Today's General Counsel, V10 N1, February/March 2013

FEB/ MAR 2013 VOLUME 1 0 / NUMBER 1 TODAYSGENER A LCOUNSEL.COM

INTELLECTUAL PROPERTY

Freedom-to-Operate Opinions Insider Theft E-DISCOVERY

InfoTech Outpacing the Law CANADA/ CROSS-BORDER

Antitrust Leniency Questioned GOVERNANCE

GC in the Crosshairs HUMAN RESOURCES

The DACA Hiring Pool

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feb/ mar 2013 toDay’s gEnEr al counsEl

Editor’s Desk

I’m very pleased to announce some exciting changes that begin with this issue, as we relaunch our publication and unveil our new name, Today’s General Counsel. Since our start our audience has grown significantly and our content has evolved to focus increasingly on the information needs of general counsel. Our circulation has expanded to reach more in-house readers than any other legal trade publication by a two to one margin, and our new name reflects a revised mission. We will be adding additional news and information geared specifically to our growing in-house audience, and the increasingly complex regulatory environment in which they do business.

For example, in this first issue of Today’s General Counsel, John Bace writes about what he calls a potential battle between the chief information officer of an organization and its general counsel. He observes that information technology is fast approaching the point at which it can save all the data a company generates forever, at a reasonable cost, and produce it whenever called upon to do so. But in the event of litigation, this capability means that legal departments will be forced to pay huge sums of money to review and categorize that information before production. How this conflict can be resolved is an issue that we will be sure to address in the future.

Even with our expanded readership, we intend to remain relevant to the large number of senior executives who are not attorneys, and continue to uniquely address the needs of the entire C-Suite by explaining how important changes in laws and regulations affect business strategies.

Today you cannot be a media force without a digital presence that is compelling to readers. We are hard at work to com-

2

plete our relaunch, and in next issue’s Editor’s Letter I will announce changes to our website and daily email newsletter. These new digital products will provide original and curated content to keep you informed on the latest developments, regulations and trends. We understand the unique requirements of our readers, and we will continue to respond to your changing needs.

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

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FEB/ MAR 2013 TODAY’S GENER AL COUNSEL

Features

46

ARBITRATION-LITIGATION CHOICE NOT ALWAYS OBVIOUS

48

GOVERNMENT KNOWLEDGE DEFENSE AGAINST WHISTLEBLOWERS

Anthony Pierce and Jonah McCarthy Sometimes a jury is preferable.

Michelle L. Merola and Reetuparna Dutta Give them an office on site.

4

52

TECHNOLOGY CAN IMPROVE LAW DEPARTMENT PERFORMANCE

54

LITIGATION RISK FOR WEBSITE AND MOBILE APPS MARKETING

58

CAUTION REQUIRED WHEN USING MANAGERIAL ACCOUNTING DATA IN COURT

Eric Laughlin Integrated solutions lacking in some areas.

Dominique Shelton You might have to eat those cookies.

James Rosberg and Eric Korman Cut and paste may not do it.

60

FIVE TRENDS TO WATCH AS POWER, RESPONSIBILITY, SHIFT TO IN-HOUSE LEGAL DEPARTMENTS Bill Young The silos crumble.

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FEB/ MAR 2013 TODAY’S GENER AL COUNSEL

Departments Editor’s Desk Executive Summaries

2 10

6

Page 28 E-DISCOVERY

18 | Information Technology Outpacing Information Law John Bace GC and CIO need to synchronize.

22 | Challenges of Asian Language E-Discovery John Tredennick and W. Peter Cladouhos Language, legal and cultural traditions, complicate the task.

26 | Staying Ahead on E-Discovery Gabriela Baron Court decisions institutionalize TAR.

INTELLEC TUAL PROPERT Y

28 | When is a Freedom to Operate Opinion Cost-Effective?

Linda Thayer Marking the boundaries of your patent.

32 | Theft of Critical Information

by Insiders Kurt Calia, David Fagan and Richard Shea Plan ahead or you could pay the thief a bonus.

GOVERNANCE

34 Corporate Counsel in the Crosshairs |

CANADA /CROSSBORDER

40 | Competition, Cartels and Canada

William E. Hunt Internal investigations can bring difficult decisions.

Nikiforos Iatrou and Mandy Seidenberg Court may not approve leniency deals.

38 | Top In-House Legal Salaries are Up, Reflecting Greater CLO Role

HUMAN RESOURCES

Lauren M. Chung More reliance on “variable pay.”

Jeffrey C. P. Wang and Agnna Varinia Guzman An immigration reform already enacted.

42 | What Does Daca Mean for Employers?

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Editor-in-ChiEf Robert Nienhouse

PublishEr Julie Duffy

Managing Editor David Rubenstein

ExECutivE Editor Bruce Rubenstein

sEnior viCE PrEsidEnt & Managing dirECtor, today’s gEnEral CounsEl institutE Neil Signore

art dirECtion & Photo illustration MPower Ideation, LLC

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dirECtor of CirCulation Carol Spach

Contributing Editors and WritErs

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John Bace Gabriela Baron Kurt Calia Lauren M. Chung Reena Dutta David Fagan Agnna Varinia Guzman William E. Hunt Nikiforos Iatrou Eric Korman Eric Laughlin

Jonah McCarthy Michelle Merola Anthony Pierce James Rosberg Mandy Seidenberg Richard Shea Dominique Shelton Linda Thayer John Tredennick Jeffrey C. P. Wang Bill Young

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FEB/ MAR 2013 TODAY’S GENER AL COUNSEL

Executive Summaries E-DISCOVERY

10

PAGE 18

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Information Technology Outpacing Information Law

Challenges of Asian Language E-Discovery

Staying Ahead on E-Discovery

By John Bace UBIC North America

By John Tredennick, Catalyst Repository Systems and W. Peter Cladouhos Paul Hastings LLP

In seeming accord with various informal laws suggested by physicists and engineers (the most well known being Moore’s law, which says that processing power of a microchip doubles every 18 months), information technology is changing so rapidly that civil law and regulation can’t keep up.

