers (OEMs), contracts with providers or recipients of services other than those enumerated above, or the function of a legitimate collaboration agreement. Indeed, the Antitrust Division mentions in its Guidance that no poaching agreements that are reasonably necessary to a larger legitimate collaboration between employers, including legitimate joint ventures, are not considered per se illegal under the antitrust laws.

PROTECTIONS EXIST

TAKEAWAYS

Many employers have asked the question, can we lawfully do anything to protect our significant investments in our people, who often carry with them our most competitively sensitive IP? The answer is yes. The vast majority of states still enforce non-competition agreements that are reasonable in scope. Restrictive covenants

• Non-disclosure, non-compete and non-solicitation agreements with individual employees can assist an effective IP protection program and are enforceable in most states. • Don’t assume that courts will enforce restrictive covenants simply because an employer and employee agree to them, or that you can avoid

•

antitrust problems just because you explain what you are doing to the affected employees. Beware entering into non-solicitation and similar agreements (particularly about setting wage rates) with other companies, as it may violate antitrust law. Look at your compliance program; include HR personnel in the antitrust training and consider whether written materials need updating. Continuing competition won’t stem prosecution if there is an agreement on some phase of the process that is not ancillary and required for a legitimate competitive purpose. For example, the companies may be vigorously competing for employees, but agreements to set benefit levels could still be criminal. If you find a problem that was not terminated before October 2016, you may want to consider an application under the Antitrust Division’s Leniency Policy, which provides for criminal amnesty for the first to disclose an antitrust violation. ■

Roxann Henry is a partner in the Global Antitrust Law Practice of Morrison & Foerster. She is the former chair of the Antitrust Section of the American Bar Association. She has over 30 years of experience defending companies and individuals in antitrust government investigations; she also assists companies with antitrust compliance. rhenry@mofo.com Eric Akira Tate co-chairs the Global Employment and Labor Practice of Morrison & Foerster. He is expert in the area of trade secrets and employee mobility, and co-chairs the Covenants Not to Compete and Trade Secrets Subcommittee of the American Bar Association’s Labor & Employment Section. etate@mofo.com

FALL 2018 TODAY’S GENER AL COUNSEL

WORKPLACE ISSUES

Unconscious Bias in the Workplace By Yvette Gatling

he next step, as organizations tackle creating a diverse workforce and retention of minorities and women, is eliminating unconscious bias. Sometimes referred to as implicit bias, unconscious bias is defined as states of mind that inform our everyday decisions. Naturally, these biases — which include stereotypes based on race, color, sex, gender, religion, national origin and socioeconomic status — infiltrate the workplace and affect the work lives of employees. This can hamper diversity by perpetuating patterns we already see in our profession. For example, according to the National Association of Women Lawyers, since the mid-1980s over 40 percent of law school graduates have been women. Yet in 2017, 97 percent of firms report that their top earner is a man, and nearly 70 percent of firms have only one or no women in their top 10 earners. Supreme Court Justice Ruth Bader Ginsburg recalled one example of facing unconscious bias. When she interrupted Justice Sandra Day O’Connor during an oral argument, the next day the headline in USA Today read “Rude Ruth Interrupts Sandra.” When a reporter asked her

Yvette Gatling is a shareholder with Littler Mendelson, and an active member of the firm’s Diversity & Inclusion Council. She counsels and defends companies on a broad range of employment matters, including discrimination, harassment, retaliation, disability accommodation and equal pay. She serves as co-chair of the firm’s Healthcare Industry Group. ygatling@littler.com

about it, she said that her male colleagues interrupt each other all the time during oral argument, and it is not a headline. The first step to eliminating unconscious bias is recognizing that we all have such biases. They may come up in recruiting, work assignment, pitch opportunities, who we select as outside counsel, and who we choose for projects. Once an organization recognizes that unconscious bias exists in everyone, it can institute systems to combat it. Forty law firms, including mine, have adopted the Mansfield Rule to combat unconscious bias. The Mansfield Rule grew out of the 2016 Women in Law Hackathon, hosted by the Diversity Lab in collaboration with Bloomberg Law and Stanford Law School. The Mansfield Rule measures whether law firms have affirmatively considered women and minority lawyers

for at least 30 percent of the candidate pool for promotions, senior level hiring, and significant leadership roles in the firm. This includes equity partner promotions, lateral partner and mid/senior level associate searches, practice group and office head leaderships, executive committee and/or board of directors, partner promotions/nominations committee, compensation committee, and chairperson and/or management partner. The new Mansfield Rule 2.0 will include LBGTQ+ lawyers, in addition to women and attorneys of color. It will also measure consideration for participation in client pitch meetings, and it will request that participating law firms make appointments and election processes transparent to all lawyers in their firms. Finding new systems for recruiting, reviews, promotions and assignments is another way to eliminate unconscious

