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TODAY’S GENER AL COUNSEL FALL 20 19
Editor’s Desk
Any good law enforcement officer will tell you that organized crime is easier to deal with than disorganized crime. Christopher J. Campbell’s article in this issue of Today’s General Counsel provides a good illustration of why. It is full of information about workplace shootings, the ultimate in disorganized crime, and he opens by stating the obvious: Employers cannot place the exclusive burden of safety on law enforcement. That’s an understatement. The police have no tools to address these tragedies until they’re underway, but Campbell says that employers do have a few preventive tools and he suggests taking advantage of them. Employers don’t like dealing with organized labor, and few are required to. Union membership in the U.S. hit a new low of less than 12 percent of the workforce in 2018, but as Lisa Vickery and Todd Lyon point out, strikes came back with a vengeance that same year. They’ve continued in 2019, and they’re not limited to organized workforces. The authors expect more strikes in the near future, likely taking the form of walkouts when the workers aren’t formally organized. When they are organized, negotiations sometimes prevent strikes, but the authors predict a greater willingness to push such negotiations to an impasse now that “disorganized” labor has shown that strikes work. With respect to cybersecurity, the legal profession has a lot to do. Diana Didia writes about data breach risks that are unique to alternative dispute resolution. Arbitrators, mediators and representatives come from different organizations with their own systems, a fact that heightens the risk that data will migrate somewhere it doesn’t belong. Didia outlines some steps ADR professionals can take short of implementing expensive security systems. David M. Stauss and Robert J. Bowman preview the California Consumer Privacy Act, which becomes effective on January 1, 2020. Most observers agree this law will serve as a preview of federal cybersecurity legislation. Also, in this issue, editorial advisory board member Robert Heim reviews the Fourth Edition of Business and Commercial Litigation in Federal Courts. He calls it a remarkable store of current knowledge on every topic of interest to commercial litigators, as well as inside counsel dealing with commercial litigation. This edition, which is edited by Heim’s fellow advisory board member, Robert L. Haig, includes new chapters on mediation and social media.
Bob Nienhouse, Editor-In-Chief bnienhouse@TodaysGC.com
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FALL 2019 TODAY’S GENER AL COUNSEL
Contents 1
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Editor’s Desk
8 | Executive Summaries
COLUMNS
40 | Workplace Issues #MeToo Two Years Later What companies need to do now. By Helene J. Wasserman 42 | The Antitrust Litigator Antitrust and Big Tech What do they monopolize? By Jeffery M. Cross
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44 | Privilege Place Subsidiaries, Affiliates and Privilege Protection Make sure you have the evidence. By Todd Presnell 64 | Back Page Front Burner Workplace Shootings: The Three P’s Thinking about preventing the unthinkable. By Christopher J. Campbell
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FEATURES
33 | Managing Mountains of Data Maximizing the value of information. Interview with Sheila Mackay and Karla Wehbe of H5 36 | Business and Commercial Litigation in Federal Courts A classic updated, with 25 new chapters. Book Review By Robert C. Heim 46 | Shareholder’s Rights V. The Accountant-Client Privilege It’s subject to a good-cause examination by the court. By Allen M. Levine and Jonathan D. Silver 48 | In-House Management of Appeals New game . . . playing the old one is for losers. By Svetlana K. Ivy 52 | Making the 30(b)(6) Witness Work for the Defense It’s like ju-jitsu. By Matthew D. Keenan 54 | A Platform-Based Approach to Operational Efficiency GCs and CLOs must provide the leadership. By David Carns 58 | Insider Trading Liability What you can do before it happens. By W. Ira Bowman and Ekaterina G. Long 60 | Class Actions Are an M&A Deal Killer How they killed the Tribune Media/Sinclair Broadcast merger. By Kevin Skrzysowski
FALL 2019 TODAY’S GENER AL COUNSEL
Contents
L ABOR & EMPLOYMENT
14 | Protecting IP With Employment Agreements in France When employment law and IP are at odds. By Julian Haure and Marine Hamon 16 | Unions Strike Back Fast food, teachers and big tech. By Lisa Vickery and Todd Lyon
E-DISCOVERY
20 | Negotiating Second Request Discovery Tight deadlines, high stakes. By John Murdock 24 4
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INTELLEC TUAL PROPERT Y
CYBERSECURIT Y
22 | A Fresh Look at Japanese Trade Secret Protection Employers’ false sense of security. By Wakako Inaba and Gino Cheng
28 | Cybersecurity Protocols and ADR Stakes even higher than they are for law firms. By Diana Didia
24 | Use of Landmark Images in Advertising Watch out for forced rebranding. By Purvi Patel Albers and Tiffany Ferris
30 | Preparing for the California Consumer Privacy Act Big changes starting January 1. By David M. Stauss and Robert J. Bowman
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Purvi Patel Albers W. Ira Bowman Robert J. Bowman David Carns Christopher J. Campbell Gino Cheng Jeffery M. Cross Diana Didia Tiffany Ferris Marine Hamon Julian Haure Robert C. Heim Wakako Inaba Svetlana K. Ivy
Matthew D. Keenan Allen M. Levine Ekaterina G. Long Todd Lyon Sheila Mackay John Murdock Todd Presnell Jonathan D. Silver Kevin Skrzysowski David M. Stauss Lisa Vickery Helene J. Wasserman Karla Wehbe
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Executive Summaries L ABOR & EMPLOYMENT PAGE 14
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Protecting IP With Employment Agreements in France
Unions Strike Back
Negotiating Second Request Discovery
By Julian Haure and Marine Hamon Mayer Brown
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E-DISCOVERY
An employer in France does not automatically own the intellectual property rights on industrial or artistic works created by employees in the course of their employment, even when such employees were specifically hired to invent or develop technologies. Extra care must therefore be taken when drafting employment agreements to ensure exclusive ownership on all intellectual property attached to inventions or developments conceived in the employment relationship. French law considers authors as independent individuals irrespective of their employment status; and per French copyright law, the creation and the intellectual property rights attached to it belong to the author, even if the creation was made at work with the means made available to the employee by the employer. Software is one of the rare exceptions for which the French IP code clearly states that the company owns ab initio any and all rights created by employees in the course of their employment. The creation of software does not legally entitle the employee to any compensation in addition to regular salary. Given the variety of protectable rights, the drafting of IP clauses can be a lengthy and technical process. If templates and generic clauses may seem useful, a detailed and tailor-made clause drafted by specialists well versed in both employment law and IP is key to adequately and effectively protect the company’s investments in research and development. Given the stakes, it would be worth carefully addressing this topic in the employment contract.
By Lisa Vickery and Todd Lyon Fisher Phillips
In 2018 there were suddenly strikes everywhere — from fast- food restaurants to Google, from statehouses to schoolhouses. After decades of declining strike activity, workers took to the streets on a magnitude not seen in recent memory. Workers in both the public and private sector focused on bringing attention to their demands concerning wages, changes in working conditions and union status. Unions capitalized on the contentious political climate to advance their narrative despite the fact that union membership was at historic lows. Strike activity has continued in 2019 without any signs of slowing down. Educators again took to the streets, going out on strike in school districts like Los Angeles, Oakland and Denver. These strikes were not limited to organized workforces. For example, Uber and Lyft drivers in Los Angeles held a strike in March to protest cuts to their per-mile compensation. As of now, there are no signs of this momentum slowing. It is likely that unions will continue to take advantage of their position in this contentious political climate to mobilize workers and bring pressure on employers. For non-unionized employers, this will likely take the form of walkouts, for either a few hours or a few days. At the bargaining table, unionized employers will likely see a greater willingness by unions to push negotiations to impasse and increased threats of strikes. The best defense is a good offense: An employer can engage in preparations to minimize a strike’s economic impact.
By John Murdock FTI Consulting
Few things can incite more urgency for legal and compliance teams than a Hart Scott Rodino Second Request. Notorious for their tight deadlines and high stakes, second requests require organizations to process, review and produce large quantities of documents in a short time. Failure can result in significant delays to M&A proceedings. Upon receiving the second request, legal teams from both companies will need to quickly figure out what the government wants to review, assess how long it will take to collect it and then try to negotiate a deadline that works within those constraints. Along with the timing agreement, it is important to agree which documents must be produced from which custodians, during which time period. The government wants as much time as possible to review the data. The last thing it wants is to receive all documents on the same day, right before the negotiated deadline. Some of the government’s TAR guidelines are negotiable; others are not. E-discovery teams will need to come into negotiations armed with full knowledge of how predictive coding software and statistical reporting works, and understanding the government’s guidelines in advance of the negotiations can help. The high-stakes second request process is growing more complex due to growing data volumes and diversity, TAR technology usage and new regulatory guidelines. Successful negotiations will determine the speed at which the e-discovery team can meet the certification, and ultimately streamline a typically burdensome and expensive exercise.
TODAY’S GENER AL COUNSEL FALL 2019
Executive Summaries INTELLEC TUAL PROPERT Y
CYBERSECURIT Y
PAGE 22
PAGE 24
PAGE 28
A Fresh Look at Japanese Trade Secret Protection
Use of Landmark Images in Advertising
Cybersecurity Protocols and ADR
By Wakako Inaba and Gino Cheng Winston & Strawn
By Purvi Patel Albers and Tiffany Ferris Haynes and Boone
There is no specialized trade secret statute in Japan, but trade secrets are afforded both civil and criminal protection under the broader Unfair Competition Prevention Act. The act has been amended to address issues of big data and protect against the circumvention of copy control. Under the Unfair Competition Prevention Act, a trade secret is “a production method, sales method, or any technical or operational information useful for business activities that is controlled as a secret and is not publicly known.” Similar to many other jurisdictions, this definition contains three basic requirements: (1) economic value, (2) maintenance of confidentiality and (3) nonpublic nature. The presence of the second element is subject to the most debate and where companies often find themselves vulnerable. A person or entity whose business interests have been, or are likely to be, injured by unfair competition may seek injunctive relief under the act. The owner may seek compensatory damages. Measures include plaintiff’s lost profits, the defendant’s profits or actual losses. The court may also order the infringer to take necessary actions to restore the plaintiff’s business reputation. Any person who commits trade secret misappropriation in the manner prescribed in the act faces imprisonment for up to 10 years, a fine of as much as 20 million yen, or both. Overseas infringement is implicated even where the effect is felt domestically but the underlying acts occurred abroad. Such “foreign” activity is subject to heavier, criminal penalties.
Though landmark images are valuable visual assets in advertising campaigns, their use can raise serious legal concerns. They are often protectable under intellectual property laws, and unauthorized commercial use could rise to the level of infringement. One issue that could arise when using landmark images in advertising is potential trademark infringement. It may be tempting to think that using a landmark’s image in advertising couldn’t constitute infringement, and the leading U.S. case on this point, Rock & Roll Hall of Fame & Museum, Inc. v. Gentile Productions, makes it seem so. However, the facts of that case do not align with the facts that would be present in an action against advertising using a landmark’s image. Copyright problems can also exist if, for example, the building has a mural or sculptural element that is artistic. Savvy marketers will adhere to the following best practices to mitigate and manage risks involved with a landmark campaign. Conduct a clearance process to provide an idea of whether someone could successfully enforce rights in a building image against you, the likelihood that someone would attempt to enforce, and a general idea of potential consequences. Compare your risk tolerance to the risks of using the landmark. Mitigate risks if necessary by obtaining a license and/or revising the image as a skyline. With proper planning and mitigation strategies, using landmark images in advertising and promotional campaigns can be a valuable tool to connect with consumers.
By Diana Didia American Arbitration Association
The legal profession, in general, needs to modernize its approach to cybersecurity. And alternative dispute resolution has even more work to do, given its unique composition. ADR participants — arbitrators, mediators, representatives — come from different organizations, each with its own systems, technologies and procedures. This heightens the risk that something will get into the wrong person’s hands. What’s more, it’s not uncommon for ADR professionals to use a mix of consumer and enterprise software, inviting additional risks. To safeguard sensitive documents, clients should look for ADR firms that have secure document exchange, extensive use of encryption, web-browsing control, and advanced intrusion detection, among other systems and controls. There are steps ADR professionals can take to guard against hacks and data breaches, and not all involve installing expensive systems. These include complex passwords and passphrases, tools like password manager and two-factor authentication, and freeware avoidance. Additionally, use full disk encryption on all computers, encrypt files on portable storage devices and never send passwords by the same media as password-protected files. Ultimately, the legal community, ADR in particular, should approach cybersecurity as they do any other important aspect of their work, taking part in training programs; keeping abreast of research, new guidelines and technologies; and empowering themselves to be part of the solution, not the problem.
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Executive Summaries CYBERSECURIT Y PAGE 30
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Preparing for the California Consumer Privacy Act
Managing Mountains of Data
Book Review Business and Commercial Litigation in Federal Courts
By David M. Stauss and Robert J. Bowman Husch Blackwell LLP
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FEATURES
Privacy law in the United States is about to undergo a fundamental change when the California Consumer Privacy Act becomes effective on January 1, 2020. Preparing for the CCPA has been complicated by the fact that the California legislature is still considering bills that would amend its terms, and the California Attorney General’s office is charged with drafting interpretive regulations for a law that has not been finalized. For companies with complex corporate structures, one of the first steps should be analyzing the company’s corporate structure to determine which entities can be considered the same business and which must be treated separately. Identifying which corporate entities qualify as the same business will determine how to respond to requests for information. Inventory your data. Organizations won’t be able to comply without understanding what personal information flows into the organization, why it is being collected, where it is stored and whether it is being shared. Determine your web presence. Many organizations have numerous websites that they created over the years for various purposes. If they are active, they are subject to the CCPA. Understand how your organization uses “cookies.” Cookies are one of many types of information that the CCPA defines as personal. Although certain activities can be stayed pending the Attorney General’s regulations, others — such as analyzing your organization’s corporate structure, conducting data inventories, understanding your organization’s web presence and cookie usage, and reviewing your information security posture — can be undertaken now.
Interviewees Sheila Mackay and Karla Wehbe H5
Identifying and retaining data that has business value is critical, but that same data can pose risks for corporations. Today’s General Counsel interviewed Sheila Mackay and Karla Wehbe of the technology services firm H5 on how to manage these competing realities, a task made more difficult by the increasing volumes of data we’re seeing today. The biggest risks are: Identity theft or inadvertent disclosure of consumer or employee confidential information either to hackers or to third parties such as suppliers and service providers; inadvertent disclosure of business-sensitive data that can have an impact on a company’s processes, operations and competitive position. The biggest obstacle to managing those risks effectively, says Wehbe, is too much data to wade through. Traditional methods of reviewing and categorizing data are not scalable and viable for large volumes. The business value of the data isn’t always visible to IT, and business units aren’t always equipped to divert resources to managing data that has business value. Most companies simply underestimate data risk, says Mackay, and managing data still isn’t viewed as a strategic activity but it is beginning to be viewed as a competitive advantage. The interviewees see a growing role for legal and compliance in respect to data governance. For example, as more analytics and complexity are introduced into business processes, new challenges arise, some related to ethics and norms. The legal department will be instrumental in helping the business navigate those issues.
By Robert C. Heim Dechert LLP
The recently published Fourth Edition of Business and Commercial Litigation in Federal Courts, Robert L. Haig Editorin-Chief, consists of 14 volumes (three more than the Third Edition) with 25 new chapters. It is a comprehensive guide to topics that confront generalists and specialists. Any inside counsel who has engaged lawyers to handle complex commercial cases would benefit greatly by immersion in the subject areas they are confronting, either as plaintiffs or defendants. There is a new chapter on mediation. Those of us who began practice before the late 1970s would have seen mediation as a proverbial flash in the pan; but once the idea took hold, it became increasingly popular. There is a section describing which cases the authors believe best suited for mediation. Another important new chapter is the one on social media. It points out that a litigant seeking to access an opponent’s social media will have to deal with the Stored Communications Act, which places limits on what a service provider must disclose. However, the statute does not protect an account owner from disclosing relevant social media communications. Finally, the chapter on Civil Justice Reform should be of interest to every participant in the civil justice system. As a former member of the Judicial Conference of the United States Civil Rules Advisory Committee, I found the discussion of efforts to fix problems in the 2015 amendments to the Federal Rules of Civil Procedures quite illuminating.
TODAY’S GENER AL COUNSEL FALL 2019
Executive Summaries PAGE 46
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Shareholder’s Rights v. the Accountant-Client Privilege
In-House Management of Appeals
Making the 30(b)(6) Witness Work for the Defense
By Allen M. Levine and Jonathan D. Silver Becker & Poliakoff
It is common for a business or its executives to be presented with allegations of mismanagement or wrongdoing by a minority shareholder, accompanied by requests for company financial records. When such allegations arise, it is important to efficiently address the allegations while protecting privileged communications with accountants. Shareholders and members have an absolute right to inspect and copy the corporation’s articles of incorporation and bylaws. A shareholder’s right to examine additional company documents and private financial records is not absolute. In one Colorado case, shareholders demanded to inspect financial records possessed by the corporation’s accountants. The court upheld the defendants’ assertion of accountant-client privilege. In another case, the same court concluded that the petitioners “established good cause to put aside the protections of the accountantclient privilege,” focusing on the fact that the discovery requests related to communications that were directly related to the allegations. Since it is difficult to reconcile the two Colorado cases, it appears that the only court that has considered this issue twice has ruled in favor of providing the shareholders with the requested information. However, when documents other than financial records satisfy the shareholder’s request or the privileged information can be redacted, the accountant-client privilege should continue to trump the shareholder’s right to inspect a corporation’s privileged financial records.
By Svetlana K. Ivy Harris Beach PLLC
Although larger in-house teams often include attorneys with a litigation background, managing cases on appeal can be out of the comfort zone for many. Trust your outside counsel but be aware of the potential pitfalls and common mistakes even experienced attorneys make. When an attorney lives and breathes a case through years of litigation, it often is difficult to view it objectively. Consider adding fresh eyes to the team. If you lost in lower court, be open to reframing your arguments or abandoning some of them on them on appeal. If you won, consider that maybe you shouldn’t have. Talk through the arguments, and their order. Once there is a draft, re-consider whether what you thought might be a throwaway point should be featured. The strongest argument at trial court may not be the strongest on appeal. Remember that the case may go up another level or be remanded to the trial court. This is critical because arguments you make to intermediate appellate court may backfire should you win, and the opposing party seeks leave to appeal to the higher court. Depending on the circumstances, a published appellate decision may have an impact well beyond the case at hand, whether it be for your organization or for an entire industry. Not every case warrants the same level of scrutiny or resources, but every appeal should be a collaborative process aimed at maximizing your chances of success.