The author sees it as a case of Star Wars technology and Gutenberg laws, and he says one technological law in particular – Kryder’s Law pertaining to the growth in capacity of information storage devices – could make some lawyers and business managers shake in their boots. Kryder’s law means that information governance must deal with the fact that “keeping everything forever” is, or soon will be, both possible and affordable.

This raises the prospect of a battle line soon to be drawn between the chief information officer (CIO) and the general counsel. Without some kind of accommodation and damper on the process, in the event of litigation or regulatory compliance requirements, legal departments could be saddled with huge bills for reviewing and categorizing information before production.

Key stakeholders within the enterprise will need to collaborate to strike an appropriate and economical balance.

Management will need to determine the value of the information and what amount of resources will be needed to maintain it. Legal will need to define what information must be retained, for how long, why and under what circumstances. Information officers will need to both keep pace with technology and find appropriate and economical solutions.

As e-discovery reaches into Asia, global companies face unfamiliar challenges.

The so-called CJK languages (Chinese, Japanese and Korean) are difficult to search and review. The cultural and political climate of Asian nations differ sharply, and each of these languages presents unique problems.

The key to solving them is to assemble the right team as early as possible.

That includes lawyers, case managers, linguists and vendors with demonstrated experience in the host country.

Many Asian companies doing business in the United States are unfamiliar with U.S. discovery rules and practices, and a fundamental premise of the U.S. system – that a full exchange of documents among all parties is the best way to arrive at the truth about a dispute.

In Asia, few if any documents are exchanged before trial. The parties simply bring their witnesses and state their case as best they can. When working with Asian clients, they must be informed early about the duties and processes surrounding e-discovery in the United States. Disclosure is not cheap. The client must be warned that the costs of e-discovery are high in the best of circumstances, and multi-language discovery rarely offers the best of circumstances.

Expect the process to be tedious, time-consuming and expensive. In a multi-language matter, translation is often the single-largest expense, sometimes even more expensive than review. Machine translation (MT) may present an alternative in many cases, depending on the nature, volume and complexity of the data.

By Gabriela Baron Xerox Litigation Services

Last year several opinions approving technology-assisted review (TAR) gave litigants the confidence to consider and try these technologies. First, U.S. Magistrate Judge Andrew J. Peck of the Southern District of New York endorsed TAR’s use in Da Silva Moore v. Publicis Groupe. This was followed by an opinion from the District of Louisiana, In re Actos (Pioglitazone) Products Liability Litigation and from two state courts: Global Aerospace v.

Landow (Virginia) and EOHRB, Inc. v. HOA Holdings (Delaware).

While the specifics of TAR tools may differ, the workflow and process tend to be consistent. Senior lawyers familiar with the facts of the case, the claims and defenses, review a sample of data from a collection for responsiveness and privilege. The software “learns” from the lawyers’ hands-on decisions and extrapolates from them across the data set, repeatedly applying statistical sampling and quality control techniques to refine and improve its decisions. The software then assigns each document a responsiveness score. Documents with higher scores can be prioritized for senior review. Lower-scoring documents may be reviewed by more cost-effective personnel (e.g. discovery attorneys or contract reviewers) or set aside altogether.

With the focus on cutting costs and optimizing resources, the challenge confronting “Big Data” in e-discovery is daunting. Organizations will increasingly turn to managed and shared services models. These approaches allow clients to predict costs, create efficiencies and control skyrocketing budgets despite massive data growth, frequent litigation and heightened regulatory scrutiny.

When it comes to collaborating with your clients and colleagues, the “in-person” experience matters For many of the top legal firms in the nation, video conferencing and telepresence continues to become the new business norm as a way to reduce travel costs, increase productivity and gain competitive advantage. The result: faster decisions and a connected team of colleagues and clients that are no longer constrained by technology, time, or geography.

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FEB/ MAR 2013 TODAY’S GENER AL COUNSEL

Executive Summaries GOVERNANCE

INTELLEC TUAL PROPERT Y

12

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When is a Freedom to Operate Opinion Cost-Effective?

Theft of Critical Information by Insiders

Corporate Counsel in the Crosshairs

By Linda Thayer Finnegan, Henderson, Farabow, Garrett & Dunner LLP

By Kurt Calia, David Fagan and Richard Shea Covington & Burling LLP

By William E. Hunt Dinsmore & Shohl LLP

Most companies understand the value of applying for patents on inventions before launching a product. Equally important are the benefits that come with product clearance, also called “freedom to operate” (FTO) or “right to use” opinions.

FTO analysis involves identifying and analyzing those patents of others that may subject your company to patent-infringement liability.

By performing FTO analysis before developing and launching a new product or acquiring another company, your company can limit the risk of future litigation and avoid unnecessary expense. FTO analysis done early in the cycle of product development affords companies the opportunity to either modify the design and avoid infringement before reaching the point of no return, or to take a license.

FTO analysis can play a valuable role in an IP strategy. It allows a company to identify, minimize and manage risk. Often, it also enables a company to identify areas where patent coverage is thin or absent and which therefore may present opportunities.

The only real downside to regular FTO analysis on all products is the cost. Since few companies have unlimited legal budgets , most companies consider their level of FTO analysis on new products and acquisitions in light of their budget and risk tolerance. An experienced patent attorney should be able to assist in developing a policy that is right for any company. The author lists five factors that drive the decision on whether or not to perform an FTO analysis.

Protecting business critical information involves identifying which information is critical; designating it as confidential; establishing practices, procedures, and policies to maintain confidentiality; and being prepared to address breaches. Each step implicates several areas of the law, including data security, privacy, intellectual property, white collar crime, employment, employee benefits and executive compensation, corporate and securities, insurance coverage and crisis management.

A comprehensive plan to protect business critical information includes three related components: preventing theft, planning how to respond should it occur, and reducing risk of being accused of theft by others after an insider allegedly has brought information from a competitor or former employer. This article presents actions and programs to initiate under each of those headings. Regarding the problem of unwittingly coming into possession of another company’s confidential information, the author notes that new hires often do not understand what information is confidential. Upon hire, new employees could be asked to acknowledge that they have not and will not bring in any trade secrets from another company.