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bias. When organizations use the same systems for recruiting that they have used in the past, they will likely find those systems yield similar pools of individuals. When looking for diverse candidates, an organization may need to use different recruiters or recruit at different schools. Different sources for referrals might also be required — for example, minority

The first step to eliminating unconscious bias is recognizing that we all have such biases. and women bar associations. If you are looking for ethnic diversity, look beyond getting referrals from current employees. As we tend to associate with people who are similar to us, we may have to look to sources other than traditional networks and do things that take us out of our comfort zone. Some organizations are using artificial intelligence (AI) to input a list of skills, traits or qualifications they are seeking in an ideal candidate in order to eliminate unconscious bias. AI can create a profile based on the qualification of successful employees, which provides hard data that either validates or disconfirms beliefs about what to look for in candidates, while ignoring demographic data shown to bias human decision making such as gender, race and age. The key is making sure that you are using sufficient data points to get the candidates you are seeking. Once an organization implements systems, it should measure how those systems are working. If current approaches are not achieving the desired results, talk to other organizations about what is working and implement new systems. ■

V IS I T T O D AY S G E N E R A L C O U N S E L . C O M F OR T H E L AT E S T NE WS, A N A LY S IS, A ND C OMME N TA R Y F OR G C s A ND O T H E R IN - H OUS E C OUNS E L .

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THE ANTITRUST LITIGATOR

Anti-Competitive Effect By Jeffery M. Cross

ecently, I met with a prospective client who wanted to bring an antitrust claim. As I explored the facts, I realized that the client would have difficulty establishing an anti-competitive effect. Consequently, I recommended not pursuing the claim. This suggested to me that it may be valuable to explore the anti-competitive effect requirement that a plaintiff in an antitrust case must establish. Whether part of its initial burden of proof in a structured burden-shifting approach, or part of the ultimate balancing test in a full Rule of Reason, a plaintiff bringing an antitrust claim must establish an impact on competition, often referred to as an “anti-competitive effect.” It is well established that the antitrust laws are concerned with competition, not competitors. Consequently, a plaintiff must show an adverse impact on competition as a whole, not merely an impact on an individual competitor. What is an adverse effect on competition? Because Congress designed the antitrust laws to protect consumer welfare, a reduction in competition does not violate the antitrust laws until it harms consumer welfare. Competition, of course, involves rivalry among

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

competitors. Conduct that eliminates a rival obviously reduces rivalry. But such a reduction in rivalry doesn’t necessarily harm consumers. The fact that the plaintiff has been prevented from competing does not alone establish an adverse effect on competition. How is anti-competitive effect established? Proof of an anti-competitive effect may be by either direct or circumstantial evidence. For horizontal restraints, direct evidence is sufficient. However, the Supreme Court recently established that for vertical restraints, any direct evidence of anti-competitive effects must

be assessed only after defining the market and determining whether a defendant has market power. What is direct evidence of an anticompetitive effect? Direct evidence can be evidence of a reduction of output, an increase in price, or a diminution of quality. Evidence of the exclusion of competitors can be direct evidence of anti-competitive effect. What is circumstantial evidence of anti-competitive effect? Proof of market power infers an anti-competitive effect. Market power is typically defined as the ability to raise prices or reduce output

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without losing so much market share that the price increase or output reduction is unprofitable. Market power itself can be established by direct or circumstantial evidence. Direct evidence is the ability of a firm to charge supra-competitive prices or restrict output. Such power can be shown in several ways. One method

courts have applied the HMT in cases involving Sections 1 and 2 of the Sherman Act. The HMT begins with the product at issue and asks the question whether a hypothetical profit-maximizing firm that was the only and future seller of that product could impose a small but significant non-transitory increase in price. A rational profit-maximizing firm would

that a market share over 90 percent is presumed to establish market power. Some courts have held that a minimum of between 70 and 80 percent is necessary. Other courts have held that market share between 50 and 70 percent can occasionally show market power but only if other factors are present, such as barriers to entry. Most courts state