By Matthew D. Keenan Shook, Hardy & Bacon L.L.P.
The plaintiff’s bar is enamored of Rule 30(b)(6). These days even the most basic lawsuits may see several 30(b)(6) notices. In multi-district litigation proceedings, they have become so prolific that some would say they are borderline abusive. However, the 30(b)(6) witness offers as much to the defense as any perceived advantage to the plaintiff. Enabling counsel to choose their best and most important witness is a gift to the defense. You can check the obvious boxes: be credible, confident and employ good judgment. The most important box to check, however, is this one: available time. This assignment demands a significant time commitment, often weeks. The witness has the right to refer to whatever documents are required to answer questions. Offer a brief narrative of what a typical negligence jury instruction will contain so the witness understands how plaintiffs may spin their testimony, and collaboratively identify witnesses for the 30(b)(6) candidate to interview. With a roadmap defined and the initial documents identified, let the witness go to work. The rule requires a good faith effort to gather all available information on the noticed topics, under penalty of sanction for failure to do otherwise. The 30(b)(6) witness can tell the story that others can benefit from, particularly without the limitations of personal knowledge. We know that company witnesses — versus outside experts — win cases. Jurors want to know the company, and witnesses put a face on their efforts.
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Executive Summaries FEATURES PAGE 54
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A Platform-Based Approach to Operational Efficiency
Insider Trading Liability
Class Actions Are an M&A Deal Killer
By David Carns Casepoint
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Corporate law departments face demands to reduce costs and demonstrate digital readiness and innovation. Technology will be a key enabler, but the mere conviction that technology is the answer to operational challenges has yet to deliver meaningful results for many law departments. According to a recent survey, only half of CLOs say that their use of technology has resulted in significant improvement in efficiency of legal service delivery; and fewer still say that collection and analysis of management metrics has resulted in significant improvement in service delivery. Agents of change within the legal function should look for operational areas where there are repeatable processes and ample evidence of inefficiency. Resist the temptation to try to change everything at once. Instead, identify pain points and look for areas where technology can make a significant difference without massive impacts on day-to-day operations. It is now possible to have easy-touse, customized technology that doesn’t require a large IT team or expensive vendor interventions to maintain and upgrade. You can have visibility into all matters you are currently overseeing, with detailed information about who is working on what and the current status of every project. You can communicate performance metrics to other departments, C-suite executives and board members to demonstrate alignment with your organization’s business objectives. Technology is the enabler, but GCs and CLOs will have to provide the leadership.
By W. Ira Bowman and Ekaterina G. Long Godwin Bowman PC
Steep sanctions and reputation damage to the company often follow an insider trading event. To a certain degree, insider trading is an elusive concept, mostly because the law has developed primarily through the judiciary and administrative proceedings. No statute or rule defines insider trading per se. However, Section 10(b) of the Securities and Exchange Act of 1934, as implemented by the SEC in the Securities and Exchange Act Rule 10b-5, serves as the chief avenue for imposing liability. Fraud occurs when insiders obtain unauthorized access to material non-public information and surreptitiously act upon it to gain financial benefit. It is fraudulent if a duty existed to disclose the knowledge in the first place. The failure to disclose is generally categorized into the classical theory and the misappropriation theory of insider trading. Both theories concern individuals who aim to benefit from trading based on the material non-public information in breach of a fiduciary or similar relation of trust and confidence. The ambiguities in the law on insider trading pose difficulties for implementation of preventive measures. The key to overcoming them is to prioritize the concerns of insider trading and continuously develop the corporate culture based on this priority. Being in the know about insider trading cases and the way the DOJ and the SEC deal with them is paramount. Once aware, the general counsel should continuously reassess policies and execution strategy.
By Kevin Skrzysowski Risk Settlements
Any time one company seeks to merge with or acquire another, the acquiring company is looking for a few critical factors. Strong financial potential, predictable expenses and an absence of risk are positive indicators. Having only one class action lawsuit filed against the target organization, however, can throw those indicators into a tailspin. Even if the company can settle the case, there is a significant risk that the settlement goes viral due to various settlement websites that promote access to free money by filing claims, and the awareness that is created by free media overall. The increased volume of claims creates unpredictable financial outcomes. There are various options. Settling the litigation and containing the exposure appears to be a simple solution but in practice is often unworkable. Without a final judgment, which can take years, litigation uncertainty remains. Setting aside a large litigation escrow or a specific litigation indemnity presents its own unique problems. There is always tension between the parties on the amount of escrow. When the seller is doing an asset deal and the funds are being distributed to the stakeholders, specific litigation indemnity loses its appeal. When settlement is not possible or advisable, but the risk is impeding a deal, the buyer and seller can obtain litigation buyout risk transfer. Using this approach, the parties to the M&A transaction obtain certainty in the uncertain situation of class action litigation, allowing the deal to proceed even with litigation obstacles.
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Labor & Employment
Protecting IP With Employment Agreements in France By Julian Haure and Marine Hamon
A
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round 90 percent of artistic or technical creations are now conceived by employees. These creations and inventions are part of companies’ major assets and contribute to valuing the business, notably in M&A operations. Yet an employer in France does not automatically own the intellectual property rights on industrial or artistic works created by employees in the course of their employment, even when such employees were specifically hired to invent or develop technologies. French employment law and French intellectual property law have always pursued different goals, which can make rights’ ownership tricky to assert and hence protect. Indeed, the subordinate nature of the employment relationship goes against one of the very core principles of French intellectual property law — that the rights attached to a protectable work belong to the author and are
not transferred ab initio to the employer even though the work was created in the workplace and with the means made available to the employee by the employer. In addition, and subject to the nature of the employee’s creation (patentable invention, software or creation protectable by copyrights), different protections and rules may apply. This initial difficulty is reinforced by our modern scattered work conditions, where one’s home can also become one’s workplace from time to time. The line between working time and free time is also a difficult one to draw since most executive employees can arrange their working time as they see fit. They are no longer subject to the legal working time (i.e., 35 hours per week) but most of the time are required to work a set number of days per year. Such flexibility brings new challenges for companies seeking to adequately protect their intangible assets. Extra care
must therefore be taken when drafting employment agreements to ensure exclusive ownership on all intellectual property attached to inventions or developments conceived in the frame of the employment relationship. This article aims at presenting an overview of the main IP clauses and some practical tips to keep in mind when drafting them in French employment contracts. PATENTABLE INVENTIONS
Intellectual property rights on patentable inventions are well regulated by the French intellectual property code, which prescribes a set of specific rules to determine ownership and facilitate the drafting of IP clauses in employment agreements. In a nutshell, three categories of employees’ inventions are set out in Article L. 611-7 of the French Intellectual Property Code, which are summarized below:
CATEGORY
CONTEXT
COMPENSATION
OWNER OF THE INVENTION
Inventions created as part of an “inventive mission”
The employment agreement clearly outlines that the employee is hired to invent or to work on an invention
Additional remuneration per invention. Amount set by the applicable collective bargaining agreement, a companywide collective agreement or the employment contract
The company
Inventions created outside an “inventive mission” but that could be assigned to the employer
The employee does not have an inventive mission per se but the invention was created over the course of his/ her duties, within the field of activity of the company or via the technologies or specific means made available by the company to the employee
“Adequate” consideration for each invention assigned (lump-sum or amount proportionate to the revenue or mix of both)
The company
Inventions that cannot be classified in any of the two above categories
The invention was conceived outside the company’s premises, during the employee’s free time
No compensation but employee is free to use the invention, file a patent and make profit out of it
The employee
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Labor & Employment
15 The employee is required to inform the employer of every invention created in the course of the employment relationship to determine whether such invention was developed as part of an “inventive” mission or not, and if not, whether such invention could be assigned to the employer anyway. According to the National Institute of Intellectual Property (INPI), French companies pay on average EUR 2,200 per invention to their employees with an inventive mission. While this set of rules can be very helpful, it is worth noting that it only applies to “employees,” a category that excludes independent contractors, corporate officers, interns, students and those for whom more generic agreements should be drafted to ensure protection for the company.
any and all rights created by employees in the course of their employment. The creation of a software does not legally entitle the employee to any compensation in addition to regular salary. Although it may seem easy on paper, some situations would require lengthier
take into account if it cannot be the workplace or the working time? In an attempt to save costs, some companies also allow their employees to use their personal computers or mobile phones, which only add more complexity when it comes to asserting property rights. The field of expertise of the business will be a good hint. If the company produces and markets management software, it should have no legitimacy in subsequently claiming the intellectual property rights attached to a dating app, for instance. Employees, however, are likely to develop works in fields where they have an expertise, which they usually acquired through their employment. To mitigate the risk of claims for financial compensation from employees (or former employees upon the termination of their contract), the IP clause should describe in broad terms the types of software that are likely to be developed by employees over continued on page 19
Allowing employees to use their personal computers or mobile phones adds complexity when it comes to asserting property rights.
PROTECTING SOFTWARE
Software is one of the rare exceptions for which the French IP code clearly states that the company owns ab initio
contractual provisions. For instance, IT engineers subject to day-per-year working time arrangements may oftentimes work on weekends or at night; and it is not rare to see these engineers, who are passionate about their jobs (or may not even consider it a job), develop new apps as a hobby. Who should own this work? What should be the determining factor to
FALL 2019 TODAY’S GENER AL COUNSEL
Labor & Employment
Unions Strike Back By Lisa Vickery and Todd Lyon
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n 2018 there were suddenly strikes everywhere — from fast- food restaurants to Google, from statehouses to schoolhouses. After decades of declining strike activity, workers took to the streets on a magnitude not seen in recent memory. Workers in both the public and private sector focused on bringing attention to their demands concerning wages, changes in working conditions and union status. Unions capitalized on the contentious political climate to advance their narrative despite the fact that union membership was at historic lows. Strikes defined: As the United States Supreme Court acknowledged in NLRB v. Erie Resistor, strikes are the “ultimate weapon in the labor arsenal for achieving agreement upon its terms.” Strikes occur when a group of employees engage in a work stoppage to bring pressure to bear on their employer. Economic strikes are
called to protest wages, hours, working conditions or other mandatory subjects of bargaining, in contrast to work stoppages to protest an unfair labor practice by an employer. Striking employees are not often fired. However, an employer may continue to operate during a strike using replacement workers. Who Can Strike? The right to strike is not limited to employees who are represented by a union. Section 7 of the National Labor Relations Act (NLRA) protects all private-sector workers who engage in lawful concerted activity for the purposes of mutual aid and protection. Section 7 applies to unionized and non-unionized workforces alike. Any worker who takes or seeks to initiate an action (including a strike) among a group of employees about work-related issues, or brings complaints about the workplace to management, is covered by the NLRA.
In the public sector, an employee’s right to strike is governed by state law. Many states have adopted language similar to Section 7, giving public employees the right to engage in lawful concerted activity. However, unlike the NLRA, some state laws prohibit or limit an employee’s right to strike. In Oregon, for example, public safety and public transportation bargaining units are “strike prohibited.” Other states allow public employees to strike but require the parties to satisfy impasse procedures — mediation, “cooling off” periods, and so forth — prior to striking. Public and private employers must always exercise caution not to discipline employees who engage in such protected activity. It is likely that unions and worker advocates are encouraging and financially supporting the strike. They are therefore looking to trip up unprepared employers who would discipline
PHOTOS VIA UNSPLASH
NOVEMBER 27, 2018 IN CHICAGO, IL
TODAY’S GENER AL COUNSEL FALL 2019
Labor & Employment employees for engaging in protected conduct. They will capitalize on such conduct by filing an unfair labor practice charge. The right to strike is not absolute. If employees are unionized, they may be covered by a collective bargaining agreement that limits the right to strike. The NLRA and many state laws also prohibit “intermittent” strike activity, where employees engage in a series of short-term strikes. Should strikeprohibited public employees engage in unlawful strike activity, they may be subject to discipline, including termination. Moreover, Section 8(g) of the NLRA requires a 10-day written notice of the intent to strike or picket a health care organization. DECLINE OF STRIKES
Strikes have unquestionably played a significant role in the development of labor law in the United States. Indeed, the Railway Labor Act and the NLRA were promulgated to promote “labor peace” and “eliminate the causes of substantial obstructions to the free flow of commerce” caused by work stoppages. Employers have long feared strikes, both because of the disruption to business operations and the occasional violence that accompanies them. Yet, as union membership has declined over the last 50 years, so has the frequency of union strike activity. Union density peaked at 34.8 percent of the workforce in 1954. In 1952, there were 470 major strikes (defined as those involving more than 1,000 workers). More than 2.7 million employees participated in those strikes. Thirty years after its peak, union density had dropped to 21.6 percent by 1984. That year, there were 62 major strikes, with only 376,000 employees participating. By 2017, with union density at 11.9 percent, there were only seven major strikes, involving only 25,000 employees. In 2018, union density again hit an all-time low of 11.7 percent. Yet, unlike previous years, it saw a surge of strike activity. At the forefront were actions by employees not represented by labor organizations, including the October 2 “Fight for $15” walkouts to demand a
$15 per hour minimum wage and the November 1 walkout at Google to protest the company’s response to sexual harassment accusations. In many ways, 2018 represented the culmination of years of work by labor organizations. What started in November 2012 as the “fast food strikes” in New York City, had coalesced into a fight for a $15 minimum wage by 2015. This represented a strategic choice by unions over the last decade — an effort to maintain some relevance. Unions have pivoted toward organizing employees in historically unrepresented industries, including childcare facilities, the home healthcare industry, airports, gas stations, convenience stores, retail stores, news media and tech start-ups. While this has not reversed the downward trajectory
of union membership, it has arguably increased awareness of the labor movement and collective action generally. These efforts have been amplified by the existing political climate. Over the last five years, there has been a national spotlight on collective action through the work of Black Lives Matter, #MeToo and March for Our Lives. The large-scale Women’s Marches in January 2017, following the inauguration of President Trump, also invigorated broad swaths of a previously disengaged public. This confluence of organized labor and political activism reached what appeared to be its apex in 2018’s unprecedented state-wide education workers strikes. Frustrated with stagnant pay, educators walked out in Arizona, Oklahoma and West
Section 7 of the NLRA protects all private-sector workers who engage in lawful concerted activity for mutual aid and protection.
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Labor & Employment Virginia. Smaller-scale protests occurred in numerous counties in North Carolina and Colorado. Through this collective action, educators could bring political pressure to bear in an election year, and extract the concessions they desired. Labor organizations, in turn, got positive publicity nationwide for their involvement in the efforts. UNIONS RE-ENERGIZED
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In 2019, unions took their political activism a step further by using the threat of a strike to bring pressure to bear during the 35-day government shutdown. In late January, as the shutdown neared its one-month anniversary, Association of Flight Attendants International President Sara Nelson said: “Almost a million workers are locked out or being forced to work without pay. Others are going to work when our workspace is increasingly unsafe. What is the Labor Movement waiting for? Go back with the Fierce Urgency of NOW to talk with your Locals and International unions about all workers joining together to end this shutdown with a general strike.” Later that same week, when federal employees missed their second payday of the shutdown, air traffic controllers called in sick, which temporarily grounded all flights at New York’s LaGuardia airport. At that point, Nelson again raised
the call for a work stoppage, saying her union would engage in a “suspension of service” for safety reasons. That afternoon, the White House announced a deal to reopen the government. Although it is impossible to say what actual impact the aviation unions’ threats had on the negotiating parties, it again resulted in positive publicity for unions and perhaps an inflated view of their continued significance. Indeed, strike activity has continued in 2019, without any signs of slowing down. Educators again took to the streets, going out on strike in large school districts such as Los Angeles, Oakland and Denver. These strikes were not limited to organized workforces. For example, Uber and Lyft drivers in Los Angeles held a 25-hour strike in March to protest cuts to their permile compensation. As of now, there are no signs of this momentum slowing. It is likely that unions will continue to take advantage of their position in this contentious political climate to mobilize workers and bring pressure to bear on employers. The recent strike activity has given unions a platform to demonstrate their effectiveness in a variety of industries. Not surprisingly, unions have latched onto worker frustrations in an attempt to win back relevancy in the modern workplace.
Frustrated with stagnant pay, educators walked out in Arizona, Oklahoma and West Virginia.
Employers should therefore anticipate the threat of strikes for the foreseeable future. For non-unionized employers, this will likely take the form of walkouts, for either a few hours or a few days. At the bargaining table, unionized employers will likely see a greater willingness by unions to push negotiations to impasse and increased threats of strikes. When faced with threatened strike activity, it is best to consult with your labor counsel to develop a lawful strategy to address it. The best defense is a good offense: An employer can engage in strike preparations to minimize its economic impact.