Still, probing may be necessary to determine whether the individual has in electronic form, possibly at home, a former employer’s information. If a former employer’s information is uploaded onto a new employer’s systems or otherwise shared, the question of how to remedy the problem, whether and how to inform the prior employer, and how to return the information, need to be carefully considered.

In regulatory and criminal investigative matters, an in-house attorney often faces a dilemma – how to balance the duty of loyalty to the corporation against the duty of care if he or she finds out about corporate missteps.

The author analyzes the case of an associate general counsel at a leading pharmaceutical company who handled a letter from the FDA requesting information about the marketing of a drug, and ended up facing criminal charges.

The charges did not include an allegation that she was involved in the underlying conduct that gave rise to the investigation. They related only to her actions in conducting an internal investigation and her subsequent response to the government inquiry. The question was whether she intentionally misled the government or was merely advocating for her client.

There is a safe harbor provision in the federal obstruction of justice statutes that explicitly states that providing lawful, bona fide legal advice in connection with, or anticipation of, an official proceeding is not prohibited.

But if a company asserts an adviceof-counsel defense, it is required to divulge the advice counsel gave and waive its privilege.

The current regulatory environment, which includes enhanced awards to whistleblowers, warrants extreme care as corporate counsel weigh the risks and responsibilities of good stewardship to their employer. The author cautions that it’s a bad idea to provide any information before all the facts relating to an inquiry have been assessed internally.

TODAY’S GENER AL COUNSEL FEB/ MAR 2013

Executive Summaries GOVERNANCE

CANADA /CROSS-BORDER

HUMAN RESOURCES

PAGE 38

PAGE 40

PAGE 42

Top In-House Legal Salaries are Up, Reflecting Greater CLO Role

Competition, Cartels and Canada

What Does DACA Mean for Employers?

By Nikiforos Iatrou and Mandy Seidenberg WeirFoulds LLP

Jeffrey C. P. Wang and Agnna Varinia Guzman WHGC, PLC

Antitrust agencies in the U.S. and Canada have programs designed to encourage cartel participants to alert authorities about the existence of a cartel and cooperate in the ensuing investigation and prosecution. In exchange, cooperating parties receive immunity, or leniency in the form of lower recommended sentences.

A recent case of the Federal Court of Canada, R. v. Maxzone Auto Parts (Canada) Corp., indicates that court approval of sentences determined under Canada’s leniency program is less certain than antitrust lawyers had thought.

Maxzone came before the Federal Court as a joint sentencing submission, arrived at through the leniency program. Citing the impacts of “hard core” cartel agreements on the economy, the court asserted such offences “ought to be treated at least as severely as fraud and theft, if not more severely than those offences,” and to be an effective deterrent, the fine should effectively disgorge all expected profit.

While it recognized the public interest in refraining from handing down prison sentences to the “first-in” leniency applicant, beyond that the court made it clear that it will require submissions to explain why a fine alone suffices to meet sentencing objectives.

The court’s concern is that sentences risk becoming simply “the cost of doing business” and fail to deter white collar crime. While it was always possible for the court to decline approval of an agreed upon sentence, traditionally these agreements received deference. Maxzone indicates this may not continue to be the case.

The Deferred Action for Childhood Arrivals (DACA) initiative is a temporary solution for undocumented immigrants 15 to 30 years old, as well as for future applicants now 5 to 14 years old. Applicants must have been brought to the United States as children and educated in the U.S. educational system.

DACA recipients receive “deferred action,” which is a determination by the U.S. government that it will defer removal action on the basis of executive prosecutorial discretion. The DACA initiative does not grant any new legal status and may be revoked by the Department of Homeland Security at any time. DACA recipients are permitted to remain in the United States under deferred action while working legally during the existence of the DACA initiative. DACA recipients may be granted open-market work authorization with any U.S. employer through an Employment Authorization Document (EAD) card for an initial period of two years.

Renewals are available.

Although little guidance on DACA has been provided by DHS, the challenges can be mitigated through a uniform company policy, due diligence, and with the advice of immigration counsel.

Ultimately, DACA can have a positive impact on employers, by enabling access to a multi-lingual and talented hiring pool of over 1.2 million candidates.

The authors run through various scenarios that can arise in respect to DACA — for example when considering new hires and what to do if an existing employee wants help in acquiring DACA status.

By Lauren M. Chung HBR Consulting

According to a 2012 survey of law departments by the author’s firm, total compensation (base salary, cash bonus and the value of long-term incentives) for chief legal officers averaged $1.96 million, while the median figure was $1.67 million. Mostly larger departments were represented in the survey.

The median was a 32-lawyer department with more than $9 billion in worldwide revenues.

For all in-house attorney levels, average total compensation per the 2012 survey was $314,700, with a median of $257,200. Among all in-house lawyer levels, total compensation increased an average of 2.6 percent and a median one percent according to the survey.

Chief legal officers received the greatest base salary increase among all lawyer levels surveyed – an average of 5 percent and median of 3.5 percent.

This was a bigger increase than in the previous two years. In the 2010 and 2011 surveys, the base salary increase for CLOs was an average of 4.3 percent.

For the past five surveys, average base salary increases for the CLO have ranged from 2.4 percent to 5.3 percent. The value of long-term incentives awarded to chief legal officers was an average of $913,500 (median $775,000).

Opportunities for overall compensation increases for the chief legal officer and the legal staff will be in the form of variable bonuses and other incentive pay. Among the participants in the 2012 survey, 78 percent indicated that they are moving more base compensation to variable pay, and this trend is likely to continue.

13

FEB/ MAR 2013 TODAY’S GENER AL COUNSEL

Executive Summaries

14

PAGE 46

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Arbitration- Litigation Choice Not Always Obvious

Government Knowledge Defense Against Whistleblowers

Technology Can Improve Law Department Performance

By Anthony Pierce and Jonah McCarthy Akin Gump Strauss Hauer & Feld LLP

By Michelle L. Merola and Reetuparna Dutta Hodgson Russ LLP

By Eric Laughlin Thomson Reuters

Despite its many perceived advantages, arbitration should not necessarily be the default method for solving corporate disputes. Rather, when choosing between arbitration and litigation, counsel should make a careful and informed decision.