The fact that the plaintiff has been prevented from competing does not alone establish an adverse effect on competition. is an econometric model comparing a known competitive market or time period to the challenged market or time period. Determination of a firm’s “ownelasticity” of demand is another measure of market power. So is the Lerner Index, which measures the difference between price and marginal cost divided by price. Direct evidence, however, is often difficult to establish. Market power is typically determined by circumstantial evidence of market structure. This requires the definition of the relevant market, a showing that the defendant has a dominant share of that market, a determination of any barriers to entry and a showing that existing competitors lack the capacity to increase output in the short run. The relevant market generally involves both product and geographic components. The classic method of determining the relevant market is the cross-elasticity of demand — the responsiveness of the sales of a product to price changes of another product. If a slight decrease in the price of the product at issue causes a considerable number of customers of other products to switch to that product, it would be an indication that there is a high cross-elasticity of demand and that the products compete in the same market. A closely related concept is the Hypothetical Monopolist Test (HMT) found in the Horizontal Merger Guidelines adopted by the DOJ and FTC. Many

only impose such a price increase if its profits from the increased prices were greater than the profit lost for customers substituting other products. In other words, is the price increase profitable? If not, the products substituted by customers in response to the price increase are included in the basket of goods considered to be in the relevant market. The process is applied again, now assuming that the hypothetical monopolist controls all of the products in the basket of products. It is an iterative process. The process continues until a sufficient number of customers buy only products from the hypothetical basket of products so that the posited price increase would be profitable. Once the relevant market is determined, the market shares of the participants are determined. How high must a defendant’s market share be to establish market power? One leading case held

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that a market share below 50 percent is rarely evidence of market power. Market share alone is not sufficient to establish market power. The court must consider barriers to new rivals entering the market and existing competitors from expanding their output. Entry barriers have been defined as long-run costs that were not incurred by incumbent firms, but must be incurred by new entrants or existing firms attempting to expand. The main sources of entry barriers are legal and licensing requirements; lack of control over or access to an essential or superior resource; entrenched buyer preferences for established brands; higher capital costs; and economies of scale. Proof of an anti-competitive effect is an essential element of an antitrust claim. Both plaintiffs and defendants should know and appreciate the requirements to establish an anti-competitive effect. ■

I refer to the magazine often and the information is useful in my daily work. Informative and worth reading.

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

FALL 2018 TODAY’S GENER AL COUNSEL

YOU SHOULD WORRY ABOUT EMBEDDED LEASES By Mathew Keshav Lewis

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018 is a hallmark year for regulatory change. The General Data Protection Regulation (GDPR) has already gone into effect, setting a new standard for consumer data collection, storage and usage. Despite a GDPR deadline that has come and gone, the enormity of the undertaking means that most companies still have contracts in need of remediation as they confront the fact of compliance. But while legal departments continue to focus on the world’s most sweeping privacy law, they must also be prepared for sweeping change in the world of leasing. Virtually all large organizations use leasing agreements to obtain access to assets, yet few are prepared for the $2 trillion of lease obligations that are set to hit corporate balance sheets in December 2018 for United States companies, and January 2019 for international companies. The new lease accounting standards (FASB ASC 842 and IFRS 16) introduce rules not only as to how companies identify and measure the value of leases but how they report them on corporate balance sheets. The impending regulation is far-reaching. It applies to all leases — from real estate to office equipment and data centers — and has the potential to significantly impact the way companies do business. The task ahead is large and complex, involving numerous functions within the company, legal being among the most critical. Although companies must already disclose their lease obligations, it is currently done in the footnotes to their financial statements. Leases aren’t included in the balance sheet numbers to which investors pay the most attention. With the introduction of IFRS 16 and FASB ASC 842, nearly all off-balance sheet accounting for lessees will be eliminated. Companies will need to account for the present value of all lease liabilities on the balance sheet as debt, while also being able to account for a right-of-use asset. Rather than lease charges being accounted for as operating income in

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FALL 2018 TODAY’S GENER AL COUNSEL

the profit and loss statement, interest and depreciation will be accounted for separately. According to a recent survey, 39 Mathew Keshav Lewis leads Axiom’s percent of United Global Banking & States compaRegulatory Response nies have not yet Practice. Prior to started adopting joining Axiom, he the new lease was on the founding executive team of accounting stanClarient Global LLC. dards. But ready mathew.lewis@ or not, the impact axiomlaw.com will be significant. It will require in-depth analysis of a company’s entire contract portfolio. Whether deep into the process or just getting started, there are three keys to making meaningful progress toward compliance.