Lisa Vickery is an associate with labor and employment law firm Fisher Phillips in Portland, Ore. She represents public- and private-sector employers in labor negotiations and arbitrations and before administrative hearings. lvickery@fisherphillips.com Todd A. Lyon is a partner with Fisher Phillips in Portland, and cochairs the firm’s Labor Relations Practice Group. He represents employers in labor negotiations, collective bargaining, arbitrations and other litigation involving employment law and benefits. tlyon@fisherphillips.com
TODAY’S GENER AL COUNSEL FALL 2019
Labor & Employment Protecting IP
continued from page 15 the course of their employment and that should automatically belong to the employer, while stressing that this category may evolve depending on the evolution of the business itself. COPYRIGHTS
French intellectual property law continues to consider authors as independent individuals irrespective of their employment status. Per French copyright law, the creation and the intellectual property rights attached to it belong to the author even if the creation was made at work with the means made available to the employee by the employer. There are no formal requirements for the protection to kick in. Anything can
this core principle of French intellectual property law merely prevents general and unlimited assignments. As a result, employment contracts cannot provide that any future work created by employees in the course of their employment shall belong to the company. To circumvent this hurdle, employees may undertake in the employment agreement to transfer any and all rights on creations that will fall within the field of activity of the company. Every right to be assigned (the right to reproduce, interpret, etc.) should be clearly mentioned, along with the potential physical support on which the creation can be materialized. Such assignment is usually compensated by the mere payment of the employee’s monthly salary. Case law tolerates this type of clause for it is not a transfer of the employee’s future works but rather his/her commit-
French employment law and French intellectual property law have always pursued different goals. be protected by copyright under French law — a brochure, a piece of furniture, a pen. The work must only be an original work of expression and the author must be in a position to prove its “anteriority,” which can easily be done by sending oneself a copy or a description of the creation via sealed and registered post. As the author of the work, and unless otherwise provided in the employment agreement, the employee remains the sole owner of the economic proprietary rights and the moral rights. This rule was confirmed by the French Supreme Court in numerous decisions: “… any employee remains legally the owner of works they create, even though such creation has been made in the course of their duties or following the employer’s instructions.” To make things even more complicated, the assignment of the proprietary economic rights of future works is prohibited under French law. In practice,
ment to transfer. Here, again, the line can be blurry. It is also important to mention that in most civil law countries including France, the assignment of copyrights can never include the moral rights. Nevertheless, it is common practice to include a clause in the agreement whereby the employee renounces his/ her right to be credited as the author of the work. The lawfulness of such practice is doubtful, for case law only allows authors to renounce to their moral rights, providing such renunciation is reversible and not permanent. Another option can be to consider prima facie that any work created by employees over the course of their duties shall be deemed collective. In a “collective work,” the employer is the author of any work created by the employee and the owner of the related intellectual property rights, including the moral rights. While this exception
is commonly accepted by judges, not every creation may qualify as a collective work. The initiative of the creation must come from the employer and the employees’ contributions must be indistinguishable in the final result. Given the variety of protectable rights, the drafting of IP clauses can be a lengthy and technical process. If templates and generic clauses may seem useful, a detailed and tailor-made clause drafted by specialists well versed in both employment law and IP is key to adequately and effectively protect the company’s investments in research and development. Given the stakes, it would be worth carefully addressing this topic in the employment contract.
Julien Haure is a partner in the Employment & Benefits practice group of the Paris office of Mayer Brown. He specializes in complex employment collective matters, including shut down of activity, reorganizations implying reduction in force plans (including social plans), negotiation with unions and employee representative bodies, and implementation of collective agreements. jhaure@mayerbrown.com Marine Hamon is an associate in the Employment & Benefits practice group of the Paris office. She advises French and foreign corporations on all matters related to French employment, labor law and intellectual property. mhamon@mayerbrown.com
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FALL 2019 TODAY’S GENER AL COUNSEL
E-Discovery
Negotiating Second Request Discovery By John Murdock
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ery few things can incite more stress and urgency for legal and compliance teams than a HartScott-Rodino Second Request. Notorious for their tight deadlines and high stakes, second requests require organizations to process, review and produce large quantities of documents in a matter of weeks or months. Failure to properly comply can result in significant delays to M&A proceedings. Decisions about what needs to be reviewed, how and when, must be agreed upon with regulators before review — either electronic or eyes-on — can begin. Negotiating these terms with the government is an exercise in strategy and
tact. This article outlines best practices for successfully agreeing upon terms with regulators at the outset of a second request. By outlining timing agreements, custodian scope, how technology assisted review (TAR) will be applied, and government oversight and reporting before review begins, e-discovery teams can ensure a smooth process. In a typical second request, two companies have announced a merger or an acquisition, and the Federal Trade Commission and/or the Department of Justice have 30 days to conduct an initial review of the deal. These agencies want to ensure that this proposed action will not cause harm to consumers; and if after the initial
review, they need more information, either agency may issue a second request for more data. The actual date for compliance is usually negotiated between the government and involved companies, as are the conditions for compliance. TIMING AGREEMENTS
Upon receiving the second request, the legal teams from both companies will need to quickly figure out what the government wants to review; assess how long it will take to collect, review, and produce the relevant materials and privilege log to the agency; and then try to negotiate a deadline that
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E-Discovery
works within those constraints. It’s important to understand the underlying tension point. The government wants as much time as possible to review the data — emails, spreadsheets, voicemail recordings, chats, etc. — and determine whether the proposed merger will create an unfair market advantage for the new entity. Thirty days is often not enough time, so the last thing that the government wants is to receive all documents on the same day, right before the negotiated certification compliance deadline. On the other side, the merging companies typically want to complete the e-discovery process and certify compliance as quickly as possible. Given these various concerns, legal teams should decide on the likely custodians and amount of data to be collected before they meet with the agency. This includes evaluation of the scope of custodians and volume involved, whether certain relevant data resides outside of the United States and may be subject to data privacy laws, and assessment of whether relevant data resides in a unique or new digital format, such as a cloud-based collaboration application. Once the data universe is defined, the legal team needs to assess realistic time frames for the e-discovery process given the budget and staffing levels for legal review attorneys. With all this information, counsel should walk into negotiations with a strong sense of the amount of data at hand, the various tiers of data that may be responsive, and realistic time frames to give this data to the government. Along with the timing agreement, it is important to simultaneously agree which documents must be produced from which custodians, during which time period. When possible, teams should negotiate to have all the specifications in the request cover the same time period. This simplifies the process and leads to better predictive coding results. When that is not possible, it may be possible to restrict the scope of data in the earlier time period by limiting the number of custodians, or by developing different key words.
Scope negotiation includes reaching agreement upon who the custodians are. Starting the collection and review process (except perhaps for custodians who would have been part of the initial HSR filing) before the list is set can be an enormous mistake. Collecting from employees who end up not making the custodian list can waste a lot of effort and hundreds of thousands of dollars. For some critical custodians, the government may require refresh obligations, or an updated production for any responsive documents created since the original production. These refreshes can be difficult and complicated, so it is important to reduce the number of custodians subject to the refresh. It is also possible to negotiate the type of documents that are subject to a refresh. Doing so can save a lot of trouble and expense, as collecting emails is much easier than rescheduling time to collect from each custodian’s local devices, or coordinating additional scans of paper documents. TECHNOLOGY ASSISTED REVIEW
Over the last few years, agencies have grown more aggressive in TAR oversight; and it can be reasonably expected that this oversight will continue. The DOJ has become extremely sophisticated about predictive coding and has set out guidelines for e-discovery teams. Tracy Greer, Senior Litigation Counsel for E-Discovery in the DOJ’s Antitrust Division wrote, “The Division believes that the use of subject-matter experts to conduct the review is superior to using armies of less informed lawyers. Productions to the Division too often are rife with facially nonresponsive documents and information that is costly to load and review.” Some of the government’s TAR guidelines are negotiable, and others are not. E-discovery teams will need to come into negotiations armed with full knowledge of how predictive coding software and statistical reporting works. Understanding the government’s guidelines in advance of the negotiations can help legal teams push back against TAR processes that may be overly burdensome or expensive. One of the biggest changes to second request processes is the frequency and de-
tail of reports now required by the DOJ. Historically, it only required reporting at the end of the process, but today there is a push for daily reports. While this is doable, there are practical implications that should be considered pertaining to the balance of what is deemed work product and what is in good faith cooperation with the process. The government also typically requires a sampling of documents that have been predicted to be nonresponsive, and will require some level of remediation should it feel that too many responsive documents have been missed. The common arrangement is for agency attorneys to do this at the counsel’s office, never taking control of actual documents. Also, and critical to understand, the government will no longer allow documents that have been classified as responsive by the model to be changed to non-responsive as they make their way through the privilege review process. The government argues that this nullifies the recall rate agreed upon during negotiations. The high-stakes second request process is growing more complex due to growing data volumes and diversity, TAR technology usage and new regulatory guidelines. Second request experience, combined with a clear playbook for the process can have a profound impact on the success of negotiations with the government. Successful negotiations will determine the speed at which the e-discovery team can meet the certification, and ultimately streamline a typically burdensome and expensive exercise.
John Murdock is a Managing Director for FTI Consulting’s managed review services. He has led discovery for second request matters for more than 20 years. The focus of his work has been on fast-paced technology leveraged document reviews and quick turnaround of privilege logs and productions that satisfy government compliance requirements. john.murdock@fticonsulting.com
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Intellectual Property
A Fresh Look at Japanese Trade Secret Protection By Wakako Inaba and Gino Cheng
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ountries in East Asia have been updating their respective trade secret protection regimes in quick succession. The latest amendments to mainland China’s Anti-Unfair Competition Law and the overhaul to South Korea’s trade secret and patent laws took effect in April and July, respectively. At about the same time Taiwan was adding criminal penalties to its Trade Secrets Act, Japanese companies were also feeling the sting of trade secret misappropriation. According to Japan’s National Police Agency, the number of criminal offenses involving trade secret theft was dramatically on the rise. The agency received 72 requests for advice
cedural amendments and additional protection against the circumvention of copy control. The aim of this article is to provide a basic understanding of Japan’s trade secret protection regime, examine how the amendment expands the legal framework and survey some notable, high-value cases. BIG CASES A BACKDROP
The massive data leak in 2014 from Benesse Holdings, the largest correspondence education provider in Japan, startled the nation. It was a harbinger for more mishaps to come. In Toshiba Corp. v. SK Hynix Inc., an engineer who was working in a
POSCO and one of the former employees in 2012, seeking 98.6 billion yen in damages and an injunction against the manufacture and sale of such steel sheets. In 2015, the corporate parties settled for 30 billion yen. Nippon Steel reached a settlement with the former employees in 2017 for an undisclosed amount. Under the Unfair Competition Prevention Act, a trade secret is “a production method, sales method, or any technical or operational information useful for business activities that is controlled as a secret and is not publicly known.” Similar to many other jurisdictions, this definition contains three basic requirements: (1) economic value, (2) maintenance
Bona fide downstream users or disclosers of trade secrets are protected unless they were aware of the impropriety or grossly negligent. in 2017, a five-fold increase from just four years prior. It brought charges in 18 cases in 2017, up from merely five cases in 2013. Although there is no specialized trade secret statute in Japan, trade secrets are afforded both civil and criminal protection under the broader Unfair Competition Prevention Act. In parallel with the public’s growing awareness of the systemic problem of trade secret theft and other types of unfair competition, and to deal with new threats enabled by the evolution of technology, the act’s coverage was further expanded to capture additional proscribed activity. The latest such amendment was made in mid-2018 to address issues of big data, and its provisions took effect on July 1, 2019. The amendment also includes pro-
joint venture manufacturing plant copied Toshiba’s confidential information regarding NAND flash memory technology and divulged it to SK Hynix, a competing South Korean company. Toshiba filed a civil lawsuit against SK Hynix in the Tokyo District Court, seeking roughly 110 billion yen (then US $1.08 billion) damages in 2014. The corporate parties settled for US $278 million. In the Tokyo High Court in 2015, the engineer was individually prosecuted, sentenced to five years’ imprisonment and fined three million yen. In Nippon Steel & Sumitomo Metal Corp. v. POSCO and POSCO Japan Co. Ltd., former Nippon Steel employees copied confidential information regarding grain-oriented electrical steel sheet technology and divulged it to POSCO. Nippon Steel filed a civil lawsuit against
of confidentiality and (3) non-public nature. The presence of the second element is subject to the most debate and where companies often find themselves vulnerable. In response to the requests from industry, the Ministry of Economy, Trade and Industry (METI) fully revised its Guidelines for the Management of Trade Secrets in January 2015 and further revised them in January 2019. Although the guidelines are not legally binding, they are respected as the competent authority’s formal understanding of the minimum requirements for safeguarding information as a trade secret. The guidelines explain that a company’s measures must clearly communicate to its employees its intent to manage the information as confidential information. Although what constitutes such reason-
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Intellectual Property
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able measures differs for each company on a case-by-case basis, the intent should be easily and generally recognizable by the employees. As an example, the guidelines explain that placing confidential labels or marks on paper documents and using locked cabinets would be typical ways to communicate such intent. With respect to misappropriation, there are three basic categories of conduct that could trigger civil liability under the Act: (1) wrongful acquisition and
subsequent use or disclosure; (2) use or disclosure for the purpose of obtaining an illicit gain or causing injury to the trade secret holder and subsequent use or disclosure; and (3) assignment, import, or export, etc., of things produced as a result of (1) or (2). Bona fide downstream users or disclosers of the trade secrets initially gained through (1) or (2), and bona fide downstream distributors in (3), are protected unless such secondary
acquirers were aware of the impropriety or grossly negligent in their lack of awareness. Activity, such as the combination of wrongful acquisition with profit-seeking or damage-causing intent proscribed in the act, is subject to criminal penalties. CIVIL REMEDIES, STATUTORY RELIEF
A person or entity whose business interests have been, or are likely to be, continued on page 27
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Intellectual Property
Use of Landmark Images in Advertising By Purvi Patel Albers and Tiffany Ferris
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n an age of increased consumer choice, marketers frequently turn to localized campaigns to connect with purchasers on a “hometown” level. One strategy is to use architectural landmarks in campaign materials. If you see the art deco spire of the Chrysler Building, you know you’re in Manhattan. The wrought-iron lattice of the Eiffel Tower indicates Paris. Companies take advantage of this and incorporate imagery of city landmarks into advertising and branding materials to create a businessnext-door feeling. Though landmark images are valuable visual assets in advertising campaigns, their use can raise serious
legal concerns. They are often protectable under intellectual property laws. Unauthorized commercial use could rise to the level of infringement, the potential consequences of which include an injunction (read: forced rebranding) and monetary damages. Marketers should consider whether use of a landmark’s image is a violation of intellectual property rights and should weigh that risk in crafting a localization campaign that includes the image. TRADEMARK PROBLEMS
One issue that could arise when using landmark images in advertising is potential trademark infringement. With
few exceptions, U.S. law allows nearly anything to serve as a trademark if it identifies or distinguishes the goods or services provided under it from others in the market. Colors and sounds, for example, can serve this purpose — think orange for The Home Depot or the G-E-C sequence of musical notes that makes up the NBC chimes. If colors and sounds can serve as source identifiers, then it makes sense that the image of a landmark could do so as well. Since building images can serve as source identifiers, the unauthorized use of those images can be infringing. Landmark image infringement may occur when your use in commerce of
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Intellectual Property the image is likely to cause confusion or mistake, or to deceive as to the affiliation, connection or association with the building and/or its owner. It may be tempting to think that using a landmark’s image in advertising couldn’t constitute infringement, and the leading U.S. case on this point, Rock & Roll Hall of Fame & Museum, Inc. v. Gentile Productions, makes it seem so. However, the facts of that case do not align with the facts that would be present in an action against advertising using a landmark’s image, and Rock & Roll Hall of Fame doesn’t provide an iron-clad shelter to marketers who use landmark images in promotional materials. There, the defendant artist benefitted from the plaintiff museum’s difficulty in proving enforceable rights. Landmark image owners seem to have learned from this case and are careful to use their building images in ways that create enforceable rights. Consider the Transamerica Pyramid image, which serves as a source identifier for Transamerica Corporation, or the Empire State Building, which licenses its “trademarked name and images” for certain promotional and advertising purposes. Absent significant evidence to the contrary, it seems unlikely that a court would find that landmarks such as these do not have enforceable rights in their images. Finally, protections and enforcement efforts may be more robust for international landmarks. The entity behind the Sydney Opera House image is notoriously protective of the building’s image, buoyed by Australian law and ownership of three-dimensional image trademarks. Unauthorized uses of the building’s image are often met with cease and desist letters, and requests for a license are not always granted.
visible from, a public place. Still, it would be remiss to dismiss the idea of a copyright claim. First, copyright can exist in items other than the building itself. Does the building have a mural or sculptural element that is artistic in nature? If so, it might be protected by copyright and its reproduction in pictorial form may be infringing. If the advertising image is not based on the physical building itself but is instead based on a drawing, photograph or other image of the landmark, then the advertisement may infringe the copyright in that work. Second, not every landmark is an architectural work. Some landmarks fall into other protected categories of copyrighted works, for example, sculpture. Consider that Cloud Gate in Millennium Park (aka, “The Bean”) is a three-dimensional work of art. Artist Amish Kapoor owns a copyright registration for it, and pictorial reproduction, especially for the commercial purpose of an advertisement, may be an infringing use. As with trademark issues, international protections may be robust or unexpected. Many famous international landmarks still have some form of copyright protection. The Société d’Exploitation de la Tour Eiffel, claims that illuminations of la Tour Eiffel are protected. Night renderings of this famous Parisienne icon may infringe.
We have seen well-known global landmarks require as little as $5,000 for licenses and others that require standard six-figure payments.
COPYRIGHT CONUNDRUMS
In the U.S., copyright protection exists for original works fixed in a tangible medium of expression, including architectural works. U.S. law is explicit, however, that copyright in a constructed architectural work does not prevent making, distributing or public display of pictorial representations of the work if the building is located in, or ordinarily
be found liable for monetary damages, with potential statutory damages in a copyright infringement scenario. Though there are risks involved, the benefits of using landmarks in marketing can be significant. They communicate location and tap into hometown feelings of pride and community. It is understandable why marketers want to use them. Savvy marketers will adhere to the following best practices to mitigate and manage risks involved with a landmark campaign. Conduct clearance. The clearance process can provide a better idea of three things: whether someone could successfully enforce rights in a building image against you (legal risk), whether it is likely that someone would attempt to enforce (practical risk), and a general idea of potential consequences at stake. If a landmark has a formal image licensing program, that could indicate relatively higher degrees of legal and practical risks, and a good chance that monetary damages would be imposed. Clearance can illuminate these issues and set up your business for informed decision making. Consider risk tolerance and ability to pivot. Is yours a company that never wants to receive a cease and desist letter? If you received one, would your company be willing and able to comply with its demand, which might require you to revise the advertising at issue? Compare your risk tolerance to the risks of using the landmark(s) you had advertising counsel clear. If the risks associated with using the image are greater than your risk tolerance, you could pivot away from the image or implement strategies to mitigate risks. Mitigate risks if necessary. The two primary ways to mitigate risks associated with a landmark image are to obtain a
BEST PRACTICES
The risks and consequences of infringing the rights in a building image are real and can be costly. If a court finds an advertisement infringes, it could issue an injunction, forcing you to withdraw the material, redesign, or even rebrand if, for example, it has been incorporated into a logo. Your company could also
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Intellectual Property license and/or revise the image toward a skyline. There are two primary hurdles to obtaining a license. First is convincing the rights holder that your brand/company aligns with the landmark’s brand. Initial negotiation approaches should lay out this synergy and a value proposition for the landmark. You should also be prepared to state the medium, geographic distribution, and intended duration of the promotional campaign. The second hurdle is price. Marketers are often shocked at the wide range of licensing fees that rights holders request. We have seen well-known global landmarks require as little as $5,000 for licenses and others that require standard six-figure payments. An unsuccessful attempt to negotiate a license can put a rights holder on alert for anything it views as infringing, so approaches should be made carefully. Revising your materials to be skyline imagery can also help mitigate risks. The crux of a trademark infringement claim stemming from use of a landmark’s
image is that such unauthorized use is likely to deceive consumers as to the connection between your company and its offerings, on one hand, and the landmark on the other. This claim is stronger when only one or a few landmark images are used. After all, if you were just trying to convey location, there were probably other landmarks that you could have chosen. When skyline imagery is used, the argument that the message conveyed is one of location rather than of association with a particular building is much stronger. To be clear, use of skyline imagery is not bulletproof, but certain design techniques can strengthen its defensive position. The most defensible skylines are the ones that are the most accurate — meaning they display the skyline as it actually appears from a publicly accessible viewpoint. Buildings should appear in their correct position — relative to one another — and be displayed in accurate proportions. Miniaturizing five buildings in a circle around a triple-sized sixth
Since building images can serve as source identifiers, the unauthorized use of those images can be infringing.