Both methods involve the same elements, for the most part, and they embody many of the same fundamental concepts. For example, witnesses testify and are cross-examined, evidence is submitted, and opening and closing statements are made. Both arbitration and litigation also involve motions practice and varying forms of discovery, and protective orders are available and enforceable in both forums.

At the same time, one noticeable difference is that in arbitration the parties must pay someone to resolve the dispute. Arbitration, including administrative fees, are no small cost, especially when there are complex issues and a panel of arbitrators.

Often it takes the same amount of time and expense to resolve a dispute through arbitration as it does through litigation. On the other hand, an advantage unique to arbitration is its ability to shield disputes from the public eye.

There are generally no public “dockets,” and most arbitration clauses expressly call for confidential proceedings.

If you determine that arbitration is the best way to resolve the dispute, it’s important to make sure that the arbitration agreement completely defines the ground rules. If you think it will be advantageous to limit the number of witnesses or even the days of the hearing itself, include language to that effect in the agreement.

The False Claims Act allows private persons, known as “relators” or whistleblowers, to bring suit on behalf of the government and share in any recovery obtained.

The FCA often generates multimillion dollar recoveries. In fiscal year 2012, federal and state governments took in over $9 billion under the False Claims Act and state counterparts. The law’s liability provisions encompass not only those who have actual knowledge of false claims, but those who act in “deliberate” or “reckless” disregard of the truth or falsity of information underlying a false claim.

Before 1986, the FCA contained a complete “government knowledge” defense. The 1986 amendments eliminated that, but government knowledge remains germane to demonstrating that a defendant did not act with an offending state of mind when submitting the false claim. Culpability under the FCA does not require intent to defraud, but there must be some element of gross negligence or willful blindness. The government knowledge defense can show that this state of mind did not exist.

The typical example of the successful application of the government knowledge defense is where government contracting officers are aware of, and approve, a defendant’s alleged deviations from the terms of the contract.

According to the authors, keeping the government informed is essential to laying the groundwork for this defense.

This costs the company little or nothing, and it may help forestall the penalties, damages, and legal fees that False Claims Act charges often bring.

A survey conducted by the author’s firm examined the current workflow environment in legal departments and identified three key challenges: keeping track of matter details and tasks; managing work product; and meeting increased expectations of 24/7 availability and global collaboration. Respondents identified specific problems, such as document retrieval, task management, prioritization difficulties, and trying to manage tasks while mobile.

Respondents outlined what their ideal technology requirements would be to successfully meet those challenges.

Respondents identified critical tasks currently being addressed through use of vendor-provided automated software tools. Vendor-provided tools were in wide use for legal research, matter and spend management and contract management. Fewer organizations currently deploy automated vendor solutions to address legal holds, complex transactions, compliance and entity management.

Legal departments are actively seeking innovative technology that will fill those gaps. In some cases, such as legal hold and compliance, more than 25 percent of legal departments intend to purchase solutions within the next two years.

Respondents identified currently unmet needs for greater integration between tools and mobile offerings that can handle complex tasks. It is important for information, software and user interfaces to work together to simplify and streamline work flows, rather than merely offer another layer of technology and complexity to an already overloaded work flow. Effective solutions must involve more than simply automating manual tasks. They need to provide more powerful analytics, collaboration and mobility that can be embedded within existing work flows.

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Executive Summaries Page 54

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Online Behavioral Advertising Facing Legal Challenges

Caution Required when Using Managerial Accounting Data in Court

Five Trends to Watch as Power, Responsibility, Shift to In-House Legal Departments

By James Rosberg and Eric Korman Analysis Group, Inc

By Bill Young Bridgeway Software

Managerial accounting data can be used in expert analyses conducted in at least two types of antitrust litigation: predatory pricing and price fixing.

A central allegation in predatory pricing cases is that a company is pricing its products below what is profitable in order to drive out competition and create a monopoly. Profitability is typically measured by looking at price in excess of variable cost, so a factual question that often must be answered is whether the defendant priced its products below a measure of its variable cost.

The central allegations in price-fixing cases are that a cartel has colluded to raise prices and purchasers were charged a higher price than would have been set in a competitive market.

In some states, indirect purchasers, or those who have bought products at one or more steps removed from the alleged cartel, can also claim damages.

A key economic question in indirect-purchaser cases is how much of the overcharge – the difference between the market and the cartel price – was passed through the direct purchaser(s) to the indirect purchaser(s). Managerial accounting data may be used to measure prices at different points in the distribution chain, and to study the relationship between those prices, thereby revealing the extent to which the overcharge has been passed through.

Managerial accounting expertise, methodical analysis, and clear communication with the company managers can enhance the accuracy and credibility of analyses based on such data.

Cost-containment and resource efficiency remain essential goals for legal departments, but are no longer the primary concern. In-house teams are increasingly taking lead roles in their work with outside firms, and general counsel are assuming more influence at the executive level, as power shifts toward in-house departments. Maturing law departments are aligning themselves with business goals and strategies, while still maintaining their traditional role of mitigating corporate risk.

The author quotes Gary Ballesteros, Rockwell Automation Vice President Law, in that regard: “Our legal department has taken on a wide variety of functions and areas that aren’t strictly ‘legal’ under the traditional way of viewing legal departments. For example, the product safety group reports to the head of our litigation group.

So when there are product notices or recalls, Legal gets involved early. And on the other hand, if the litigation lawyers identify a litigation-trend or lesson learned associated with a certain product, they can quickly connect with Rockwell’s engineers.”

Other trends: Enterprise legal management software will provide mobile attorneys more information on-the-go, delivered through their mobile devices.

Ease of use, device portability and intuitive functionality will be essential.