COLLECT POTENTIALLY IN-SCOPE CONTRACTS The first step is to gather all contracts that may now include a lease — anything that provides use of a physical asset and is valued at more than $5,000 per year. On the surface, this may seem like a small task; but, historically, companies have not needed to capture and centralize lease data and contracts in a structured way. Don’t underestimate how much time and effort it will take to find and review what could be millions of contracts, housed in various departments spread across large geographical areas. Given the enormous volume of data, locating relevant lease information will be a considerable task even for the most organized companies. Transition and implementation of the new standards will require cross-functional communication among the legal, accounting, IT, procurement, tax, operations, corporate real estate and human resource functions. These departments sit on an enormous number of contracts that may contain leasing components. They will need to work across functional areas to ensure coordination on project

funding, project management and data models. Compliance isn’t a one-time exercise. Once all the known leases are collected, consideration should be given to where the lease data is currently held and how it will be captured, stored and maintained under the new accounting standards. This could (and likely, should) mean implementing new processes across the organization. FIND YOUR EMBEDDED LEASES A common and hidden pitfall: tracking down leases hidden inside larger contracts, otherwise known as embedded leases. The new accounting standards expand the definition of a lease to include a broader set of commercial arrangements than under previous standards. To comply with the new standards, organizations will need to review large volumes of additional agreements to identify these embedded leases and make sure they are categorizing and accounting for them properly. The general rule is that an arrangement contains a lease if there is an explicitly or implicitly identified asset in the contract, and the customer controls its use. Many companies fail to recognize that their contracts contain embedded leases. In fact, embedded leases could form a substantial part of third-party outsourcing agreements that essentially are a lease of equipment, services, technology or supply contracts. As a result, companies in the manufacturing and pharmaceutical industries are particularly vulnerable to the inclusion of embedded leases in their service contracts.

Increased visibility into existing contracts can enable improved business decisions.

One of the most effective ways to uncover embedded lease language is to utilize artificial intelligence and technology-enabled processes to comb through contracts. It is not uncommon for large commercial contracts to run into hundreds of pages. Tech-enabled processes can rapidly identify key markers and concepts that define embedded leases. Once identified, personnel can validate the flagged contractual terms and make any necessary declarations. OPTIMIZE YOUR CONTRACTS Though the standards are likely to have a material impact on the organization’s balance sheet, there are opportunities to revisit leasing strategies and embedded leasing arrangements to minimize the impact. Increased visibility into existing contracts can enable improved business decisions, and allow for the optimization of contracts and the embedded leases within them. This can lead to better lease management, term comparisons, and benefits and obligations. Additionally, firms can use the improved data to minimize duplicate agreements, unnecessary services and equipment found in the contractual reviews. There is also opportunity to reevaluate contractual terms to minimize embedded leases and reverse some of the unintended balance sheet impact, whether this is to stay within debt covenants or other financial commitments, or simply to manage the critical financial metrics driving business valuations and peer comparisons. Businesses can renegotiate contracts to minimize embedded leases and thus reduce the negative impact on the company balance sheet. The new accounting standards are as much about legal as they are about accounting. Contracts intelligence is critical to compliance, as firms look to meet the new accounting standards and financial reporting deadlines, thus strengthening legal’s position as a strategic player within the organization. ■

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FRESH PERSPECTIVE ON EXPERT SELECTION By Miriam L. Fisher, Ann Gittleman and Marisa Abernethy

n expert can make or break a company’s case and is often a critical component in effective advocacy and implicit storytelling in pre-litigation disputes and at

trial. Thus, choosing the right storyteller is of vital strategic importance. Recently, a law firm with control over a client’s multibillion-dollar litigation set out to hire a team of consulting and testifying experts with eight distinct areas of expertise. Not only was the firm looking for the right mix of credibility and know-how but also for professionals who could persuasively help convey the client’s story in court. Having reached out to multiple consulting firms for recommendations, the firm interviewed approximately 40 potential testifying experts. The lead litigator was female. To her dismay, every one of the recommended experts across all specialties

THE EXPERT MUST BE ABLE TO EFFECTIVELY COMMUNICATE AND CONNECT WITH THE INTENDED AUDIENCE.

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was a middleaged (or older) white male. The client’s general counsel, whose case was pending before a female Miriam L. Fisher is the Global Chair of judge in a diverse Tax Controversy at district, pushed Latham & Watkins back. The general LLP, an international counsel was conlaw firm. She has cerned that, while served on the firm’s Diversity Leadership the recommended Committee and its experts might Women Enriching have the requisite Business initiative. qualifications, Miriam.Fisher@ their uniformity lw.com was not reflective of the available Marisa Abernethy talent pool, nor is a director in the were they people Governance, Risk, Investigations and the ultimate fact Dispute Practice at finders would Duff & Phelps. She relate to well. focuses on providing The experience consulting services of being presented in fraud and internal investigations, as well with a pool of hoas assistance with acmogenous expert counting and auditor witnesses is not negligence matters. unique. As in many Marisa.Abernethy@ fields, seasoned duffandphelps.com litigators will recognize that older white men typically far outnumber younger professionals, women and more ethnically diverse persons as courtroom experts. This is perhaps less true than in past decades — more diversity is found among experts in such areas as psychiatry, psychology and nursing — but it is still a prevailing phenomenon.