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building, for example, likely would not serve to mitigate risks. In fact, the opposite might be the case. With proper planning and mitigation strategies, using landmark images in advertising and promotional campaigns can be a valuable tool to connect with consumers.
Purvi Patel Albers is a partner in the Haynes and Boone Dallas office. She is a member of the firm’s board of directors and serves as trusted adviser and counsel to Fortune 500 companies and high-growth ventures on the management of their valuable brand investments. Purvi.Albers@haynesboone.com Tiffany Ferris is an associate in the Haynes and Boone Dallas office. She assists clients in all aspects of brand management and promotion, from evaluating the availability of potential trademark to analyzing potential risks associated with advertising claims. Tiffany.Ferris@haynesboone.com
TODAY’S GENER AL COUNSEL FALL 2019
Intellectual Property Trade Secrets in Japan continued from page 23
injured by unfair competition may seek injunctive relief under the act. Once the business interests are intentionally or negligently infringed, the owner may seek compensatory damages. Measures include plaintiff’s lost profits, the defendant’s profits or actual losses. The court may also order the infringer to take necessary actions to restore the plaintiff’s business reputation. One major obstacle for plaintiffs is that the Japanese judicial system provides for little to no fact discovery. For the ease of plaintiffs, the burden of proof was relaxed in 2015. The act also sets out various methods to calculate damages. Independent of these measures, a court may determine a reasonable amount to award based on the parties’ oral arguments and its examination of the evidence. Any person who commits trade secret misappropriation in the manner prescribed in the act faces imprisonment for up to 10 years, a fine of as much as 20 million yen, or both. And in a departure from mainland China’s Anti-Unfair Competition Law, Japan’s act provides for respondeat superior for certain types of misappropriation. When an individual or a representative of a juridical person (or an agent, employee or any other worker thereof) has committed such a violation with respect to his or his employer’s business, not only the offender but also the employer shall be found guilty and punished by a fine of not more than 500 million yen unless it proves that it was not negligent. This provision, as interpreted by associated case law, is similar to the counterpart provisions in South Korea and Taiwan. As clarified by a previous amendment of the act in 2015, overseas infringement is implicated even where the effect is felt domestically but the underlying acts occurred abroad. Such “foreign” activity is subject to heavier, criminal penalties. The amendment enumerates a new category of improper activity, i.e., the
wrongful acquisition or use of technical or business information stored and managed by electromagnetic means (e.g., user ID, password), whose storage or maintenance purpose was to further the business of providing the information to a limited number of persons. Think big data, the Internet of Things (IoT), and smart cities. Take, for example, a high precision, three-dimensional map database compiled from data collected separately from consumer vehicles and provided to automobile makers to utilize for data crunching. Although such a database holds significant value, it would not have been protectable under the conventional definition of trade secret, due to its contents having being shared with or derived from third parties. Per the amendment, however, those injured by the wrongful acquisition or use of such information will also enjoy the same civil remedies available for other forms of unfair competition. Criminal penalties were not extended to cover this type of misconduct. To further explain and interpret the newly prohibited acts, METI provided the Guidelines of Protected Data. In addition, on June 15, 2019, METI published A.I./ Data Contract Guidelines that provides exemplary contract clauses to help popularize the use of data utilization contracts among Japanese businesses. In the Benesse, Toshiba, and Nippon Steel cases, confidential information and sensitive data were leaked by those who had access to them at work. With increasing employee mobility, departing and former employees are a major concern, along with vulnerability in terms of data egress. Nonetheless, a recent survey by the Information Technology Promotion Agency shows that a large percentage of Japanese companies have a false sense of security towards the specter of trade secret theft and are ill-prepared to handle it. Although the unfair competition statute affords some legal remedy in Japan, one must also account for uncertainty in the judicial process. Considering the economic stakes, commercial derailment and reputational harm that data leakage could inflict on the aggrieved
business, every company should take the ubiquitous risk more seriously. It is advisable to prophylactically reevaluate one’s current companywide security protocols to prevent the theft of a business unit’s most valuable trade secret before it occurs, and/or serve as a backstop to quickly detect theft once it occurs.
Wakako Inaba is a foreign legal advisor in Winston & Strawn’s Los Angeles office and member of the Osaka Bar Association. Her practice focuses on commercial litigation and international arbitration. She advises clients on commercial disputes in a wide variety of sectors including aviation, automotive, and pharmaceutical and medical device technologies. Winaba@winston.com Gino Cheng is a partner in intellectual property at Winston & Strawn. His practice focuses on licensing negotiations, trade secret audits, patent litigation, Section 337 ITC investigations, and adversarial post-grant proceedings at the United States Patent and Trade Office, predominantly in the semiconductor and LED space. He is also a member of the firm’s Disruptive Technologies Team and the cross-functional Global Privacy and Data Security Task Force. GCheng@winston.com
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Cybersecurity
Cybersecurity Protocols and ADR By Diana Didia
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hree years ago, a whistleblower hacked into the computer network at the Mossack Foneseca law firm, leaking 11.5 million documents known as the Panama Papers and placing a target squarely on the back of the legal profession. That event proved that law firms, similar to banking/credit card and health-care companies, have what cyberthieves desperately want — a treasure trove of valuable, confidential information. How has the legal profession adapted to cyber threats in a post-Panama Papers world? Unfortunately, not well enough. According to the ABA’S 2018 Legal Technology Survey Report, 23 percent of attorney respondents reported that their law firm had experienced a data breach at some time. Although financial services firms and healthcare companies have been swift to adopt new cybersecurity measures, law firms have been much slower to respond to 21st century security challenges. As reported in Forbes, Mossack Fonseca left itself extremely vulnerable to attacks by maintaining weak, outdated web technology; failing to encrypt emails; using a shared email/ server; and going without firewall protections. If the legal profession, in general, needs to modernize its approach, alternative dispute resolution (ADR) has even more work, given its unique composition. ADR participants — arbitrators, mediators, representatives — come from vastly different organizations, each with its own systems, technologies and procedures. This heightens the risk that something will get into the wrong person’s hands. What’s more, it’s not uncommon for ADR professionals to use a mix of consumer and enterprise software, inviting additional risks. To safeguard sensitive
documents, clients should look for ADR firms that have secure document exchange, extensive use of encryption, web-browsing control and advanced intrusion detection, among other systems and controls. Ultimately, the ADR industry will need to come to terms with several major questions: How will participants with varying degrees of technology and training collaborate without risking sensitive data? What’s the ideal process for managing large volumes of material? How should parties handle document retention and deletion? Who has the authority to enforce these measures? The good news is that the legal profession at large is slowly moving in the right direction.
guard people’s personal data and serves as a kind of roadmap for multi-national companies operating in jurisdictions outside of the EU. In a legal setting, cybersecurity threats can originate from any number of places — from cyber criminals looking to steal intellectual property and other valuable information, to hacktivists like the Panama Papers whistleblower, and disgruntled employees or partners who gain access to data through various means, including malware, ransomware, social engineering and phishing. There are steps ADR professionals can take to guard against hacks and data breaches, and not all involve installing expensive new systems. Legal professionals can better safeguard sensitive information by using complex passwords and passphrases; tools such as password manager and two-factor authentication; and freeware avoidance. Additionally, they should use full disk encryption on all computers, encrypt files on portable storage devices and never send passwords by the same media as password-protected files. Of course, it’s important to remember the basics. Exercise caution before clicking on links or attachments, and if you see something, say something — alert your IT team and colleagues if an email looks out of the ordinary. In the modern mobile workforce, professionals can conduct business from an airport, a café or, indeed, anywhere. But legal professionals should always remain aware of their surroundings when using public Wi-Fi and mobile hotspots. And they must also take old-fashioned precautions such as using a privacy screen to prevent visual hacking and shredding documents before disposal. For ADR professionals, a major cybersecurity challenge involves the sharing of large volumes of documents.
To safeguard sensitive documents, clients should look for ADR firms that have effective systems and controls. In May 2017, the ABA Standing Committee on Ethics and Professional Responsibility issued guidance to help attorneys address their obligations to safeguard their clients’ sensitive information, stating: “A lawyer should understand how their firm’s electronic communications are created, where client data resides, and what avenues exist to access that information. Understanding these processes will assist a lawyer in managing the risk of inadvertent or unauthorized disclosure of client-related information.” A growing number of state bar associations are also clarifying best practices in cybersecurity. On a global scale, the EU is leading the way. Last year, the General Data Protection Regulation (GDPR) went into effect throughout the EU. The most sweeping set of regulations of its kind, the GDPR provides far-reaching steps businesses need to take to properly safe-
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Cybersecurity
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Although there is no quick fix to this issue, everyone should take a more thoughtful approach to document sharing. Instead of blindly forwarding emails, professionals should think carefully about what kind of information they must send and receive, pushing back when colleagues offer to share non-essential material or instead use a cloud-storage system. Although these measures will help lessen the likelihood of a cyberattack or breach, nothing removes the risk altogether. That’s why businesses need
to have a plan to respond and notify their clients. All 50 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands have enacted laws requiring private or government entities to notify individuals of security breaches involving their personal information. Ultimately, the legal community, ADR in particular, should approach cybersecurity as they do any other important aspect of their work, taking part in training programs; keeping abreast of
research, new guidelines and technologies; and empowering themselves to be part of the solution, not the problem.
Diana Didia is Senior Vice President and Chief Information Officer at the American Arbitration Association, International Centre for Dispute Resolution. didiad@adr.org
FALL 2019 TODAY’S GENER AL COUNSEL
Cybersecurity
Preparing for the California Consumer Privacy Act By David M. Stauss and Robert J. Bowman
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rivacy law in the United States is about to undergo a fundamental change when the California Consumer Privacy Act becomes effective on January 1, 2020. Preparing for the CCPA has been complicated by the fact that the California legislature is still considering bills that would amend its terms, and the California Attorney General’s office is charged with drafting interpretive regulations for a law that has not been finalized. Nonetheless, as discussed below, there are many activities that organizations can be engaging in now to ensure that they are not caught unprepared once the CCPA goes into effect. CCPA FUNDAMENTALS
The CCPA is a first-in-the-nation privacy law that will provide numerous privacyrelated rights to California residents. Once it goes into effect, the CCPA will require covered businesses to provide California residents with a number of privacy-related rights. These include the right to know what personal information a business collects and how it shares that information with others, to request that the business provide the specific pieces of personal information it has collected to the individual, to demand that the business delete the individual’s personal information and the right to opt-out of a business’s sales of personal information to third parties. The CCPA applies to “businesses,” defined as any for-profit legal entity that does business in California, collects the personal information of California residents, and satisfies at least one of the following three thresholds: (1) has annual gross revenues in excess of $25,000,000; (2) alone, or in combination, annually buys, receives for the business’s commercial purpose, sells or shares for commercial purposes, alone or in combination,
the personal information of 50,000 or more consumers, households or devices; (3) derives 50 percent or more of its annual revenue from selling consumer’s personal information. The CCPA defines “personal information” broadly to include information that identifies, relates to, describes, is capable of being associated with or could reasonably be linked with a consumer or household. The statute identifies many different
The CCPA is a first-in-the-nation privacy law that will provide numerous privacy-related rights to California residents. types of information that qualify as personal information, including email addresses, IP addresses, browsing history, search history, biometric information, social security numbers, credit/debit card numbers, geolocation data, account names, information regarding a consumer’s interaction with a website, cookies, education information, and professional or employment-related information. The California Attorney General’s office is charged with enforcing the CCPA’s privacy-related rights and is authorized to seek statutory damages of $2,500 for each violation or $7,500 for each intentional violation. The CCPA also establishes a private right of action for data breaches involving certain types of personal information if the breach is caused by a failure to implement and maintain reasonable security procedures
and practices. The CCPA provides for statutory damages of between $100 and $750 per consumer per incident. When this article was written, the legislature was considering bills that would modify some parts of the CCPA if passed. That process will have concluded by September 13, when the legislature closes. However, none of the bills that have survived to date will usher in significant changes that would justify taking a wait-and-see approach to compliance. The CCPA also requires the California Attorney General’s office to promulgate regulations on certain topics. The Attorney General’s office has publicly stated that it will publish those regulations in the fall of 2019. Presumably, this will happen after the legislature finishes with its amendment process. The Attorney General’s office has identified seven categories upon which it may publish regulations: personal information; definition of unique identifiers; exceptions; submitting and complying with verified consumer requests; providing a uniform opt-out logo button; guidance on notices and information to consumers, including financial incentive offerings; and verification of consumer’s requests. Although there certainly are compliance issues that businesses will not be able to deal with until the legislative and regulatory process is finalized, there are many activities that businesses subject to the CCPA should be performing now to ensure compliance. Analyze Your Organizational Chart For companies with complex corporate structures, one of the first steps to CCPA compliance should be analyzing the company’s corporate structure to determine which entities can be considered the same business and which entities must be treated separately. The CCPA’s
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Cybersecurity
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definition of “business” includes not only the entity that qualifies under one of the three threshold requirements discussed above but also any “entity that controls or is controlled by the business . . . and that shares common branding with the business.” Identifying which corporate entities qualify as the same business and which do not will dictate how an organization responds to verified requests for
information, the types of disclosures it must make regarding its collection and sharing of personal information, and whether the sharing of personal information between organizations in the same corporate family is subject to the CCPA’s opt-out provision. Inventory Your Data Organizations are not going to be able to comply with the CCPA without
understanding what personal information flows into the organization, why it is being collected, where it is stored and whether it is being shared with other entities (both inter- and intra-company transfers). Among other things, the CCPA requires businesses to disclose the categories of personal information the business has collected in the preceding 12 months, a list of categories of personal information it has sold about
FALL 2019 TODAY’S GENER AL COUNSEL
Cybersecurity
California residents in the preceding 12 months, and a list of categories of personal information the business has disclosed about consumers for a business purpose for the preceding 12 months. This requires an inventory of data. Entities that transfer personal information to other entities will need to determine whether those entities are
keting purposes often collect personal information. Marketing personnel may implement certain cookies, while the legal department may not be aware of what data is being collected. Businesses subject to the CCPA will need to understand what cookies their webpages are using and how those cookies interact with the CCPA’s
Marketing personnel may implement certain cookies, while the legal department may not be aware of what data is being collected. “service providers” or “third parties” under the CCPA. That analysis will require looking at the nature and purpose of those transfers in the context of the CCPA’s requirements for each category.
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Determine Your Web Presence Many organizations have numerous websites that they created over the years for various purposes. Some of those websites may be dormant for commercial purposes but still active online (and therefore potentially subject to the CCPA). As a result, determining your organization’s web presence is critical for completing your data inventory and for making sure that each website has the proper online privacy notice disclosures. Understand How Your Organization is Using Cookies The word “cookie” appears only once in the CCPA, however, understanding how your organization uses cookies will be a critical element to driving compliance. One of the categories of personal information the CCPA covers is “unique personal identifiers.” The CCPA contains an extensive definition of that term, which includes things such as IP addresses, cookies, beacons, pixel tags and mobile ad identifiers. A cookie is a small text file that is downloaded onto a computer or smartphone when someone accesses a website. Cookies that are used for digital mar-
requirements. For instance, third-party advertising cookies likely constitute “sales” under the CCPA and, therefore, are subject to the CCPA’s opt-out provision. Moreover, understanding which cookies are being used is required to make the proper disclosures in your online privacy notices. Information Security The CCPA authorizes California residents to bring private lawsuits against organizations for data breaches involving certain types of personal information. The CCPA links these damages to the state’s data breach notification statute’s definition of personal information, not the CCPA’s broader definition. Nonetheless, with statutory damages of between $100 and $750 per consumer, per incident, it is not hyperbole to say that data breaches will quickly turn into bet-thecompany litigation. To mitigate against this risk, organizations should take steps to ensure that they have reasonable information security measures in place to prevent breaches (or to establish evidence of reasonable measures if a breach occurs). Organizations also should review their cyber insurance coverage to ensure that it will be adequate. As we wait for the California legislature and Attorney General’s office to finalize the CCPA’s terms and provide further guidance on its contours, there are undoubtedly steps that any covered organization can and should be taking
now to place itself in a position to comply with the CCPA when it goes into effect. Indeed, while certain activities, for example, drafting online privacy notices, can be stayed pending the Attorney General’s regulations, other activities — such as analyzing your organization’s corporate structure, conducting data inventories, understanding your organization’s web presence and cookie usage, and reviewing your information security posture — can be undertaken now.
David M. Stauss is a partner at Husch Blackwell LLP and co-leader of the firm’s privacy and data security practice group. He counsels clients on complying with existing and emerging privacy and information security laws, including the European Union’s General Data Protection Regulation (GDPR), the California Consumer Privacy Act of 2018, and state information security statutes. david.stauss@huschblackwell.com Robert J. Bowman is a partner in Husch Blackwell’s Technology, Manufacturing & Transportation industry group and a co-leader of the firm’s internet of things (IoT) team. bob.bowman@huschblackwell.com
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Managing Mountains of Data Q&A WITH SHEILA MACKAY AND KARLA WEHBE OF H5 Further, business units are not always well equipped to manage their content over time and cannot afford to divert resources to managing data that still has business value. The result is often multiple data stores with duplicate information where valuable data is mixed with redundant, obsolete or trivial data (ROT). Sheila Mackay: Another obstacle is an enterprise’s lack of visibility into its data repositories. Often, the company does not view proactively managing data as a strategic activity, so data governance procedures remain undeveloped. Do you think corporations devote enough budget to information governance?