There will be increasing sophistication and accountability in “Software as a Service” or SaaS-based applications. Cloud computing will increase and ultimately overtake on-premise computing. And, via the use of portals, information-sharing between corporate law departments and outside counsel will increase, creating cost savings.

By Dominique Shelton Edwards Wildman Palmer LLP

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As the year 2013 began, more than 180 consumer class actions regarding the relatively common practice of companies tracking user behavior on line and via mobile devices were pending. Any company that advertises using a website or mobile apps should pay close attention to this trend.

Online behavioral advertising (OBA) is the term used to describe this process of tracking consumers’ on line activities in order to target them for advertising directed at their specific interests. Even when ads are not served, tracking can lead to liability.

From December 2011 through January 2012, for example, some 60 class actions were filed against the mobile industry for tracking user behavior for internal analytics purposes, and not for ad serving. Tracking children’s habits is especially risky. In December 2012, for example, Google and Viacom were sued in California for alleged illegal tracking of children’s video viewing to serve targeted advertising.

OBA is being addressed by regulators in Canada and the European Union, among other places. In 2011, the SEC issued a guidance calling for publicly-traded companies to disclose material cyber-risks in public filings. Being named in a do-not-track class action counts as a fact that must be disclosed.

Companies should consider the following steps: Understand what tracking is taking place through their websites and apps, include requisite insurance and indemnity provisions in vendor agreements, and include appropriate disclosures in privacy policy and website disclosures, to inform consumers and obtain their consent.

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feb/ mar 20 13 toDay’s gEnEr al counsEl

E-Discovery

Information Technology Outpacing Information Law Star Wars Technology, Gutenberg Laws

By John Bace

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E-Discovery

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ews releases from technology and communications vendors continue to herald new and more powerful microprocessors, larger networks and wider bandwidths (whether we need them or not). Meanwhile, the courts and the legal system struggle with issues such as privacy, data security and intellectual property. The latest case law is addressing technology that may be several generations old by

the time an opinion is handed down.

This conflict between laws, public policy and the judiciary on the one hand and the “laws” of technology on the other, is now front and center in the world of e-discovery. It’s as if we are living in a world of Gutenberg Laws while attempting to deal with Star Wars technology. Failure to address this chasm threatens any prospects for moving the legal system forward in a reasonable and just way.

THE “LAWS” OF TECHNOLOGY

No legislative body voted to create them, and there are no regulators or courts to enforce them, but the laws of technology remain in effect and are now manifest in esoteric fields that barely existed a generation or two ago, such as materials science and nano technology.

As long as the “laws of physics” articulated by the likes of Newton and Einstein are not broken, these laws will continue to be in effect, creating an ongoing problem for the legal profession.

Currently one of the best known and most cited of the technology laws was formulated

by Gordon E. Moore of Intel in 1965. Moore’s Law says that the processing power of a microchip doubles every 18 months. A corollary is that computers become faster and the price of a given level of computing power falls by one-half every 18 months.

This trend has continued for close to half a century. How long will it last? The 2010 update to the International Technology Roadmap for Semiconductors (an industry organization, made up of the major industry groups from the world’s five leading chip manufacturing regions) suggests that Moore’s Law will lose steam in 2013, and the 18-month period will stretch to three years.

Others suggest that it will be sometime between 2015 and 2020 before the progress in the

development of microprocessors slows.

Before we look at the growth predictions for other technologies and the impact that they may have on our society, let us consider what impact accelerating change, driven by Moore’s Law, might have on our world.

In 1999, Raymond Kurzweil, a U.S. author, inventor, and futurist, wrote a book entitled The Age of Spiritual Machines. He argued for extending Moore’s Law to diverse forms of technological progress. According to Kurzweil, whenever a technology approaches some kind of a barrier a new technology will be invented to allow humans to cross that barrier. He cites numerous past examples of this, and he predicts that such paradigm shifts have and will continue to become increasingly common, leading to “technological change so rapid and profound it represents a rupture in the fabric of human history.”

Gilder’s Law is an assertion by George Gilder, author of the 2000 book Telecom: How Infinite Bandwidth Will Revolutionize Our World, which states that “bandwidth grows at least three times faster than computer power.”

This means that if computer power doubles every 18 months, per Moore’s Law, then communications power doubles every six months. It’s this type of advancement that is creating the successful convergence of broadband, digital entertainment and mobile devices – and creating new issues regarding intellectual property and licensing of content.

This leads to what some call Gilder’s “Winner’s Waste Law.” The best business models, he suggests, waste the era’s cheapest resources in order to conserve its most expensive resources. When steam became cheaper than horses, the smartest businesses used steam and spared horses. Today the cheapest resources are computer power and bandwidth, and both are getting cheaper thanks to Moore’s Law. Google is a successful business because it wastes computer power – it has approximately two million servers powering its search engines – while it conserves its dearest resource, people. Google has 53,000

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E-Discovery

employees and generates nearly $40 billion in revenue.

Growing out of Gilder’s Law is another law, formulated by Danish computer scientist Jacob Nielsen. He was Sun Microsystem’s Distinguished Engineer, and prior to that he worked for Bell Labs and IBM’s Thomas J. Watson Research Center in the areas of web usability and human-computer interactions. Nielsen’s Law states that network connection speeds for high-end home users would increase 50 percent per year, or double every 24 months.

What that means is that Nielsen’s Law growth rate is generally slower than Moore’s Law, so user experience would remain bandwidth-bound.

Moore’s Law is the highway and Nielsen’s Law is the feeder road for growth rates. The end result is that most consumers know the grass is always greener (or speeds are faster) on the other side of the fence, and as a result they are always in a race to reach it.

machines). Only later, with the dot. com boom of the Internet, was the law applied to users and networks, in line with its original intent to describe Ethernet purchases and connections.

Metcalf’s Law is not without its critics. Some believe that it was the quantitative stimulus fueling the dot.com boom craze that encouraged people and organizations to increase user base instead of profits, thereby increasing expenses without revenue, all in hopes of hitting a grand slam home run.