HISTORICAL MALE BIAS One could explore the host of reasons why expert pools remain mostly homogenous. One simple answer may be that lead litigators still tend to be predominantly male; and, as strategic decision makers, they may be more likely to identify with and want to use men as experts. Another answer might be that there are simply more experienced men than women, given the history of the

various professions from which these experts are drawn. Nevertheless, if a lawyer’s goal is to get the best result possible for the client, it is critical to ensure that the expert is not only the best credentialed available but also able to effectively communicate and connect with the intended audience. This may include an agency, arbitrator, judge or jury — and could also include secondary influencers, such as the judge’s clerk and other agency or courtroom personnel. The old movie trope of the city slicker lawyer’s tactics failing to translate to the rural jury has a grain of truth. In a diverse world, the ultimate decision makers in dispute resolution and litigation represent a wide variety of backgrounds. Generally speaking, a decision maker may simply connect MANY better with someone who BUSINESSES, shares certain PROFESSIONAL of his or her own characterFIRMS AND istics (e.g., age, ACADEMIC gender, ethnicity, geography, INSTITUTIONS history, and so HAVE forth), assuming the expert UNDERTAKEN is otherwise IMPLICIT BIAS credible, qualified and perTRAINING suasive. Thus, IN RECENT a younger, female or other YEARS. minority expert enhances the diversity of the entire legal team, possibly making the presentation of the company’s story more relatable to a decisionmaking audience that is likely to have a similar makeup. One of an expert’s critical contributions is to illuminate the strengths and weaknesses of a case, leading to more effective strategic thinking by the legal team. Expert diversity may lend an edge here as well, as research indicates that there are clear benefits associated with

diversity of thought; that is, more diverse teams often produce better, more creative (and more profitable) results. Individuals from different backgrounds think about issues differently. A diversity expert could resonate with the decision makers and bolster the case’s strategic development, as well as the quality of the legal team’s analysis and presentation. Thus, for all the reasons general counsel increasingly demand more diverse staffing from their law firms and other professionals, they should make sure that their outside counsel and expert selection consultants provide a more diverse pool from which to choose. Expert candidates may be drawn from a variety of areas, including academia, industry and consulting. Each of these fields has a diverse population of highly qualified persons to survey for appropriate expertise; and general counsel should push their teams to broaden the usual search for expert candidates. Many businesses, professional firms and academic institutions have undertaken implicit bias training in recent years, in an effort to make professionals more aware of how subtle but measurable bias enters into their unconscious thinking. These ongoing educational efforts and similar diversity-focused programs should lead to greater opportunities for more diverse experts — in the development and promotion of such experts in their fields, in their ultimate selection to provide expert opinions in legal disputes, and in broader acceptance of their credibility as experts.

STRATEGIC BENEFITS Although many factors contribute to an effective expert presentation, a more diverse perspective could provide strategic benefits. In such cases, a non-traditional expert, even one who is slightly less experienced, may still be highly credible and appropriate, providing a better choice for communicating complex opinions to the particular audience. While age is frequently associated with wisdom and credibility, issues such

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as new technology, new software applications, social media, electronic gaming, cyber security and cryptocurAnn Gittleman is a rency may present managing director in the Governance, opportunities Risk, Investigations for a new genand Dispute Practice eration of experts. at Duff & Phelps. She A woman, for focuses on providing consulting and expert example, might witness services in address issues fraud and internal more sensitively investigations, regulaand persuasively tory investigations, in cases involving and white-collar workplace harass- investigations, as well as assistance with acment or discrimicounting and auditor nation. An expert negligence matters. from outside the Ann.Gittleman@ United States duffandphelps.com might more effectively opine on issues of foreign policy, business practices or culture. The point is simple — finding the right expert to communicate opinions in today’s world requires a more holistic approach than traditional selection methods. In any given case, it is impossible to predict precisely how an expert may resonate with the ultimate decision makers. Even highly paid jury consultants sometimes get it wrong. However, legal professionals can enhance their chances of success by considering a variety of persuasive expert voices to effectively communicate their opinions in legal disputes, rather than defaulting to the same old expert search pool. Value is added when the expert enhances the legal team’s relatability with the key decision makers and when the expert brings diversity of thought to the strategic effort. Taking a fresh look at how you select your experts may be the difference between winning or losing your next case. ■