It is critical for a corporation to identify and retain data that has business value, but that same data can pose risks. Today’s General Counsel interviewed Sheila Mackay and Karla Wehbe of H5, a leading technology services firm, on managing these competing realities, a task made more difficult by increasing volumes of data. What are the most common risks a company faces as a result of retaining large data volumes?
could expose customer or third party business secrets.
Karla Wehbe: Retaining too much unmanaged data can make a company vulnerable to fines from data regulators or criminal prosecution, damage its reputation, and result in the loss of customer confidence. I see three main categories of risk: You have compliance risk from insufficient protection of consumer or employee PII and confidential information stored in multiple systems; risk of disclosing business-sensitive data during litigation; and vulnerability to data breaches that
What can stop a corporation from overcoming those risks?
Karla Wehbe: Large data volumes often obscure the risky information they contain because there is too much to wade through. Companies cannot always allocate sufficient resources for review, and traditional methods of reviewing and categorizing data are not viable for such large volumes. IT teams may manage data storage, but they do not always have visibility into its business value.
Sheila Mackay: In the last few years, we have seen more companies allocate money to mitigate risks, identify PII, and reduce overall costs by eliminating data without business value. Companies are now working to get ahead of these challenges rather than being in reactive mode when an investigation or litigation commences. How can companies better minimize risk?
Sheila Mackay: They can deploy tools at the data end points, where data is stored, in order to gain a better understanding of what is in unstructured data; a blind spot for many organizations. The goal is to identify and classify data early in order to know where custodians store data, determine its business value, and classify it according to corporate data retention policies. That facilitates pre-incident data organization, prior to collection. Karla Wehbe: It’s a good practice for a company to maintain information about what is contained in its large data stores, allowing it to gain control of its data and
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take action. These solutions can include creating and maintaining a data inventory that identifies sensitive data and that can be used for multiple purposes across the enterprise; implementing data risk assessments for core data sets to reduce cost and risk; using a combination of AI, machine learning, and professional services to create customized, advanced searches and workflows that identify and classify data; and establishing defensible and actionable data disposal initiatives.
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Sheila Mackay: In a traditional organization, many departments may be tasked with addressing different aspects of data risk; however, it’s more effective to apply a unified solution across multiple departments and workflows. The convergence of e-discovery, information governance, and information security allows the company to apply similar methodologies to address issues simultaneously or in parallel. For example, an e-discovery process launched in response to a document request on a specific matter can also initiate the management of privacy risk. Or a company can apply PII classifiers to a data set that is simultaneously being identified and prepared for production. What about legal and compliance departments? Can they help the business with their data challenges?
Karla Wehbe: They certainly can. A litigation team has to develop solutions for distilling large volumes of data down to the information relevant to a matter. The legal department can share this know-how to help create data management solutions for the business, too. So, do you see a growing role for legal and compliance departments in data governance?
Karla Wehbe: Yes. The complex nature of today’s data and analytics is creating new challenges. The corporation’s responsibility as a data steward is growing, and legal and compliance teams play a key role. Digital transformation is changing how we capture and analyze data. We can now create
learning systems that derive key decisionmaking intelligence, with algorithms that spot trends in large data sets. This continuous learning process will challenge traditional business ethics and norms, and the role of compliance and information security in data governance will increase. We’ve been talking about risks, but how can a company use data to bring value to its business?
Sheila Mackay: First, the organization has to mature in its use of data. It has to evolve from taking an ad hoc, reactive approach characterized by one-off projects without data standards or cost management to recognizing that data has operational value. A good way to start turning data into an asset is by managing its cost – identifying, tagging, and retaining key documents for re-use and future reference – and by using quality data to develop knowledge that informs business strategy. A step up from there would be deploying data analytics to anticipate risk, inform and report on strategic decisions, and accelerate the learning curve when a situation calls for swift action.
on protecting company data and increasing the reliability and quality of the data by categorizing it properly and making it accessible to inform decisions and support business growth. Sheila Mackay: I agree with Karla. By utilizing holistic solutions, companies can address challenges related to data volumes and variety of sources while also extracting, classifying and therefore maximizing the business value.
SHEILA MACKAY is Managing Director of eDiscovery at H5. She has more than 25 years of experience in legal services, including product development, professional services, operations, management, and business development. She helps develop and deploy custom solutions for global and domestic companies and for law firms. smackay@h5.com KARLA WEHBE is Director of Legal and
What value can the legal department bring, specifically?
Compliance Business
Karla Wehbe: For one thing, a legal department can develop a methodology to leverage documents or knowledge from one matter for use in another. In addition, the legal team can create re-usable key litigation document sets, for example, that show how a company has developed safety procedures or marketed products over the years. Those documents can be used in future cases. Lessons learned from data insights and these document and data compilations can be shared with the business so they can leverage that history when they design products, talk to customers, or manage their suppliers.
verages her experience
Do you have any final thoughts?
Karla Wehbe: It’s promising that corporations now recognize the importance of digital technology for operational and business success, but that success depends
Solutions at H5. She leas a liaison between business, legal, and IT functions to help companies identify and manage the issues stemming from the accumulation of electronic data, and she collaborates with legal teams on case strategy and the efficient utilization of litigation tools and methodologies. kwehbe@h5.com
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BOOK REVIEW
Business and Commercial Litigation in Federal Courts
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riting this review of the Fourth Edition of Business and Commercial Litigation in Federal Courts, Robert L. Haig Editor-in-Chief, was a formidable challenge because there is so much to review. The 14 volumes (three more than the Third Edition) contain 25 new chapters. It is a comprehensive guide to a wide range of topics that confront both generalists and specialists in litigation. Also, while it may not be the primary purpose, any inside counsel who has engaged lawyers to handle complex commercial cases would benefit greatly by immersion in the subject areas they are confronting, either as plaintiffs or defendants. Each chapter has a principal author or authors. Reviewing the list is equivalent to reviewing the lineup for an all-star game if you are a baseball fan, or the principal musicians of the Philadelphia Orchestra (I have my biases). These notable judges and lawyers have written fully annotated chapters on virtually every subject that comes into play in a commercial case, beginning with jurisdiction and venue and ending with e-commerce and information technology. All the chapters are full of substantive law but there are also practice tips aplenty, along with an explanation of what is required from practitioners by the Federal Rules of Civil Procedure. As one example, Chapter 7 in the first volume entitled “The Complaint,” contains more than 100 pages that not only cover the basics of how to draft a complex commercial complaint but also provides strategic considerations and pleading essentials. If the shoe is on the other foot, Chapter 8 provides insights into ways
a surprise for a treatise with this one’s title. It is written by a very experienced federal judge. Although not commercial litigation as such, it is especially important since a very high percentage of the overall case load in federal courts involves cases that have been joined together in MDLs covering a wide variety of products, but especially pharmaceuticals. The father of mass torts is the decision by the United States Supreme Court 42 years ago in Bates v. Arizona, 433 U.S. 350. That 5 – 4 decision, written by Justice Blackmun, held that the First Amendment allows lawyers to advertise their services in a manner that is not misleading to members of the general public. Now, lawyers
Robert C. Heim, a partner at Dechert LLP, is a trial lawyer who focuses his practice on antitrust, securities, product liability and complex commercial litigation. He is a past Chancellor of the Philadelphia Bar Association, past President of the National Conference of Bar Presidents, and an elected Fellow of the American College of Trial Lawyers and the International Academy of Trial Lawyers. robert.heim@dechert.com
to attack a complaint in addition to understanding the bases for denials. Since earlier reviews of this encyclopedic approach to important topics of interest to every commercial litigator cover a wide range of territory, I will emphasize new additions starting with Chapter 110 of Volume 11, Mass Torts,
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advertising alleged harm arising from the use of certain products is a fact of life and attracts large volumes of cases that become mass torts. The chapter refers to mass torts principally within the products liability context and provides an overview of case management issues as well as discovery strategies. This is an excellent historical piece with a number of good practice suggestions. I particularly commend the section on assessing claims and defenses. Chapter 51, Volume 5, is a new chapter on mediation. One of the authors, former judge Daniel H. Weinstein, is a founding member of JAMS, a pioneer organization in the mediation world. (Full disclosure — Judge Weinstein and I have been friendly for years.) I was glad to see this addition. As any experienced commercial litigator knows, most cases settle; and many of them settle through the mediation process. Those of us who began to practice before the late 1970s would have seen the onset of mediation as a proverbial flash in the pan. How wrong we would have been! Once the idea of mediation took hold, it became increasingly popular and judges started to recommend it, sometimes gently and sometimes not so gently. The Civil Justice Reform Act of 1990 specifically authorized district courts to refer appropriate cases to alternative dispute resolution, essentially mediation and arbitration. There is a section describing which cases the authors believe to be best suited for mediation. Particularly of use is the section on the “mediation advocate,” which refers to a lawyer skilled at representing clients at mediations. All in all, this is a much- needed discussion of mediation, including how to best prepare for one. Another important new chapter is one on social media, Chapter 67, Volume 6. For those of us steeped in the traditional discovery tools permitted under the Federal Rules of Civil Procedure, the idea of seeking to access social media platforms is not something that comes quickly to mind. And yet for many people, communicating by way of social media is a daily
occurrence, and platforms that provide who would call him at inconvenient important information about people and times, finally eliciting an exasperated their behavior can be central to a claim comment from my partner who said, or defense. The Federal Rules do not “I’m sorry, but you must think you are expressly contemplate discovery of social the only client I have.” There was a short media, but the basic discovery tools can pause and then the client responded, “I be used to discover facts that are part of don’t know about that, but you are the an individual’s social media network. only lawyer I have.” This chapter points out that a litigant Given today’s contentious political seeking to access an opponent’s social climate, Chapter 141 on Civil Rights media will likely have to deal with the in Volume 13 can be of substantial imStored Communications Act, which portance to businesses and the lawyers places limits on what a service provider representing them. The chapter deals needs to disclose. However, the statute principally with 42 U.S.C.A. Section does not protect an account owner from 1983, the procedural vehicle by which disclosing relevant social media commu- substantive rights created by the Connications. This is another important new stitution or some other federal law are chapter for the 21st century litigator. enforced. In today’s competitive business cliThe subject is more complicated than mate, lawyers find themselves in the posi- it might seem at first. Businesses and tion of explaining to prospective clients private individuals can be defendants why they should be selected to handle under Section 1983 in a variety of cira commercial case. It is no longer true cumstances; and counseling businesses that, as a senior on their potential partner of mine once liability — especially commented, “don’t if the business or inworry, the work will dividual has been in just drop in from a partnership with over the transom.” a state — can be a Chapter 70 in Volcritical component ume 7 of the Fourth of advice given by a Edition on Marketing commercial litigator to Potential Busior inside counsel. ness Clients is a This is an excellent useful introduction review of the comto younger lawyers, plexities involved and a reminder to and especially worth older lawyers of the reading if a client is best ways to market engaged in activities their services. As with other federal or explained in this state agencies. chapter, the key (in A commercial lita word) is visibility. igator may be of the Business and Commercial Litigation The chapter gives view that the subject in Federal Courts, Fourth Edition specific suggestions of punitive damages Robert L. Haig, Editor-in-Chief as to how to be more is not likely to be visible and how to prepare and deliver on his or her plate when representing the “pitch.” I was particularly taken either a plaintiff or a defendant. Howevwith the section on maintaining client er, it is not uncommon for a plaintiff to connections after being retained. bring an action for breach of contract It reminded me of a story told to me and couple it with a tort claim seeking by a very senior partner when I was a punitive damages, such as a claim for young lawyer. This partner had a client breach of fiduciary duty. As the authors
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note, cases seeking punitive damages are now commonplace. Chapter 48, Volume 5 provides a comprehensive review of this subject. The authors are forthright in admitting their bias that punitive damages are awarded too often and are frequently excessive. Nonetheless, this chapter is
the plaintiff’s affirmative case and how defense counsel can defend against it. The exposition of punitive damages case law is excellent. As you read through this chapter, you will understand why the authors provided their initial caveat about leaning towards the defense. The material in
Once the idea of mediation took hold, it became increasingly popular and judges started to recommend it.
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not only good reading for defense counsel but for plaintiff’s counsel as well. Some of the standard features of punitive damages doctrine are reviewed, such as discovery of a defendant’s financial condition and “other acts” evidence, but the chapter is at its best when discussing
the chapter does lean in that direction, but it is an extremely valuable addition to the overall treatise. Finally, the subject matter of Chapter 11 of Volume I on Civil Justice Reform should be of interest (and concern) to every participant in the civil justice
system. The authors do not treat it as an esoteric subject. They repeat the lament heard all too often about civil cases taking too long and being too expensive, but they also discuss the various proffered solutions. As a former member of the Judicial Conference of the United States Civil Rules Advisory Committee, I found the discussion of the efforts to fix the problems in the 2015 amendments to the Federal Rules to be illuminating. Of particular interest is the discussion of the new proportionality rules and the difficulties presented by ESI. The authors also make reference to various federal and state court justice reform initiatives. All in all, this Fourth Edition with its new chapters contains a remarkable store of current knowledge on almost every topic of interest to commercial litigators, and to inside counsel dealing with commercial litigation. It would be wise to keep the index to these 14 volumes close at hand.
V I S I T T O D A Y S G E N E R A L C O U N S E L . C O M F O R T H E L AT E S T N E W S , A N A LY S I S , C O M M E N TA R Y FOR GCs A ND OTHER IN-HOUSE COUNSEL . PLUS, R ECENT JOB OPENINGS & CA R EER OPPOR T UNIT IES.
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WORKPLACE ISSUES
#MeToo Two Years Later Some Unintended Consequences By Helene J. Wasserman
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lthough Tarana Burke coined the term “me too” more than a decade ago to raise awareness of the pervasiveness of sexual abuse and assault, it did not become a household phrase until two years ago, after allegations against Hollywood mogul Harvey Weinstein came to light. Since then #MeToo has empowered women to raise concerns they may not have felt comfortable revealing previously, while emasculating men who once believed they were invincible and untouchable. No industry has been immune. While Hollywood, media, sports and political figures accused of inappropriate conduct have garnered most of the publicity, corporate America has made its share of headlines and seemingly has been impacted just as hard, if not as publicly. However, the actual statistics regarding #MeToo and sexual harassment claims filed tell a somewhat different tale. For FY 2018, the Equal Employment Opportunity Commission (EEOC) reported that 7,609 charges containing
Helene J. Wasserman practices exclusively in the area of labor and employment law. She appears before state and federal courts and administrative agencies and handles litigation matters, including trial practice, arbitration and mediation. She often works with clients and small businesses in the hospitality, staffing, construction and transportation industries. hwasserman@littler.com
sexual harassment allegations were filed, an increase of just under 1,000 from FY 2017. Interestingly, for FY 2010, the number was 7,944. A couple of other statistics provided by the EEOC are also illuminating. The percentages of “no cause” findings went up between 2010 and 2018 (50.8 percent in 2010 to 56.4 percent in 2018), and the percentage of “cause” findings went down during that same time period (8.7 percent in 2010 to 5.4 percent in 2018).
The number of merit resolutions went down, but the monetary value of those resolutions went up. The year-over-year statistical changes in the charges recorded by the EEOC are not as dramatic as one would have expected. Nevertheless, there have been some notable changes and consequences of #MeToo. MORE TRAINING, UPDATED POLICIES
In Littler’s 2019 Employer Survey of more than 1,300 in-house counsel, HR
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professionals and C-suite executives, 63 percent reported that, in response to #MeToo, they have provided additional training to supervisors and/or employees, up from 55 percent in 2018. Although most state legislatures encourage or recommend that employers provide sexual harassment training, only seven states — California, Connecticut, Delaware, Maine, Massachusetts, New York and Washington — have actually implemented laws mandating such training.
as less favorable. For example, male managers and supervisors report being concerned about mentoring and engaging in “work-related socializing” with women. They are anxious about being alone with women, or taking too much interest in women, for fear that their conduct will either be misconstrued or used against them at some later date. The #MeToo movement has made it clear that, regardless of potential statutes of limitation, it is now acceptable
tions. If the lawsuit contains allegations of sexual assault, then (depending upon the severity of the conduct alleged) California law precludes any confidentiality, including the amount of the settlement. Thus, employers are faced with the choice of either entering into a settlement of disputed claims that ultimately could become public or devoting resources to try a case they know there is a chance of losing, with the verdict becoming public. Further, alleged victims
Although most state legislatures encourage or recommend that employers provide sexual harassment training, only seven states have actually implemented laws mandating such training. Additionally, there has been a trend towards updating human resources policies. More than 50 percent of employers surveyed indicated that they have updated human resource policies or handbooks, up from 38 percent in 2018. With the exception of Delaware, all of the states identified above — as well as Oregon, Rhode Island, Tennessee, and Vermont — require employers to develop and promulgate some communications for employees regarding the prohibition of harassment in the workplace. Forward-thinking organizations have thoroughly evaluated and, in some cases, wholly revamped existing reporting and investigation procedures. A full 20 percent of those surveyed by Littler indicated that in the prior year they had implemented new tools or investigation procedures to manage employee complaints. Some of the changes have included shifting to or adding app-based or other easy methods for employees to lodge complaints and adding further levels of review of investigation methods and results prior to action being taken. SOME DOWNSIDE
Although most of the changes resulting from #MeToo can be seen as positive and productive, there have been some unintended results that can be viewed
for alleged inappropriate conduct to be raised or reported a significant amount of time after it occurred. Resolution of claims of alleged sexual harassment has become a significantly more daunting task. In reaction to the uproar associated with claims of “hush money” being paid to alleged harassment victims, and the non-disclosure agreements they’ve been asked to execute in order to resolve such claims, changes in federal and state law have made it virtually impossible to resolve these claims short of trial. Federal law now makes it impossible for employers wishing to settle sexual harassment suits to obtain tax benefits related to the amount paid to settle if they want to maintain confidentiality of the settlement. Thus, under federal law, employers need to decide whether to maintain the confidentiality of the settlement or take the amount as a tax deduction. Given the fear of copycat (or #MeToo) claims, most employers seem to be willing to forego the tax deduction in favor of confidentiality, which is not the result that was intended by the legislation. California expressly prohibits any agreement resolving claims of sexual harassment from containing language requiring confidentiality of the allega-
are being forced to go to trial and relive their experiences rather than having the matter resolved in a private, confidential manner. This type of legislation has proven to be lose-lose for everyone. Some states, such as New Jersey and New York, have passed legislation prohibiting mandatory arbitration of sexual harassment claims. Rather than matters being resolved expeditiously, all parties are forced to endure protracted and public litigation. Thus, the pendulum is still swinging. Hopefully, the positive steps being taken by employers in the areas of training and education, and appropriately responding to claims of alleged workplace harassment, will obviate some of the counterproductive legislation that has been passed as a result of the #MeToo movement.