The technology “law” that should make most lawyers and business managers shake in their boots is the one focused on the growth of storage devices. Its author is Mark Kryder, who was Seagate Corporation’s senior vice president of research and its chief technology officer. Kryder’s Law says that magnetic disk area storage density is increasing at a pace much faster than the doubling occurring every 18 months in Moore’s Law.

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The latest case law is addressing technology that may be several generations old by the time an opinion is handed down.

The reason why the Internet has become so powerful – and why eBay has made so much money and Facebook has such great potential – can be expressed simply through Metcalfe’s Law, attributed to Robert Metcalfe, the originator of the Ethernet and founder of 3COM. Metcalfe believes the value of a network is proportional to the square of the number of nodes. Thus, as a network grows, the value of being connected to it grows exponentially, while the cost per user remains the same or even goes down.

Metcalfe’s Law started out in the early 1980s being applied not to users, but rather to “compatible communicating devices” (for example, fax

What this means is that “keeping everything forever” in terms of information governance becomes both possible and affordable. One article postulates that by 2020 a two-platter, 2.5-inch disk drive will be capable of storing more than 14 terabytes (TB) and will cost about $40. That article also looks at 13 different potential non-volatile memory technologies to see whether in 2020 one of them might outperform hard drives on a cost-per-TB basis.

As a result of these technology laws, there is a potential battle line being drawn between the chief information officer (CIO) of an organization and its chief legal officer or general counsel. Information Technology can

save everything forever at a reasonable cost and produce it when necessary. But this means, in the event of litigation or regulatory compliance requirements, legal will be forced to pay huge sums of money to review and categorize that information before production.

DRAG ON THE ECONOMY

The internal debate that takes place within an organization regarding which information to gather, which to keep and which to discard has a powerful impact on business models, public policy, and the law. Some of these arguments slow or retard the adoption of technology for one-half of all organizations as they struggle to protect their revenue streams, existing markets and intellectual property from technology cannibalization.

At least one academic agrees that this imbalance creates a drag on the economy. Eli Noam, professor of finance and economics at Columbia University, believes that the United States has lost its global leadership in the mobile and wireless industry because of the government’s slow pace of spectrum allocation.

Noam warns that the same thing is happening with broadband, as regulators attempt to treat it like traditional telecommunications. His observation, and a suggestion: “Courts can take years to resolve disputes. Regulators and legislators require years to establish rules ... In the U.S. the delay in the courts could be alleviated by tripling the number of judges. Compared with overall cost of government, judges are cheap. So are patent examiners.

Streamlining administrative law, simplifying the appeals process or creating mandatory arbitration mechanisms should not be expensive.”

The economic benefits, he adds, would be “incalculable.”

However, at the same time, Noam believes that speed in the process has created some of the problems. “No business or government institution can change at 50 percent a year,” he says. “While stability and tradition are important, if a fundamental technology progresses far beyond society’s

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E-Discovery

ability to absorb its impacts, a growing disconnection occurs.”

However, this market-driven approach may not be in the best interest to the overall economy. University of Chicago economics professors Raghu Rajan and Luigi Zingales, in their book Saving Capitalism from the Capitalist, point out that economic elites often use their power “to restrict competition, limit access to capital and promote their vested interests over those less fortunate – undermining the potential of free markets to spread wealth and opportunity.”

From the very business school that defined free and efficient markets, Rajan and Zingales warn that governments “must be powerful enough to thwart those intent on rigging the marketplace, but the balance between too much regulation and not enough is tougher to achieve than previously supposed ... Only the right balance and incentives can prevent capitalists from becoming capitalism’s worst enemies.”

Yet, the thought of trying to achieve this balance is something most in the IT industry resist. As one management consulting firm concluded, regulation “is the single biggest uncertainty affecting capital expenditure decisions, corporate image, and risk management.”

At the heart of the gathering tension between the law, as it becomes manifest in e-discovery requirements, and the technology laws as they find expression in ever-greater capacity to gather and store information, is the issue of information governance. Technology will continue its advance. Organizations will continue to function, adopting the new technologies and using them to meet their regulatory, commercial, and organizational compliance requirements.

To do this successfully, three key stakeholders within the enterprise will need to collaborate to strike an appropriate and economic balance. Management will need to determine the value of information and what amount of

resources will be needed to maintain it.

Legal will define what information must be retained, for how long, why, and under what circumstances. Information Technology will find the solutions that will keep pace with the evolution of the industry and balance them against the cost to the enterprise. ■

John Bace is on the advisory board for UBIC North America and is a guest lecturer at the Center for Information Technology and Privacy Law at the John Marshall Law School. He is a former Research Vice President at Gartner, Inc., where he covered the impact of public policy on information technology for 14 years. johnbace@hotmail.com

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E-Discovery

Challenges of Asian Language E-Discovery

By John Tredennick and W. Peter Cladouhos

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s e-discovery reaches into Asia, global companies face new and unfamiliar challenges. Whatever the nature of the case, if it involves electronic information stored in China, Japan, Korea or elsewhere in Asia, be advised: You’ll be managing case files differently than you would in the United States.

The challenges presented in managing electronic files in Asia stem from many causes, some geographical, some technical and some cultural.

In Asian countries, the laws governing data and privacy are quite different

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than in the United States. For example, in China, collecting and exporting data involving “state secrets” can get you thrown in jail. In Japan, taking data out and hosting it in the United States may cause you to lose your client.

Language, too, presents multiple challenges. The so-called CJK languages (Chinese, Japanese and Korean) are the most difficult to process, search and review. Mangle the processing and you lose your data. Mess up the search, and you may as well have lost your data. Either way, your review becomes costly and ineffective.

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In this article, we have outlined some of the most common and critical challenges companies face when handling Asian data, and keeping Asian e-discovery on track and on budget.

• Navigating Data Privacy Laws and Political Minefields.

Different countries have different laws governing the collection and use of data.

These laws may be national, regional

with our discovery rules and practices.

In particular, their executives may be unfamiliar with a premise of our justice system – that a full exchange of documents among all parties is the best way to reach the truth about a dispute. This is not necessarily the case in Asia, where few if any documents are exchanged before trial. The parties simply bring their witnesses and state their case as best they can.

either headquartered there or with a local office.