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HUNDREDS OF CLIMATE SUITS BEING LITIGATED By Tricia Dunlap and Sarah Edwards

n 1998, the Vice President of the Tobacco Institute, Murray Walker, testified in a Minnesota trial, “We don’t believe it’s ever been established that smoking is the cause of disease.” His testimony contradicted decades of internal industry research stretching back to the early 1950s that concluded smoking causes cancer and other diseases. The plaintiffs in City of New York v. BP, Chevron Corporation, ConocoPhillips, Exxon Mobil Corporation and Royal Dutch Shell alleged that the defendants, like Murray Walker, deliberately misled the public about the causal links between their products and climate change. The City of New York’s claims were dismissed. But in April, Shell surrendered internal documents from 1988 and 1998 that reveal the company knew its products cause climate change for which the company might someday be liable. Hundreds of climate change lawsuits are working their way through United States courts, using arguments grounded in several different legal theories: tort, fiduciary duty, securities laws and constitutional law.

TORT CLAIMS State and local governments are attempting to use tort claims to impose liability on fossil fuel companies for the climate change caused by their products. Plaintiffs such as the state of Rhode Island, and cities like Oakland and San Francisco, argue that climate change causes sea levels to rise and seas to acidify, degraded air quality, and more severe weather patterns with resulting damage to infrastructure.

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Although a tort claim is not a new legal theory for remediating the negative effects of air pollutants, it remains a difficult Tricia Dunlap is the founding partner of one. In the 1970s, Dunlap Law PLC, tort claims for a business law firm bus emissions and focused on sustainother pollutants ability and climate failed because the risks to business and investments. She public utility of holds the Fundamenbus transportatals of Sustainability tion systems offset Accounting credential the acknowledged from the Sustainabilpollution buses ity Accounting Standards Board. Prior to created. Followfounding Dunlap Law, ing this principle, she was an attorney a federal district with McGuireWoods court recently disLLP and, before that, missed a complaint General Counsel of Christensen Global for public nuisance Strategies. brought by Oaktdunlap@dunlap land and San Franlawplc.com cisco against major fossil fuel companies. The court balanced their claim against the public good provided by burning fossil fuels. Noting Sarah Edwards is Of Counsel to Dunlap that our economy Law. A 2017 graduate relies heavily on of William & Mary the defendants’ Law School, she was fossil fuels, the the Notes Editor of judge granted the the William & Mary Environmental Law motion to dismiss. and Policy Review. The plaintiffs have sedwards@dunlap promised to appeal lawplc.com the dismissal on grounds that a public nuisance claim does not permit offsetting the alleged harm with public good. Other tort cases continue to advance. Courts will have to decide if new claims and greater alleged harm support industry culpability. If, like the tobacco industry, fossil fuel companies have engaged in decades of deception, obfuscation and obstruction of less harmful technologies, then future defendants may find

themselves on the wrong side of the balancing test. Several pending tort claims argue that many decades ago defendants knew of the causal link between burning fossil fuels and climate change with its associated harms. Plaintiffs allege that fossil fuel companies actively concealed the science and willfully caused harm in the form of climate change. If successful, these cases may dramatically change corporate liability for climate change and alter disclosures to investors and other stakeholders. Even if they are not successful, the discovery phase may compel revelations that industry members would rather avoid. As a threshold matter, climate change tort claims must overcome displacement by the Clean Air Act, which preempts most tort claims. In the earliest rounds of climate change litigation, courts denied multiple claims because the Clean Air Act displaced them. To avoid this fate, plaintiffs’ attorneys argue state law claims such as nuisance, trespass, negligence and product liability, and demand redress that is outside the scope of the Clean Air Act. Sometimes, industry defendants counterpunch. In response to multiple claims, ExxonMobil countersued, alleging abuse of process and civil conspiracy by plaintiffs, and petitioned a state court in Texas seeking depositions and documents in support of its claim. ExxonMobil sought communications among third parties, the plaintiff municipalities in California and the Texas Attorney General. ExxonMobil claimed that these communications would demonstrate an underlying motive to cause stricter regulations, rather than a legitimate position against ExxonMobil as a cause of public nuisance. In a similar push for plaintiff disclosure, the New York Supreme Court held that the state’s Freedom of Information Law compelled the state’s attorney general to provide documents related to common interest agreements between New York’s attorney general and other state attorneys general. Regardless of whether these counterclaims are effective, this defense strategy complicates

the landscape for current and future litigants. Litigation founded on fiduciary duty claims aimed at publicly traded companies — the same fossil fuel companies under scrutiny in torts claims — has forced them to defend their actions and disclosures to shareholders. ExxonMobil faced an allegation based on a breach of fiduciary duty under the Employee Retirement Income Securities Act. The plaintiffs claimed that ExxonMobil misled the public about the risks of climate change resulting from the company’s activity, and the misinformation caused an inflated stock market value that impacted their retirement benefits. The court dismissed this claim for insufficient facts supporting links between the stock price, the alleged misinformation and the plaintiffs’ failure to show that prudence would have resulted in alternative action or further disclosure. Although this claim failed, an action with supportive facts could result in litigation advancing on this theory.