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THE ANTITRUST LITIGATOR
Antitrust and Big Tech By Jeffery M. Cross
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ecently, there has been considerable discussion regarding the use of antitrust to address perceived anti-competitive conduct of Big Tech. However, some have questioned whether the current antitrust laws are adequate. There has even been some discussion regarding amending the antitrust laws to address such conduct. The DOJ and others have suggested that a template for applying antitrust law to technology firms is the 2001 decision by the DC Court of Appeals in United States v. Microsoft Corp. To consider whether this case is adequate to address the conduct of Big Tech, it would be worthwhile to explore this decision. The DOJ’s case against Microsoft focused principally on Microsoft’s conduct to unseat Netscape Navigator as the preeminent Internet browser. Among various legal theories, the government charged Microsoft with monopolizing the market for Intelcompatible PC operating systems in violation of Section 2 of the Sherman Act. Of course, just having a monopoly is not unlawful. Indeed, the antitrust laws encourage companies to obtain a monopoly through innovation and business acumen. Such encouragement
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
includes rewarding market winners by permitting them to charge monopoly prices and obtain monopoly profits. The theory is that monopoly profits will attract new entrants to compete in the market, ultimately reducing prices to competitive levels. In this regard, the offense of monopolization requires two elements: (1) a monopoly in a relevant market and (2) exclusionary conduct. The exclusionary conduct, however, must reduce social welfare by improperly harming rivals so as to maintain the defendant’s monopoly not by competition on the merits but by anti-competitive actions. Before considering the court’s analysis and conclusions, it is necessary to consider how Microsoft’s conduct to unseat Netscape Navigator threatened Microsoft’s monopoly in operating systems. Operating systems accomplish many functions, including allocating computer memory and controlling peripherals. Operating systems also function as platforms for software applications. They make available to software developers routines or protocols that
perform widely used functions, such as drawing a box on a screen. These are known as Application Programming Interfaces, or “APIs.” Software developers wishing to include a function in an application need not duplicate it in their own code but instead use the operating system’s API. Operating systems usually contain thousands of APIs. Each operating system will have different APIs. Accordingly, a developer that writes an application for one operating system and wishes to sell the application to users of another operating system must modify the application to the other operating system. This process is both time consuming and expensive. “Middleware” refers to software products that have their own APIs. Developers could begin to rely upon APIs in middleware for basic routines rather than relying on the APIs from the operating system. Ultimately, if developers could write applications relying exclusively on APIs in middleware, their applications could run on any operating system on which the middleware was also present. Netscape Navigator
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was a middleware product written for multiple operating systems. Widespread use of Netscape Navigator would thus threaten Microsoft’s Windows operating system. Monopoly power is the ability to profitably raise prices above competitive levels. Direct evidence of monopoly power is only rarely available. Consequently, courts typically examine market structure to infer monopoly power. This involves defining a relevant market, determining the market shares of participants in such market and confirming whether there are barriers to entry. In terms of defining the relevant market, the court noted that, because the ability of consumers to turn to other suppliers restrains a firm from raising prices above competitive levels, the relevant market must include all products reasonably interchangeable by consumers for the same purposes. In this case, the court defined the relevant market as Intel-compatible PC operating systems. It found that there were no products that customers would substitute for Microsoft’s operating systems currently or in the near future without incurring substantial costs. In that regard, the court rejected as substitutes non-Intelcompatible operating systems and nonPC-based competitors such as handheld devices and portal websites that host server-based software applications. The court also rejected inclusion of middleware from the relevant market even though Microsoft was accused of exclusionary conduct directed at middleware. The court found that middleware products were nascent competitors not sufficiently developed to be able to constrain monopoly pricing in the reasonably foreseeable future. The court found that Microsoft had 95 percent of the market for Intelcompatible PC operating systems. The court also identified as a barrier to entry what it described as the “applications barrier.” It stemmed from two characteristics of the software market: (1) most consumers prefer operating systems for which a large number of
applications are written; and (2) most application developers want to create applications for operating systems with a large customer base. The court rejected Microsoft’s arguments that developers who write applications for other operating systems and consumers use only a small percentage of the applications written. The court concluded that, even if these facts were true, the applications barrier still gave consumers reason to prefer the dominant operating system. This created a “chicken-and-egg” situation, making it difficult for another operating system to enter the market. The most challenging aspect of any monopolization claim is the exclusionary conduct. It is often difficult to distinguish between unlawful exclusionary conduct and lawful conduct that impacts rivals due to competition on the merits. The reason is that the result may be the same. The inefficient rival may be driven from the market. To address this dilemma, the court of appeals developed a burden-shifting approach. The plaintiff has the initial burden of establishing a prima facie case of an anti-competitive effect. The burden then shifts to the defendant to proffer a plausible pro-competitive justification. If it does, the burden then shifts back to the plaintiff to establish that the justification is pretextual in that it is not applicable to the facts of the case, or it is not cognizable under the antitrust laws. If the defendant’s proffered pro-competitive justification is unrebutted, then the plaintiff has the ultimate burden of persuasion to establish that the anti-competitive effects outweigh the pro-competitive benefits. The DOJ challenged several actions by Microsoft as violations of Section 2. Microsoft’s conduct with original equipment manufacturers (OEMs) regarding desktop icons, folders or “Start” menu entries illustrates the analysis necessary to find an antitrust violation. Microsoft licensed its operating system software to OEMs. These licenses prohibited the OEMs from removing desktop icons, folders, or Start menu entries. The court found that such restric-
tions had an anti-competitive effect because they thwarted the distribution of a rival browser by preventing OEMs from removing visible means of user access to Microsoft’s browser. The court found that OEMs could not practically install a second browser in addition to Microsoft’s browser because doing so would significantly increase an OEM’s support costs. The redundancy could lead to confusion among users who would then contact the OEM’s help desk. The court found that having an OEM preinstall a browser was one of the most cost-effective methods of distributing browser software. In terms of Microsoft’s justification for the restrictions, Microsoft argued that the restrictions were justified because it was simply exercising its rights as the holder of valid copyrights. The court held that such an argument bordered upon the frivolous. The court stated that such argument was no more correct than the proposition that use of one’s personal property, such as a baseball bat, cannot give rise to tort liability. Microsoft, however, asserted that a copyright holder might limit a licensee’s ability to engage in significant and deleterious alterations of a work. Microsoft also argued that the license restrictions merely prevented OEMs from taking actions that would reduce substantially the value of Microsoft’s copyrighted work. The court found that neither justification, even if legally appropriate, was applicable to the license restrictions regarding the removal of icons, folders, or Start menu entries. Consequently, having found an anti-competitive effect and no proper pro-competitive justification, the court held that the DOJ had established a violation of Section 2. As Congress and others debate the application of antitrust to Big Tech, it is helpful to understand the historical precedents. The Court of Appeals 2001 decision in the DOJ’s case against Microsoft is an important part of that precedent.
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PRIVILEGE PLACE
Subsidiaries, Affiliates and Privilege Protection By Todd Presnell
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n-house legal departments are often the legal hub of an organization’s various affiliated entities. On any given day, in-house lawyers provide legal advice to their company’s wholly owned subsidiaries, majority or minorityowned affiliated entities, or even the parent organization. To do so, they necessarily communicate with these affiliated companies’ employees or agents. The question arises (or should arise) whether the attorney-client privilege protects these communications from discovery. The privilege generally protects communications between an entity’s in-house lawyers and its employees, but does the privilege protect communications between an entity’s in-house lawyers and an affiliated company’s employees? The answer requires summoning the privilege’s foundational elements, understanding the joint client and common interest doctrines, and applying them correctly — before the communication occurs. It is a judge, of course, who ultimately determines whether the privilege protects a particular communication from
Todd Presnell is a partner in Bradley’s Nashville office. He is a trial lawyer, and creator and author of the legal blog Presnell on Privileges (www. presnellonprivileges. com). He provides internal investigation and privilege consulting services to in-house legal departments. tpresnell@bradley.com
compelled disclosure to an adversary. The communication an in-house lawyer creates today will not come under the judge’s microscope until an event occurs that gives rise to a legal claim and a party files a lawsuit, requests documents that include the lawyer’s emails, and files a motion to compel. This road to privilege determination can take several months, sometimes years. Yet the lawyer must understand and implement the privilege elements at the time of the
communication’s creation, or else face the judge’s decision with insufficient and late arguments. To prove the privilege at judicial decision time, the in-house lawyer must prove that an attorney–client relationship exists and that the employee communicated with the lawyer in a confidential manner for the primary purpose of assisting the lawyer in providing legal advice. The establishment of the attorney–client relationship is key. If an in-house lawyer
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employed by ABC Corporation emails with an ABC employee so that the lawyer can advise ABC, the privilege should protect the email. But what if ABC’s inhouse lawyer emails with the employee of an ABC subsidiary? Or an employee of ABC’s sister company? The in-house lawyer may represent and provide legal advice to an affiliated entity (i.e., an entity related to but different from the lawyer’s employer), as long as she establishes an attorney– client relationship. The joint client doctrine permits simultaneous representation of, for example, a parent and a subsidiary, without privilege loss. This doctrine provides that lawyers may represent two entities (clients) at the same time, and that the attorney–
doctrine protects the in-house lawyer’s communications. Although it may be in some circumstances, this doctrine is not the starting point for gaining privilege protection. The common interest doctrine is actually not a privilege but a non-waiver doctrine that allows parties sharing a common interest to exchange previously privileged information. The doctrine applies when two or more separate entities share a common legal interest in a particular issue, are represented by separate counsel, and these lawyers trade information protected by the attorney–client privilege or work-product doctrine in a confidential manner due to pending or anticipated litigation. The doctrine is somewhat uncertain because it is undeveloped in
elements to establish and maintain the privilege over their communications with an affiliate company’s employees. And the threshold element is the attorney–client relationship. Although some courts may presume the relationship when a parent’s lawyers provide legal advice to a subsidiary, that is not an absolute. This is especially true when the affiliate is a minority-owned subsidiary or simply a sister company with some common ownership. In-house lawyers should consider an engagement-type agreement between the two affiliates, providing that one entity’s in-house legal department will provide legal advice to the affiliated entity. The agreement should specifically state that the lawyers will communicate with the affiliated entity’s employees to provide
The lawyer must understand and implement the privilege elements at the time of the communication’s creation. client privilege protects communications between the lawyer and the parent’s employees, and communications between the lawyer and the subsidiary’s employees. Sharing these separate communication tracks between parent and subsidiary does not waive the privilege as to third parties. The key, though, is to think of the affiliated entity as the in-house lawyer’s single client. In many instances, in-house counsel communicates exclusively with an affiliate’s employees and provides legal advice to the affiliate, without involving the parent or the parent’s employees. As long as the in-house counsel can prove at judicial decision time the existence of an attorney–client relationship, but with evidence contemporaneous with the communication, then the chances of securing privilege protection significantly increase. Some may say that the parent and its affiliates always have a common interest and, therefore, that the common interest
many jurisdictions and the elements sometimes vary from court to court. Related questions arise, such as whether a formal, written agreement is required and whether the agreement is discoverable, even if the underlying information is not. This uncertainty and application of the core elements render the doctrine the least helpful in establishing the privilege over communications between an in-house lawyer and an affiliate’s employees. First, the privilege must cover putatively protected information in the first instance, as the doctrine only protects the sharing of previously privilege information. Second, many courts require that the sharing occurs only through the entities’ separate lawyers rather than entity-to-entity. Third, the litigation requirement often is not present at the time of the communication’s creation. In-house lawyers, therefore, should simply return to the privilege’s core
the affiliated entity with legal advice, and that the privilege and work-product doctrine protect these communications. The agreement may also address the joint client situation where the in-house lawyers provide legal advice to both entities. For a number of reasons, however, a formal agreement may not be feasible. The lack of an agreement will not stop the communications, so the in-house lawyer should consider including notices in the opening communication to the affiliated entity’s employee — that the lawyer has been asked to provide the affiliated entity with legal advice and that the communications are and should remain confidential. In sum, when it is time for the judge’s privilege determination of the lawyer’s communications with an affiliate’s employees, make sure you have evidence of the attorney–client relationship ready for production.
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SHAREHOLDER’S RIGHTS V. THE ACCOUNTANT-CLIENT PRIVILEGE By Allen M. Levine and Jonathan D. Silver
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t is common for a business or its executives to be presented with allegations of mismanagement or wrongdoing by a minority shareholder accompanied by requests for company financial records. When such allegations arise, it is important to efficiently address the allegations while protecting privileged communications with
accountants. This article discusses when corporations can successfully deny the requested documents based upon the accountant-client privilege.
THE RIGHT TO INSPECT As investors, shareholders and members have an absolute right to inspect and copy the corporation’s articles of
incorporation and bylaws. The rationale is that stockholders are entitled to determine whether the affairs of the corporation are properly conducted and to vote intelligently on corporate policy and management. However, a shareholder’s right to examine additional company documents and private financial records is not absolute. Instead, in order to obtain access, the shareholder must show that the records request is made in good faith, for a proper purpose, and the purpose must be described with reasonable particularity. Courts have held that a proper purpose is for a lawful reason, not satisfaction of curiosity or a general fishing expedition. Once a party demonstrates at least one proper purpose, any secondary purpose or ulterior motive that may underlie the request is irrelevant. On the other hand, if the corporation can maintain it refused a shareholder inspection in good faith or has a reasonable basis for doubt, then it may lawfully refuse to produce the requested documents pre-litigation. Once litigation ensues, the court’s determination becomes muddled when an objection to a shareholder’s claim for financial records is made by the company on the basis of the accountant-client privilege. Although shareholders may have a right to inspect the books and records of a corporation, in certain circumstances this may conflict with protections afforded to the corporation, such as the accountant-client privilege. Although confidential accountant-client privilege does not exist under federal law, many states have established a statutory accountant-client privilege.
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Florida Statute section 90.5055 privilege may supersede the statutory protects the client by preventing “any right of inspection. other person from disclosing, the conIn one case, shareholders accused tents of confidential communications the directors and accountants of fraud with an accountant and conspiracy in when…made in the connection with a It is difficult to reconcile rendition of accountmerger. The plaintiffs ing services.” The demanded to inspect the two Colorado cases, rationale is that the financial records posbut it appears that the only sessed by the corporaaccountant-client privilege encourcourt that has considered tion’s accountants. ages full and frank The court upheld the this issue twice has ruled in defendants’ assertion communication between accountants favor of the shareholders. of accountant-client and clients so that privilege and found professional advice the fact that a qualimay be given on the basis of complete fied shareholder “shall have the right information free from apprehension to examine its books and records of about disclosure. Therefore, informaaccount,” does not nullify the company’s tion transmitted within the accountant- privilege against having its accountants client privilege is regularly withheld as examined. privileged in litigation. However, in another case, the same court determined that “the accountantTWO CASES WITH client privilege did not protect the comCONFLICTING munications between the corporations OUTCOMES and their accountant from disclosure.” When a comSpecifically, the petitioners alleged that pany’s financial the controlling shareholders of a realty documents relate company violated their fiduciary duty to accounting by engaging in the misapplication and Allen M. Levine is services, a sharewaste of company assets. Plaintiffs chair of Becker & holder’s right of sought to obtain financial records Poliakoff’s Business Litigation practice. inspection may as well as to depose members of the In addition to his not extend to corporation’s accounting firm. The involvement in firm those documents court concluded that the petitioners management and that are subject to “established good cause to put aside supervision of busithe accountantthe protections of the accountant-client ness litigation attorneys, he handles client privilege. privilege.” The court focused on the fact complex business Although the tenthat the discovery requests related to litigation and real sion between the past events — communications that were estate litigation shareholder’s right directly related to the allegations brought for large corporate to inspection and against the company and essential to clients, closely held corporations, real the corporation’s the crux of the action. estate developaccountant-client In examining a shareholder’s request, ers and financial privilege has not courts will also focus on the stated institutions. He also been decided by a purpose for the records and whether represents clients in Florida court, the any non-privileged documents exist that probate and trust litigation, comColorado statute may fulfill the request. However, when munity association is substantially only privileged records exist to fulfill the litigation, insurance similar, and its stated purpose, and such documents go coverage litigation courts have held to the heart of the shareholder’s claims, and appeals. that in certain a court may order them to be turned alevine@becker lawyers.com circumstances the over to the shareholders accompanied
by a confidentiality order. As it is difficult to reconcile the two Colorado cases, it appears that the only court Jonathan D. Silver is an attorney at that has considBecker & Poliakoff. ered this issue He focuses his practwice has ruled in tice on construction favor of providing and design-defect the shareholders litigation claims and construction lien with the requested disputes. information. jsilver@becker However, when lawyers.com documents other than financial records satisfy the shareholder’s request or the privileged information can be redacted, the accountant-client privilege should continue to trump the shareholder’s right to inspect a corporation’s privileged financial records. Although the Florida legislature has provided a method for a shareholder to examine certain company documents, the scope of the accountant-client privilege may overcome this right, depending upon the documents at issue and the facts and circumstances of the request. Therefore, the tension between the shareholder’s statutory right of access to records and the corporation’s accountant-client privilege is subject to a good cause examination by the courts to determine the shareholder’s stated purpose —whether the requested documents relate to the central issue of the allegations and the communications contained within the privileged documents sought.
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In-House Management of Appeals By Svetlana K. Ivy
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hen an attorney lives and breathes a case through years of litigation, it often is next to impossible to view the case objectively. Consider adding fresh eyes to the team. The natural tendency for most attorneys is to assume that if they
lost, it must be because the trial court got it wrong and the appellate court will surely see the light. If they won, most will assume they should stick with their “winning strategy” on appeal.