For collections, however, an Asianexperienced consultant can be based anywhere, provided he or she has experience working in your jurisdiction.

At a minimum, the consultant should be conversant, if not completely fluent, in the language. Finding local vendors to assist is often an effective way to work with one primary consultant across jurisdictions.

The so-called CJK languages (Chinese, Japanese and Korean) are the most difficult to process, search and review. Characters run together without clear break, and to identify individual words and create an index, search engines must use special “tokenizers.” or local. The safest practice is to retain local counsel for compliance advice.

In a recent U.S. matter involving a Korean pharmaceutical company, it was necessary to preserve potentially relevant data located in the home country. Korean counsel provided a formal legal opinion that employee consent was required before collecting network-based data from employees who had potentially relevant email residing on servers that required preservation. This consent had to be obtained and documented before the team could move forward with the collection.

But the problem goes beyond a simple reading of the law. You also need to consider the cultural and political climate.

For example, in an antitrust litigation involving a Japanese multinational corporation, it was necessary to collect a custodian’s laptop located in China.

Although the custodian had provided the proper consent, data shipments out of China sometimes “disappeared” or were confiscated. The safe move was to retain a forensic engineer with the appropriate travel documents to enter China on short notice and physically carry out the data.

• Working with a Multinational Client.

Many Asian companies doing business in the United States are unfamiliar

When working with Asian clients, those who are responsible for managing the legal matter must educate the client early on about the duties and processes surrounding e-discovery in this country.

When discussing these matters with your client, make sure you have a fluent native speaker on your team.

Disclosure is not cheap. The client must be warned that the costs of e-discovery are high in the best of circumstances, and multi-language discovery rarely offers the best of circumstances.

Expect the process to be tedious, timeconsuming and expensive.

In order to have the client’s support and manage expectations, the corporate executives must understand the e-discovery process from start to finish, and that may be more difficult and expensive with Asian clients.

• Choosing the Right Vendor.

We cannot emphasize enough the difficulties that Asian languages can present to vendors accustomed to managing English-language documents. To avoid risk, get experienced, qualified help. If the case involves data within Japan, then your e-discovery partner should have experience working in Japan.

Ideally, the company should be local,

Familiarity means more than language, law and customs. Your partner must also understand and be fluent in the technology. This starts with knowing about the operating systems and the various encoding pages you are likely to encounter. If Japanese and Chinese character coding terms such as Shift JIS and Big5 cause consternation for your vendor, you may need to look for another. The same for GUL files and Bequi email. Not all Asian clients use Microsoft Outlook or Lotus Notes, and even if they do, they may use older versions that are not Unicode compliant. Collect data in the wrong way and you might see your data expressed as a series of ? ? ? ? ? and ????? – a disaster for your client.

• Unique Challenges in Search and Review.

Not all e-discovery platforms are up to the task of searching and reviewing Asian-language data. Select a vendor whose search engine incorporates a tokenizer – a tool with the ability to split a string of text into individual “tokens” based on language-specific rules, and capable of handling the peculiarities of the particular language.

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Search software operates by creating an index of every word within the data set. To create the index, the software identifies words by the spaces and punctuation that surround them. This process, called tokenization, is easy for Western languages, because words are separated by spaces and punctuation.

However, in the CJK languages, characters run together without clear breaks.

To identify individual words and create an index, search engines must use special tokenizers to recognize the language and determine where words begin and end.

Machine translation (MT) may present an alternative in many cases, depending on the nature, volume and complexity of the data.

The 2011 sale by South Korea-based Samsung Electronics of its hard disk drive operations to Seagate Technology for $1.4 billion is a good example of how MT can be used successfully under the right circumstances. Before the deal could close, Samsung had to await Second Request review and approval by the FTC, a fast-track process that gives the FTC the documents and information it needs to evaluate the proposed transaction.

Typically in Asia, few if any documents are exchanged before trial. The parties simply bring their witnesses and state their case as best they can.

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A further difficulty in searching CJK languages is their use of pictorial characters called logograms. The search engine must figure out how to group these pictorial characters into words. Even more challenging, the engine also must recognize how the characters are combined, because that affects their meaning.

For example, the traditional Chinese word for “Chinese” consists of three logograms that directly translate to “middle country people.” To say “China” rather than “Chinese,” you use two of these characters that represent “middle country.” A basic search engine would have no way of knowing whether to read these characters together or separately and therefore no way of discerning their meaning.

• Using Machine Translation to Control Costs.

In Asian e-discovery matters involving large numbers of documents or short turnaround times (or worse, both), translation can present an enormous hurdle.

Human translation is time-consuming, tedious and extremely expensive. In fact, in a multi-language matter, translation is often the single-largest expense, sometimes even more expensive than review.

In a Second Request scenario, each party must certify that it has “substantially complied” with the government’s requests, including a requirement that the documents be provided in English. With this substantial compliance standard in mind, the attorneys who were representing Samsung faced a quandary. The vast majority of the documents they had to produce to the FTC were in Korean, but they had to be produced in English.

With several hundred thousand Korean-language documents totaling well over a million pages, the cost to translate them all using human translators could easily have approached $15 to $20 million. The legal team decided to use MT as an alternative to hand translation.

Although the machine-translated documents did not have the same level of quality as hand-translated materials, they provided a sufficient level of comprehension to allow the FTC to identify relevant materials for further review and then, if necessary, to seek hand translation of particular documents. In the end, the machine translations were of sufficient quality to enable the Second Request process to conclude and the merger to go forward.

The final cost was a small fraction of the estimated human translation cost of $15 to $20 million.

That said, it is important to note that there are significant differences among MT offerings in the e-discovery marketplace, and very few are up to the specific challenges of CJK languages. Do not hire an MT vendor without performing a sample translation on data that’s comparable to what you’ll be working with on the case in question.

The challenges presented by an Asian-language e-discovery matter are broad and varied. They span every step of the process from collection through trial, and they vary by country, case and parties.