SECURITIES LAW Ramirez v. Exxon Mobil Corporation et al, a shareholder class action filed in 2016 in Texas, alleges ExxonMobil made materially false and misleading public statements, and cites factual support connecting the misinformation with the company’s stock valuation. Much like tobacco litigants, the plaintiffs argue that ExxonMobil internally recognized the connection between its products, climate change risks and the company’s value, but misled shareholders through its disclosures or omissions. The action alleges that those omissions and related factors caused artificial inflation of the company’s stock price and corporate credit rating. The complaint includes extensive fact allegations documenting the company’s misstatements and connecting them to ExxonMobil’s stock value. For example, on publication of 2016 news stories about regulatory scrutiny of ExxonMobil’s oil and gas reserve accounting, the price of ExxonMobil common stock

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plummeted 13 percent, erasing billions of dollars of market capitalization. Two months later, ExxonMobil disclosed that it might be forced to write down 20 percent of its oil and gas assets, which led to further sell-off of its stock. Shareholders are also using strategies other than litigation to compel publicly traded companies to address climate change risks. ExxonMobil and

In denying the defendant’s motion to dismiss, the judge wrote “I have no doubt that the right to a climate system capable of sustaining human life is fundamental to a free and ordered society,” and accepted the premise that “a stable climate system is a necessary condition to exercising other rights to life, liberty, and property.” If this holding is persuasive to other courts, then we could see significant alteration in the scope of regulatory action. The United States’ failure to act would usually not result in a viable due process claim. However, in ruling on the motion to dismiss, the court took issue with the government’s failure to act, even though it was fully aware of the dangers posed by greenhouse gases. Supported, in part, by the United States’ answer — which admitted that fossil fuel extraction, development and consumption produces greenhouse gases and that greenhouse gases are the primary drivers of climate change and constitute a threat to public welfare — the court found that fossil fuel industries and regulators acted with “deliberate indifference” to the scientific evidence identifying the causes and harms of climate change. This failure to act, in conjunction with the fundamental right to a stable climate system, underpinned the court’s denial of the government’s motion to dismiss. In addition to their Fifth Amendment claims, the Juliana plaintiffs also raise a federal public trust claim. The plaintiffs argue that the United States waters and atmosphere are public assets that the federal government holds as trustee for the benefit of current and future Americans. Public trust obligations are “inherent aspects of sovereignty.” Therefore, the federal government has a fiduciary duty to reasonably protect these assets from degradation or waste and maintain the public benefit. In defense, the United States argues that the public trust doctrine applies

CLIMATE CHANGE TORT CLAIMS MUST OVERCOME DISPLACEMENT BY THE CLEAN AIR ACT, WHICH PREEMPTS MOST TORT CLAIMS. Apple, for example, have encountered shareholder resolutions requesting that they evaluate and report on the companies’ effects on climate change. The SEC denied the companies’ requests to issue no-action responses to the proposals. Public pressure and scrutiny may affect perception of these companies and, ultimately, their stock value. Additionally, state attorneys general can use their subpoena power to investigate potential violations of consumer protection laws or claims that the company misled shareholders on its products’ effects on the climate. Even if the investigations fail to find any legal liability, they compel disclosure of corporate records. Goodwill and public perception of financial risks associated with climate change may shift as a result, with direct impacts on stock values as more details unfold.