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Do not assume anything. If you lost in lower court, be open to reframing your arguments, reordering them or even abandoning some of them on appeal. If you won, consider that maybe you shouldn’t have. Add someone to the team, preferably with significant appellate experience, whose impression of the case is not colored by previous discussions with you, or experience with opposing counsel or the trial court. If significant time has passed since the issues were first briefed, consider whether you may have additional arguments or need to deal with a subsequent adverse decision on appeal. Choose the right attorney/team to handle the appeal. Your trial counsel may be the right person/firm, but you should make an affirmative choice rather than simply proceeding without evaluating your options. An appellate attorney familiar with the appellate court and the judges who will review your case adds significant value and increases your prospects of success. That may mean bringing in a different law firm or adding another member of the firm that handled the case in lower court to the existing team. The appellate attorney’s role can range from assisting with framing the arguments and reviewing briefs to taking over and handling the appeal. Clients often believe the trial attorney who is most familiar with the facts is the best person to argue the case. There are instances when that is true, but more often someone who was not involved is in a better position to resist getting lost in irrelevant details, to identify the facts and arguments that will resonate with the appellate court and to objectively evaluate their prospects of success. QUESTIONS PRESENTED A Statement of Questions Presented is not a perfunctory formality. It is often the first section of the brief read by the appellate court, but even experienced attorneys often do not give it enough attention. If you read a draft and the Questions Presented do nothing more than identify the issues, challenge out-
side counsel to make a stronger, more persuasive presentation. “Did the trial court err in granting summary judgment to plaintiff when there is a triable issue of fact?” is not a well-framed question. Remember that every section of an appellate brief is an opportunity to persuade the court to adopt your position. The Statement of Facts must provide the relevant facts but cannot be too long. The Statement of Facts is often the most difficult section of an appellate brief to draft. Copying the factual
Appellate counsel must remember that the case may go up another level or it may be remanded to the trial court. background from motion papers is a common mistake. Do not confuse the appellate court with irrelevant facts, but provide sufficient background to understand the context in which the issues are presented. Procedural history may be critical, or it may be completely unnecessary. If you change your arguments or choose to emphasize different aspects of the case on appeal, adjust which facts you feature. The facts section must be complete but concise. Keep in mind that appellate courts are sensitive to selective or misleading presentations of the record, so while you can frame the facts in a favorable light, stay true to the record. Consider, and re-consider, the order
of your arguments. Especially in more complex cases, discussing an outline of the arguments before outside counsel Svetlana K. Ivy is begins drafting a partner in the is a good idea. Business & CommerTalk through the cial Litigation and Appellate Practice arguments, and Groups at Harris the order of the Beach PLLC. She arguments. handles and consults Once there is a on appellate matters draft, re-consider in state and federal courts. whether you want sivy@harrisbeach. to include all the com drafted arguments and/or whether what you thought might be a throwaway point should be featured more. The strongest argument at trial court may not be the strongest argument on appeal, and some arguments you made below may take away from your brief on appeal and should not be included. Team members may disagree about the order of points. Listen to everyone’s views and reasoning before making a decision. Keep the hierarchy of case law in mind. If your appellate brief relies heavily on trial court decisions, there is a problem. The judges on the panel reviewing your case are unlikely to be impressed. If your appeal is in the state intermediate appellate court, cite the decisions of the highest state court first, followed by intermediate appellate court decisions. Cases from other courts are useful and can be compelling, but acknowledge if a case is not binding authority and explain why you believe the court should still follow it. If your appeal is in a state court, recognize that the import of federal authorities varies greatly depending on the subject matter at issue. There is also a time and a place for citation of miscellaneous cases in appellate briefs, but as a general rule trial court decisions should be cited sparingly and only if they contain particularly
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applicable reasoning not articulated by any higher court.
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WRITING A BRIEF TAKES TIME Give appellate counsel time to write the brief. Writing a quality appellate brief takes time, so give counsel the chance to put together a rough draft, reflect on it and revise it before your review. The lengthy, wordy briefs are often ones that outside counsel pushed out the door too fast or put together under substantial time pressure. Expect your outside counsel to work hard but recognize that rushing can compromise quality. Lawyers prioritize making sure their presentation is complete and covers all their arguments, but often do not take time to reflect on whether all of those arguments should be included or whether they can be stated more concisely. Demand enough time to review. Tight deadlines sometimes make it difficult. Generally, however, you should be able to conduct a thorough review and provide meaningful comments. When there is a draft well in advance of the deadline, more often than not someone on the team will think of additional substantive points to add before filing. Expect outside counsel to give you that leeway, and take the time you need, even if it means requesting an extension. A short extension is always better than rushing an appellate filing only to regret it later. If you do not have the luxury of time, as may be the case on a reply submission or in the event of an expedited appeal, be clear as to when you expect to receive a
draft and then plan to dedicate as much time as you can. Conduct a moot court session to prepare for oral argument. Whether your appellate counsel has been handling the case for many years or you have a new team member arguing the appeal, a moot court session gets the
If your appellate brief relies heavily on trial court decisions, there is a problem. presenting attorney focused on the case and provides practice fielding questions from several people at once. You may not need to attend the session, but it is becoming more common for clients to require that a mock argument be conducted before any appellate oral argument in a significant case. An ideal combination for a mock panel is someone familiar with the case who can challenge the arguing attorney on factual details, an attorney not involved in the case and a retired appellate judge. Do not forget that the case may not be over after the appeal. Just as trial
counsel should keep in mind the prospect of the case going up on appeal when putting together motion papers or trying a case, appellate counsel must remember that the case may go up another level or be remanded to the trial court. This is critical because certain arguments you make in your appeal to intermediate appellate court may backfire should you win, and the opposing party then seeks leave to appeal to the higher court. Similarly, while you may appreciate the zealousness of your outside counsel in criticizing the trial court as he or she argues for reversal, make sure the tone does not compromise your prospects if you find yourself back before the same trial judge. Some of these tips may seem intuitive, but it is stunning how often in-house counsel do not even consider getting a fresh perspective on appeal and how many in-house attorneys routinely find themselves reviewing appellate briefs mere days in advance of filing. Your outside counsel should raise and discuss all these suggestions with you at the appropriate time, including if he or she is the right attorney to handle the appeal. Remember, depending on the circumstances, a published appellate decision may have an impact well beyond the case at hand, whether it be for your organization or for an entire industry. Not every case warrants the same level of scrutiny or resources, but every appeal should be a collaborative process aimed at maximizing your chances of success.
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M aking the 30(b)(6) Witness Work for the Defense By Matthew D. Keenan
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he plaintiff’s bar has fallen in love with Rule 30(b)(6). If this is news to you, congratulations on your recent law school graduation. Foremost is the ability to instruct these witnesses, with a foreboding tone, that their testimony will “bind the company.” These days even the most basic lawsuits may see several 30(b)(6) notices. In multidistrict litigation proceedings, they have become so prolific that some would say they are borderline abusive. In my practice, however, the 30(b)(6) witness offers as much to the defense as any perceived advantage to the plaintiff. Over the years, I have developed a successful paradigm that can turn
the tables with this discovery tool. The successful 30(b)(6) witness employs five basic components that fit into the acronym SOCKS: Select the right witness Organize the litigation-related documents properly Clear out the road Keep the lawyers away Show and tell Select the right witness. It is helpful to remember that the origin of this rule dates back to 1965 — plaintiffs wanted it to avoid defense witnesses who played “who’s on first” in response
to the most important discovery topics. Defendants, on the other hand, hoped it would reduce plaintiffs’ seriatim deposition of witnesses up and down the org chart. This background explains the widespread judicial hostility toward ill-prepared witnesses. Plaintiff journals unabashedly acknowledge that one goal of the 30(b)(6) is to “build a record to expose the adversary’s obstruction” — analogizing it to, of all things, jujutsu. “The power comes from deflecting the adversary’s obstructive conduct back upon them,” reported one attorney in Trial Magazine. So bear with me while I belabor the
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obvious. Enabling counsel to choose their best and most important witness is a gift to the defense. You can check the obvious boxes: be credible, confident and employ good judgment. The most important box to check, however, is this one: available time. This assignment demands a significant time commitment, often weeks. And an open calendar is not just for the witness but for those around him/ her as well. You need to get buy-in by everyone who works with and for the chosen one, particularly the supervisor but also the co-workers who may have to pick up the slack. The courts are clear — the witnesses, not the lawyers, must learn the documents and do the review. The witness is obligated to learn the subjects and the answers, even if voluminous and burdensome. In Starlight International Inc. v. Herlihy (Kan 1999), the court found this inadequacy where the representative only reviewed documents previously produced in depositions and spoke to the corporation’s attorney. As we know, this rule does not require the person most knowledgeable. Not being tethered to the PMK frees up the defense to select the best witness. The defense can also avoid the distinction between personal knowledge and corporate knowledge, which can invite confusion and unnecessary anxiety in a witness who may have personal knowledge. Organize and own. There are two phases to this exercise. The first half is dependent on counsel to give the witness a head start, which includes an overview of what is ahead. The second half is releasing the witnesses to do their work. Consider this deposition to be an open-book exam is what I tell my witnesses. Assemble whatever documents you need to answer the questions — and you will have the right to refer to them. Your notes will help you, as well as the testimony of co-workers, and timelines that may be created by counsel but are nevertheless fact based. Some witnesses
I have defended have brought 10 notebooks of documents. To explain further, Plaintiffs are looking for the ad-hoc, spur of the moment dangerous detour that tends to find its way into Hollywood movies featuring George Clooney. But the reality is that these days companies have countless control mechanisms in the shape of protocols, operating procedures and cross-functional teams in place, so there is little margin for the lone cowboy to go off the reservation. The witness’s notebooks may include other documents — the litigation building blocks such as the complaint, deposition notice, regulatory pronouncements, recalls or other product statements. I like to offer a brief narrative of what a typical negligence jury instruction will contain so they can plainly understand how plaintiffs may spin their testimony. Additional documents might be the org chart, design history file, and standard operating procedures on product safety — including complaint investigation files, risk management, design, manufacturing, marketing and sales. The targets of “gotcha questions” should be on the list. They include the type of injuries the plaintiffs are pursuing, the number of lawsuits filed and any regulatory actions that might be applicable. Finally, collaboratively identify witnesses for the 30(b)(6) candidate to interview. Clear out the road. With a roadmap defined and the initial documents identified, let the witness go to work. This rule requires a good faith effort to gather all available information on the noticed topics under penalty of sanction for failure to do otherwise. Keep the lawyers away. The witness’s work is fact-finding and consequently (generally speaking) it is fair inquiry for the plaintiffs. Checking in with counsel from time to time is sound and sensible but should never be a short cut for the witness doing the heavy lifting. Show and tell. The ultimate success obviously depends on the deposition itself. The witness’s notes, typed and/
or written, serve as the outline. They should reflect everything from employees interviewed, documents compiled and facts Matthew D. Keenan summarized. As is a partner at Shook, appropriate, they Hardy & Bacon L.L.P. should include He focuses on the preparation and opinions on topics within the scope of defense of corporate witnesses in national the notice. Docuproduct liability cases. ments should be He is a member of flagged, annotated the Trial Techniques and Tactics Commitand organized to tee of the Internabenefit their ease tional Association of of access. Defense Counsel. I always mkeenan@shb.com conduct a direct examination. It will typically include these subjects: What did you do to prepare? What did you bring with you? Under the subject of product safety, what did you learn and what have you shared with the jury today? This effort should be a dry run for your trial playbook and theme development. The 30(b)(6) witness can tell the story that others can benefit from, particularly without the limitations of personal knowledge. We know that company witnesses — versus outside experts — win cases. Jurors want to know the company, and witnesses put a face on their efforts. With adequate preparation and strategic consideration, the 30(b)(6) witness can become a defense asset. Indeed, it is worth noting that some proposed amendments to this rule included the right of the plaintiff’s bar to meet and confer on the “identity of each person the organization will designate to testify.” Defense counsel considered this, appropriately, as an attempt to block the use of corporate designees who might be strong witnesses. The amendment ultimately was rejected. What further proof do you need that Rule 30(b)(6) can empower the defense?
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A Platform-Based Approach to Operational Efficiency By David Carns
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orporate law departments are facing demands to reduce costs and demonstrate digital readiness and innovation. The challenge for GCs and CLOs is formidable, not least because the new focus on operational efficiency represents a major cultural
shift for many law departments. The latest Altman Weil survey of CLOs reveals that they spend, on average, just 18 percent of their time actually managing the law department, even as they note that their CEOs and boards increasingly regard “supporting business objectives” as a vital measure of department performance. Perhaps it’s time for GCs and CLOs to give managing the department higher priority, with the goal of becoming an integral part of the business routinely demonstrating measurable value rather than operating in isolation.
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Technology will likely be a key enabler of transformation for the legal function. The Altman Weil survey seems to confirm this, with two-thirds of CLOs reporting they have made “greater use of technology tools” to boost the efficiency of their department. But the mere conviction that technology is the answer to operational and business challenges has yet to deliver meaningful results for many law departments: • Only half say that their use of technology has resulted in significant improvement in efficiency of legal service delivery. • Only 38 percent report that collection and analysis of management metrics has resulted in significant improvement in service delivery. • Another recent survey indicates that nearly two-thirds of senior legal practitioners from businesses around the world “believe that other functions in the organization, such as finance, have benefitted more from innovation, be that through the adoption of the latest technology or higher innovation funding.” These findings indicate that law departments still have a long way to go as they learn how best to select and implement technology. Some departments fail to provide adequate training when they introduce new tools, and it is common to encounter resistance to adoption among attorneys and staff. But I suspect the problem runs deeper than that. My own experience as an industry veteran has convinced me that many legal departments still lack a comprehensive, long-term perspective on innovation and technology. Until very recently, a myopic view has prevailed wherein technology has been purchased and deployed to “fix” specific problems that have emerged with the explosion of data volumes and complexity. We have seen this play out over the last decade or so, most obviously in e-discovery where in the early stages of
innovation firms and law departments invested in discrete tools for distinct phases of the discovery process, only to gradually become frustrated with tools that didn’t “talk” to each other, could not easily share data and created highly disconnected work flows. Eventually, legal organizations began to pursue a more comprehensive innovation agenda. Instead of reflexively purchasing more tools to solve new problems, they pressed technology vendors to address the full spectrum of the Electronic Discovery Reference Model in a single platform with a single, powerful interface. This would help reduce the complexity of discovery-related work flows, eliminate the need to constantly shift from one application to another and reduce the data security risks associated with moving sensitive data between multiple applications. The focus on platform instead of applications implied an architecture that would, ideally, be designed for maximum flexibility and be easy for organizations to configure, customize and maintain on their own with minimal reliance on the vendor. It would also be built to accommodate fast development and integration of new applications as business requirements evolved in a dynamic business environment. Progressive vendors have now taken up this challenge, and the platform-based approach to innovation is clearly the future of e-discovery. AI AND THE LEGAL FUNCTION
The emergence of these innovations coincided roughly with the increasing deployment of artificial intelligence (AI) technologies such as machine learning, natural language processing and data analytics. These capabilities initially proved their value in the narrow context of predictive coding and technologyassisted review. They not only enabled much faster and more accurate review of large volumes of information at significantly lower cost than human review but also gave lawyers earlier insight into
the key documents, custodians and legal issues in legal matters. With advanced technology, practitioners could leverage highly David Carns is the relevant case data Chief Revenue Officer much earlier to of Casepoint. Prior inform high-stakes to joining Casepoint, he was Director of decisions, such as Practice Technology whether or not at a premier global to settle a matter, law firm. He holds a before committing Juris Doctorate from to large investThe John Marshall Law School. ments in data dcarns@casepoint. processing and com hosting. Gradually, we have begun to see law departments and firms extend the use of AI technologies systematically to early case assessment, and in some cases to work flows not directly related to e-discovery, such as billing, invoicing and multi-matter management. These developments represent a significant shift in which AI is understood not as just another application to address specific pain points, but as an underlying and transformational set of capabilities that organizations can use to analyze, measure, monitor and refine diverse workflows in a multitude of operational areas. Practitioners who have followed the history of technological adoption and innovation in e-discovery now grasp the importance of consolidating the technology stack, which reduces the friction imposed by switching between applications and provides more systematic, centralized control over disparate and often poorly stitched-together processes. It is now possible, for example, for organizations to use a single e-discovery platform with built-in AI and dashboard functionality to classify and monitor multiple matters over a period of time — according to practice area, matter type, specific legal issues and other variables — and make accurate projections about data volumes, the number of individual documents, the number of custodians
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and the number of reviewers a new matter will require. AI can also help identify “hot” documents in one matter that are likely to prove seminal in other, similar matters. It can help practitioners quickly identify internal code words or project names that have proven highly relevant
of advanced technology in combination with expert review. To get in front of the trend and achieve favorable outcomes, leadership will need to take a more systematic approach to technology initiatives, develop clear processes for identifying workflows most likely to benefit and adopt a detailed framework for implementing change. The CLOC core competencies are a great place to start, but many departments will already have a clear sense of tactical use cases where inefficiencies are widely acknowledged and a source of frustration in their organization. Agents of change within the legal function should look for operational areas where there are repeatable processes and ample evidence of inefficiency. In the case of invoice review, this might involve a persistent lack of compliance with existing guidelines by outside counsel, and/or evidence that inhouse lawyers are neglecting to conduct substantive review of invoices.
AI gives lawyers earlier insight into the key documents, custodians and legal issues in legal matters.