CONSTITUTIONAL LAW In Juliana et al v. United States of America et al, youthful plaintiffs invoked the Constitution and its sovereign obligations to support their claim. Juliana argues that federal regulators violated the plaintiffs’ Fifth Amendment rights by failing to protect their fundamental right to a stable climate system, and failing in their sovereign duties as trustee of citizens’ common property by permitting or encouraging its destruction.

only to the states, that it is displaced by federal statute, and that the federal government has no obligation to act as trustee, even of federally owned and controlled land, air or water. While plaintiffs have prevailed using public trust claims against state governments in other contexts, public trust claims have never before been used against the federal government. If successful, the government may be compelled to regulate industries and activities for the purpose of protecting our climate system. If the case stays on course, the Juliana trial will begin October 29, 2018. Though it is unclear whether the court will impose public trust obligations on the United States, public trust claims against states have strong odds of success because precedent holds states accountable to their duties to preserve commonly owned environmental assets for future generations. Litigation on climate change is in its infancy. Much like tobacco litigants, climate change plaintiffs’ attorneys adapt their tactics and shift strategies as they win or lose on different arguments. From 1986 to 2004, courts grappled with a total of only 24 climate changerelated lawsuits. Since 2005, however, the number of claims filed each year has clicked steadily upward, from a low of 13 claims in 2006 to a recent high of 117 claims in 2016. So far, plaintiffs have filed 45 cases this year. Even if the defendants prevail, they will face costs to defend these claims or countersue, potential exposure of sensitive internal documents that may directly contradict public statements, impact to stock prices and credit ratings, and damage to their goodwill and social license to operate. Americans changed their mind about tobacco, and the movement to curb smoking, tax tobacco and regulate tobacco marketing altered the industry’s business landscape. Industries with high greenhouse gas emissions, and governments that fail to regulate greenhouse gases, may find themselves in the same situation. ■

FALL 2018 TODAY’S GENER AL COUNSEL

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Trend Sharply Up for Securities Litigation By Robert R. Long and Elizabeth Gingold Clark

ederal class action securities fraud cases against publicly traded companies are being filed at record levels in the United States. In the first six months of 2018, there has been more than double the historical average number of filings from the last 20 years. Indeed, if you are the general counsel for an S&P 500 company, there was a nearly 10 percent chance that your company was named as a defendant in the first half of 2018 for alleged violations of the federal securities laws. So what’s going on here? Are the incidents of fraud getting more frequent? Unlikely. Are we seeing successors to the Milberg Weiss firm finally emerging, paying kickbacks to plaintiffs, and suing companies and their insurers in hopes of an easy settlement? Also unlikely. Instead, industry-specific factors such as media hype and regulatory uncertainty seem to have made companies in certain industries vulnerable to these types of actions in the current bull market. When investors lose faith in an industry that had been an investor darling, the companies in that industry see stock volatility and, thus, securities class acRobert Long is a tions. This is particularly apparent in an partner at Alston & industry that focuses on new technoloBird and the leader gies. For example in 2015 the market of the Securities grew wary of 3D-printing companies Litigation Group. He has substantial after they had enjoyed several years of experience as lead explosive growth and corresponding counsel in matters market cap growth. Even though there regarding shareholdwere no findings of corporate fraud, the er disputes, fiduciary leading 3D-printing companies found duties and numerous federal agencies. He themselves the target of shareholder also advises corporaplaintiffs eager to recoup losses caused tions on director by the market correction. and officer insurance Similarly, healthcare companies coverage issues. and pharmaceuticals, subject to rapidly robert.long@ alston.com changing United States healthcare regula-

tions, can have otherwise promising new products swiftly sidelined by regulatory decisions. Economic uncertainties created by such regulatory decisions can lead to investors losing faith in a company’s stock value. This is reflected in the securities class actions filed to date in 2018. The greatest number was filed against biotechnology, pharmaceutical and healthcare companies whose stock prices are tied to regulation. One industry in particular, cryptocurrency, is facing both intensive media coverage and regulatory uncertainty. Cryptocurrency companies make digital tokens with computer algorithms that can be used as encrypted electronic money to purchase goods and services. There are around 1,300 cryptocurrencies in circulation, but the largest are Bitcoin, Ethereum, Ripple, and Litecoin. Because cryptocurrencies are decentralized and have no issuing government authority, regulations governing the cryptocurrency market are in their infancy. Even the SEC isn’t quite sure what to make of them and is proceeding with caution. Thanks to this uncertainty and developing regulations, there have been significant swings in stock prices for Elizabeth Gingold cryptocurrency companies. Not surprisClark is a senior ingly, this has attracted the attention of associate in Alston the plaintiffs’ bar; more than 10 crypto& Bird’s Securities currency securities actions have already Litigation Group. She been filed in the first half of 2018. These focuses her practice on representing actions may well be only the first round publicly traded comagainst cryptocurrencies and their execupanies and financial tives. As the legal situation evolves, we institutions in securiwill likely see shareholders attempt to ties class actions, use the federal securities laws to recoup shareholder derivative suits, M&A litigalosses generated by market excitement tion, and government and uncertainty. ■

investigations and enforcement actions. elizabeth.clark@ alston.com

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