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in previous investigations and predict their relevance to current ones. It can enable comprehensive portfolio management. PLATFORM-BASED LEGAL OPS
The vision of a true end-to-end e-discovery platform is no longer theoretical. A holistic, platform-based approach to problem solving via technology can help law departments identify areas of waste and inefficiency, both in-house and in the work performed by outside counsel and legal services vendors. It can help departments develop customized intelligent systems, establish standardized and repeatable work flows across matters and practice areas, and exert much tighter control over project timelines and budgets. It doesn’t take a lot of imagination to extend that vision from e-discovery to the totality of workflows in the corporate law department, described in the “12 Core Competencies Reference Model” provided by the Corporate Legal Operations Consortium (CLOC). Already, we are seeing the AI-enabled e-discovery platform extended to nondiscovery functions such as contract lifecycle management. Some organizations are also looking at e-billing and invoice review as areas ripe for the application
• Look for data-intensive activity. With AI and machine learning, the more data you have and the more you analyze it over time, the better the technology performs. • Look for areas that can likely benefit from a combination of probabilitybased decision-making and expert review of data that doesn’t fit the usual patterns. • Look for opportunities for immediate cost savings, time savings and compliance gains. • Look for areas where teams are already primed to try a different approach. Resist the temptation to try to change everything at once. Instead, carefully assess current operations, identify pain points and look for areas where technology can make a significant difference without massive impacts on day-to-
day operations. Don’t lose sight of the fact that AI methodologies should be continually updated and refined as more data comes in, and as the input of expert reviewers is incorporated. Cost-effective management of the legal function is not a fantasy. It is now possible to have easy-to-use, customized technology that doesn’t require a large IT team or expensive vendor interventions to maintain and upgrade. You can have complete visibility into incoming requests from other business units, and route them efficiently to appropriate teams or individuals. You can have visibility into all matters you are currently overseeing, with detailed information about who is working on what and the current status of every project. You can quantify current litigation exposure across your portfolio and make key decisions accordingly. You can generate and view trend data for all operational activities, getting ahead of issues before they become serious, intractable problems. You can compel outside counsel to report to you using the same KPIs you rely on internally, regardless of practice area or jurisdiction. And you can regularly communicate performance metrics to other departments, C-suite executives and board members to demonstrate accountability and alignment with your organization’s business objectives. Technology is the enabler, but GCs and CLOs will have to provide the leadership and the vision.
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INSIDER TRADING LIABILITY By W. Ira Bowman and Ekaterina G. Long
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nsider trading is a recognized concern for publicly traded companies. Ambiguities in the law and broad prosecutorial discretion can make avoiding associated corporate liability quite challenging. The threat of steep corporate sanctions and potential reputation damage following an insider trading event should incentivize companies to continuously adapt solutions to curb employees’ temptation to illicitly trade on material non-public information. To a certain degree, insider trading is an elusive concept, mostly because the law has developed primarily through the judiciary and administrative proceedings. No statute or rule defines insider trading per se. However, Section 10(b) of the Securities and Exchange Act of 1934, as implemented by the SEC in the Securities and Exchange Act Rule 10b-5, serves as the chief avenue for imposing an insider trading liability. Section 10(b) prohibits securities fraud through the use of “any manipulative or deceptive device or contrivance” in “connection with the purchase or sale of any security.” The United States Supreme Court broadly interprets this to include affirmative misrepresentations and material omissions. In insider trading situations, fraud occurs when insiders obtain unauthorized access to material nonpublic information W. Ira Bowman is and surreptitiously a shareholder and act upon it to gain Chair of the Commerfinancial benefit. cial Litigation section It is fraudulent if at Godwin Bowman PC. His practice is a duty existed to focused primarily on disclose the knowlthe effective resoluedge in the first tion of legal disputes place. The failure in commercial matto disclose is genters, including both prosecution and erally categorized defense of a wide into the classical range of issues in theory and the state and federal misappropriation courts. theory of insider IBowman@Godwin Bowman.com trading. Both
theories exist as a result of individuals who aim to benefit from trading based on the material non-public information in breach of a fiduciary or other similar relation of trust and confidence. According to the classical theory, insider trading liability is imposed when someone benefits from trading on the issuer’s shares by using non-public material information. The illicit trading, for instance, can occur directly or indirectly by tipping others who trade, and liability can be imposed on the issuer, its employees or someone affiliated with the issuer. Under this scenario, the insider abuses a fiduciary relationship to the shareholders on the other side of the transaction. CLASSIC CASE
A recent case of SEC v. Yuh-Yue Chen filed in the United States District Court for the Central District of California illustrates this scenario. Yuh-Yue Chen, a now-former engineer at a large publicly traded semiconductor company, illicitly traded numerous times in advance of his employer’s earnings announcements. Chen obtained his employer’s material non-public earning reports after gaining unauthorized access to the restricted office area of the accounting and finance staff. He then used that information to trade securities to his financial benefit. According to the complaint, Chen made a profit of at least $739,959 as a result of his illicit trades. Chen’s former employer had taken specific efforts to inoculate itself against insider trading events. The company promulgated a code of business conduct and ethics to its employees, complete with a separate policy addressing insider trading. In addition, it admonished all employees against insider trading, regularly trained its employees on its code, required employees to acknowledge receiving the code and e-mailed its employees quarterly to remind them about the company’s insider trading prohibition. It was only by chance that several employees accidentally saw Chen sneaking into the restricted area and
rifling through documents. Once confronted, Chen ran out of the office and fled to his native Taiwan. When he returned Ekaterina G. Long is an associate at to the United Godwin Bowman States five years PC, a national trial later, he was met and appellate firm and interviewed based in Dallas. She by the FBI at represents clients in commercial arbitrathe airport, with tion and litigation. the SEC filing a KLong@Godwin complaint against Bowman.com him for insider trading violations shortly thereafter. In its complaint, the SEC requested the court to permanently enjoin Chen from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, disgorge all ill-gotten gains together with the accrued prejudgment interest and pay a civil penalty under Section 21(d)(3) of the Exchange Act. MISAPPROPRIATION
Insider trading can also occur under the so-called misappropriation theory. A somewhat shocking illustration of misappropriation can be found in the SEC v. Brian Fettner, Liselotte Sandberg, and Kathy Micali, filed in the United States District Court for the Southern District of Florida. Here, a general counsel of a large corporation had a close life-long friend, Brian Fettner, who visited him on a trip to play in a charity golf tournament. During his visit, he stayed at the general counsel’s residence. While there, Fettner went into the general counsel’s home office to change his golf shoes, and observed a folder with certain documents in it on the desk. The folder contained highly confidential information regarding an impending merger between the general counsel’s corporation and another publicly traded company in the same industry. Fettner mentioned nothing about seeing the merger documents to his friend. However, he used the information continued on page 63
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Class Actions Are an M&A Deal Killer By Kevin Skrzysowski
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n M&A transactions, the acquirer assesses operational and general business risks during the diligence period. In most deals, business risk is managed by adjusting price, obtaining specific indemnities and/or using escrows. However, litigation risk presents a much more significant impediment as the nature, extent and magnitude of the exposure are not easily quantified, and the acquirer is often unwilling to assume uncertain and uncapped legal liabilities. This article examines the impact of class action litigation on M&A transactions as well as the strategies to mitigate those risks. Any time one company seeks to merge with or acquire another, the acquiring company is looking for a few critical factors within the target. Strong financial potential, predictable expenses and an absence of risk are just a few of the most positive indicators. Having only one class action lawsuit filed against the target organization, however, can throw each of those positive indica-
has meritorious defenses, the defense will cost millions and the allocation of company resources can be significant. Additionally, the company may have to set aside reserves during the pendency of the case that will adversely impact the company’s balance sheet, liquidity and enterprise value. The biggest risk of class action litigation is the outcome of the lawsuit itself. This is especially true in cases involving consumer protection issues, where there is no way to predict how large the class will become. Additionally, the outcomes vary significantly. To date, the largest TCPA settlement is In Re: Capitol One Telephone Consumer Protection Act Litigation, which resulted in a settlement fund of more than $75M. However, recently, a TCPA case against the multi-level marketing company, ViSalus, was tried, resulting in a verdict exceeding $925M for a class that was less than 40 percent the size of the Capital One class. A verdict of $267M was handed down for 534,000 calls made in violation of the TCPA in
Cash for Products and Services You Purchased.” The appeal of actual free money with the gift of hyperlinks to the settlement websites and claim forms dramatically increase the risk of a viral settlement and number of fraudulent claims — both of which equal financial risk for settling businesses. Two such examples of viral settlements are:
Kevin Skrzysowski, a Director at Risk Settlements, assists companies and their counsel in assessing and transferring the financial risk of class action litigation. A former practicing attorney, he holds a J.D. from Cleveland Marshall College of Law. kevins@risk settlements.com
Naked Juice Settlement. After settling a class action regarding false labeling of products, news outlets including ABC News, Fox and Huffington Post reported that consumers could be
A merger of Tribune Media and Sinclair Broadcast Group fell apart when Tribune realized that Sinclair was defending three separate class action lawsuits. tors into a tailspin. One needs to look no further than popular news reports to prove this thesis. Just last summer, for example, a highly anticipated merger of Tribune Media and Sinclair Broadcast Group fell apart when, among other things, Tribune realized that Sinclair was defending three separate class action lawsuits. Those concerns were material and impeded a transaction that may have otherwise been favorable to both parties. The uncertain outcome and financial risk caused by known, threatened or pending class action litigation can be a deal killer. Even if the company
Perez v. Rash Curtis & Associates early this year as well. Even if the company can settle the case, there is a significant risk that the settlement goes viral due to various settlement websites that promote access to free money by filing claims, and the awareness that is created by free media overall. The increased volume and intensity of claims create unpredictable financial outcomes for business. For example, the home page of one such settlement website, www. maximizingmoney.com, advocates “Free Giveaways > Class Action Lawsuit Settlements – Claim Free
eligible for up to $75 as compensation for a product alleged to be improperly labeled as “all natural.” The stories went viral, which caused 1.4 million consumers to visit class action promotion sites and the claim site. Eventually, 634,278 claims were submitted, which collectively sought nearly $32 million in benefits, exceeding the $9 million settlement cap. Red Bull Energy Drink Settlement. After settling a class action involving allegations of false and deceptive labeling and marketing of its drinks, news outlets reported that consumers could be eligible for up to a $10 cash benefit or a $15 voucher per household. The
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stories went viral, resulting in more than 2.7 million consumers filing claims. Acquirers are generally unwilling to assume the inherent financial risks of uncertain litigation, as the outcomes can vary significantly.
OPTION 1: SETTLE
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Settle the litigation and ring-fence the exposure. While this appears to be a simple solution, in practice this approach is often unworkable. First, the litigation and deal timeline are often running at different speeds. For the deal, the company needs certainty and finality. For litigation, if class counsel senses that there is a need to settle the litigation quickly, the price of poker will become grossly inflated. Additionally, the acquirer will demand certainty. In class actions, most settlements will take months to be approved and then years to meander through the potential appellate process. Without a final, non-appealable judgment, the litigation uncertainty remains, thereby creating an impediment to concluding the deal.
OPTION 2: ESCROW Set aside a large litigation escrow. There is always a competitive tension on the amount of the escrow, who controls the funds and how the fund will be used. For the seller, the large escrow may make the deal unappealing. For the buyer, if the escrow is not sufficient, the deal has too much risk. Therefore, this tension often results in the parties walking away from the transaction.
OPTION 3: SPECIFIC INDEMNITY Have a specific litigation indemnity. This can provide a solution so long as the seller is comfortable with the risk and has assets to pay for a bad result. With indemnities, the buyer must be certain that there are funds available to pay legal fees, settlement or judgment. This option is more viable when the seller has a large balance sheet such as a publicly traded company with significant cash and/or assets on its books.
However, the seller may have to take a litigation reserve, which can be suboptimal and impair its business objectives. When the seller is doing an asset deal and the funds are being distributed to the stakeholders, this option is much less appealing.
OPTION 4: RISK TRANSFER Companies can obtain full risk transfer for known, threatened or pending litigation. In the event the company elects Option 1, it could back the settlement risk with Class Action Settlement Insurance, which is the only post-litigation
Companies can obtain full risk transfer for known, threatened or pending litigation. insurance product providing full risk transfer for 100 percent of the valid claims submitted under the settlement. With this approach, the seller and buyer will know the exact cost of the settlement by transferring the payout risk to an insurer. So, if the settlement takes months or years, ultimately a carrier will bear the risk of loss. Alternatively, when settlement is not possible or advisable, but the risk is impeding a deal, the buyer and seller can obtain litigation buyout risk transfer. Using this approach, the outcome, risk and expense of known, threatened or pending litigation are transferred to and carried up to policy limits. This approach eliminates credit risk, specific indemnities and large escrows. Now the parties to the M&A transaction obtain certainty in the uncertain situation of class action litigation, allowing the deal to proceed even with litigation obstacles.
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Insider Trading
continued from page 59 gleaned from the documents to initially acquire 4,000 shares of the company that was about to be bought by the general counsel’s corporation. Curiously, Fettner made the initial purchase using his ex-wife’s brokerage account. He subsequently bought about 5,300 additional shares in her name over the next few days. Fettner then convinced his girlfriend and father to also buy the common stock of the company, and lastly bought 200 shares of the common stock in a brokerage account of his former girlfriend. Fettner purchased no stock of the company in any of his accounts and did not receive any proceeds from any of the trades he placed or from trades he persuaded others to place. When the merger finally took place, the company’s stock price rose by approximately 17.7 percent. While the complaint does not specify how much of illicit profits were
While both of the foregoing cases were based on violations of Section 10(b) and Rule 10b-5, which impose only civil penalties, Section 32(a) of the Exchange Act imposes stiff criminal penalties for any willful violations of the Act. The ability to bring a criminal action against insider traders or their employers is subject to a prosecutorial discretion. This discretion, and disinclination of both the SEC and Congress to define the statutorily imbedded terminology that imposes insider trading liability, creates ambiguities that prevent corporations from effectively curbing or altogether precluding insider trading misconduct. PREVENTION MEASURES
Despite these hurdles, corporations can implement certain fundamental measures to ensure their employees abstain from succumbing to the temptation of insider trading. While these will invariably fall short in cases of egregious breaches of trust and confidence (as was observed in the lawsuits filed against such individuals as Fettner and Chen), they more than likely will deter a large number of employees from insider trading misconduct. The classical theory lends itself more easily to preventative measures against insider trading liability than the misappropriation theory. One of the most important measures that a company can take to deter insider trading is being aware of current insider trading cases. Staying informed about recent enforcement actions brought by the SEC or the DOJ is essential when creating, updating or revising a company’s policy against insider trading. This measure should occur in tandem with regular employee education through a code of business conduct and ethics, and regular e-mails
The classical theory lends itself more easily to preventative measures against insider trading than the misappropriation theory. gained from the unlawful trades that Fettner placed or persuaded other to place, the allegations are that those profits exceeded $250,000. The SEC filed an enforcement action against Fettner as a defendant and both his ex-wife and ex-girlfriend as relief defendants, alleging violations of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5. The SEC is seeking a final judgment enjoining Fettner from future violations of these provisions, a payment of a civil monetary penalty, and disgorgement of the illicit gains together with prejudgment interest on these gains.
with references to enforcement actions brought by the SEC or the DOJ. Consistently informing employees about the company’s policies should create a clear sense of the company’s priorities for all employees. In addition to the e-mails detailing case studies and promulgations of a company code of conduct and ethics, companies should regularly train their employees on expected conduct. This education and training should be reinforced by consistent monitoring of the employees and reward-based programs. Monitoring could begin with screening all potential employees for past misconduct and continue with supervisory overview. Other fundamental monitoring measures can include providing individuals with avenues for anonymous reporting of suspected insider trading violations via telephone or website submissions and the use of independent auditors who can review trading transactions. Apart from the preventative measures against insider trading, companies should also craft a policy and procedure for post-insider trading violations. Ideally, a company should have mechanisms in place that help identify insider trading misconduct before law enforcement arrives with a search warrant and charges are filed. The identification can occur through the company’s internal investigations that review employee conduct. In addition to preventative measures, a general counsel can signal the company’s disapproval of insider trading by implementing discipline and remediation plans to systematically deal with the misconduct.
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FALL 2019 TODAY’S GENER AL COUNSEL
BACK PAGE FRONT BURNER
Workplace Shootings: The Three Ps By Christopher J. Campbell
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f recent history is any indication, the United States will endure more mass shootings in the near future. As these tragic events demonstrate, employers can no longer place the exclusive burden of employee safety for mass casualty events upon law enforcement. When one man with a gun can enter a workplace and shoot dozens of people in minutes, companies that do not adequately respond to the threat face significant risks and costs. It is important for in-house counsel to understand and implement workplace violence prevention measures that prioritize employee safety while respecting personal dignity and civil liberties. Here is some general guidance. Think of it as the three Ps — preparation, prevention and protection. Employers should prepare for mass casualty Christopher J. events by updating secuCampbell is an attorney at Carothers rity protocols customized DiSante & Freudfor their workplace. The enberger LLP. He Department of Homeland defends California Security has issued guideemployers against lines for responding to allegations of active shooter events, wrongful termination, harassment, generally referred to as discrimination and “run-hide-fight.” retaliation, and helps Human resources institute effective should collaborate with workplace violence security professionals and and harassment policies by obtaining legal counsel to integrate restraining orders these guidelines into stanand other civil relief. dardized policies. EmployHe also provides ees should be trained and employers with drilled (i.e., practice) on workforces in California with advice “run-hide-fight,” evacuaand counseling to tion, lockdown and other ensure compliance safety techniques. with the state’s Apart from policies employment laws. restricting the possession cjcampbell@cdf laborlaw.com of firearms, weapons and
dangerous substances while on company premises, employers can help prevent mass casualty events and workplace violence by addressing persons of interest. Human resources should work with security professionals to identify persons or applicants that exhibit at-risk personality traits (which may be as simple as asking employees to share information regarding restraining orders they have against others). For example, some pre-attack traits identified by the FBI in a study of active shooters between 2000 and 2013 included mental health impairment, poor impulse control, interpersonal difficulties, poor work performance and suicidal ideation. If an incident, threat or other concerning behavior occurs in the workplace, employers should immediately speak with counsel to discuss and/ or coordinate a confidential safety assessment. The employee should be placed on administrative leave pending the outcome of a return-to-work interview and assessment. Counsel can then pair them with a third-party consultant to conduct the interview and to facilitate separation or re-integration. Safety assessments provide an important buffer in states such as California that codify workplace protection. They provide both legitimate reasons for termination, and ready evidence to substantiate a potential workplace violence restraining order if needed. Employers should actively address the fallout if the unthinkable occurs. Offer support and counseling programs to the extent practicable, and respect impacted employees’ reasonable leave requests. Legal claims will follow. Inevitably, they will vary depending upon the circumstances. For example, employers might receive claims for disability-related liability from mental suffering associated with a workplace violence event. Develop an internal strategy to secure claim releases, and/or to address prospective litigation in a manner that facilities operational concerns.
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