In all cases, the key to success is to assemble the right team as early as possible. That includes lawyers, case managers, linguists and vendors with demonstrated experience in the host country and recognized expertise in addressing the language issues. ■

John Tredennick is the founder and CEO of Catalyst Repository Systems, an international provider of multilingual document repositories and technology for electronic discovery and complex litigation. Formerly a trial lawyer, he was editor-in-chief of the best-selling book, “Winning with Computers: Trial Practice in the Twenty-First Century.” jtredennick@catalystsecure.com

W. Peter Cladouhos is firm-wide Practice Support Electronic Discovery Consultant for Paul Hastings LLP. He specializes in directing and managing international data privacy and risk management projects. petercladouhos@paulhastings.com

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E-Discovery

Staying Ahead on E-Discovery

By Gabriela Baron

2

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012 was a critical year in ediscovery. We witnessed the rise of “Big Data,” court acceptance of technology-assisted review (TAR), and significant developments in emerging technologies and data types from cloud computing and social media. TAR, the Mac operating system (OS) and use of the managed services model to combat Big Data have emerged as salient trends.

In matters involving large document collections, manual eyes-on review of every document in a collection is no longer feasible from a time or cost perspective. Last year, TAR and predictive coding gained substantial momentum as an approach to ever-increasing amounts of data. Judicial acceptance aside, we have seen a shift in the market. Many corporations with complex litigation and regulatory landscapes are implementing these technologies for their data-intensive e-discovery matters.

COURTS PAVE THE WAY

In 2011, most litigants shied away from TAR, citing a lack of judicial support.

However, in 2012, several opinions approving the technology gave litigants the confidence to consider and try these technologies. First, U.S. Magistrate Judge Andrew J. Peck of the Southern District of New York endorsed TAR’s use in Da Silva Moore v. Publicis Groupe. This landmark decision was followed by an opinion from the District of Louisiana, In re Actos (Pioglitazone) Products Liability Litigation, and from two state courts: Global Aerospace v. Landow (Virginia) and EOHRB, Inc. v. HOA Holdings (Delaware).

While the specifics of TAR tools may differ, the workflow and process tends to be similar. Generally, senior lawyers most familiar with the facts of the case, the claims and the defenses, review a sample of data from a collection for responsiveness and privilege. The software “learns” from the lawyers’ hands-on decisions and extrapolates from them across the data set, repeatedly applying statistical sampling and quality control techniques

to refine and improve its decisions.

The software then assigns each document a responsiveness score. Documents with higher scores can be prioritized for review, while lower-scoring documents may be reviewed by more cost-effective reviewers (discovery attorneys or contract reviewers) or set aside altogether.

As litigants consider adopting TAR-based approaches, they are grappling with its perceived lack of transparency and defensibility. A client’s success in the discovery phase hinges on its ability to persuade the court and opposing counsel that it has located, reviewed and produced the universe of responsive, non-privileged data.

The lack of visibility into the sophisticated technology, algorithms and statistics behind responsiveness determinations in TAR, however, complicates this assessment.

Some view TAR as a “black box” that is difficult to understand, while its novelty and its consequent lack of supporting

TODAY’S GENER AL COUNSEL FEB/ MAR 2013

E-Discovery

metrics raise concerns about defending it in litigation. Simply put, TAR challenges traditional notions of what legal review should be. It is clear, however, that the days of war rooms with boxes to the ceilings and people with Dictaphones are gone.

One way to achieve transparency is to collaborate with an adversary from the outset and agree on what technology will be used. Another is to engage experts to assist with sampling, calibration and reporting. Senior lawyers make the initial coding calls in sample sets used to train the software and ultimately certify that the results are accurate, but clients also need a technology expert who can attend court conferences or otherwise explain the inner workings of the technology to both the judge and the opposing party.

To maximize defensibility, we will see an increasing number of litigants complementing their teams with experts from continued on page 30

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FEB/ MAR 2013 TODAY’S GENER AL COUNSEL

Intellectual Property

When is a Freedom to Operate Opinion Cost-Effective?

By Linda Thayer

M

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ost companies now understand the value of applying for patents on inventions before launching a product. Obtaining patents on your inventions adds value to the bottom line by increasing your intangible assets, giving your company bragging rights and, importantly, enhancing your company’s power in the marketplace by providing it with the right to stop others from making or using your invention without permission.

Equally important, although less obvious or glamorous, are the benefits that come with product clearance, also called “freedom to operate” (FTO) or “right to use” opinions.

FTO analysis involves identifying and analyzing the patents of others that may subject your company to patentinfringement liability. By performing FTO analysis before developing and launching a new product or before acquiring a new company, your company can limit the risk of future litigation and avoid unnecessary expense. FTO analysis done early in the cycle of product development affords companies the opportunity either to modify the design and avoid infringement before reaching the point of no return, or to take a license.

As a side benefit, FTO studies can identify opportunities for patenting or further development. Similarly, performing FTO analysis as part of due diligence may allow you to steer clear of an opportunity fraught with the danger of litigation.

FTO analysis begins with an assessment of the product or service. Which components are new and/or clearly visible to the public, and therefore more likely to bring scrutiny? Are any of them subject to existing licenses? Are any components developed by others or under agreements that may include indemnification clauses?

Will the product or service vary from country to country? Concurrently, a clear-

ance search is performed for unexpired patents and published applications that may claim the various components. Finally, an experienced patent attorney should evaluate the information and provide an opinion on the risks of going forward with the product, service, or acquisition.

It is important to understand that FTO analysis can never guarantee that your company will not be sued. The patents and applications identified will depend on the quality of the search, and the degree of relevance of each patent or application will be subject to interpretation. Some applications by others may be on file but unpublished at the time of the search and therefore not considered as part of the study.

Since FTO studies can be time-consuming and costly, most companies choose when and where to perform FTO analysis to minimize risk and maximize value.

What factors should drive that decision?

1. Consider the value of the product and the amount of investment.

As a first step, a company should consider the product or service being launched or acquired in terms of its value to the company. What is the existing or projected revenue? Is this a highprofit item or low-margin product?

Products with high margin or high volume are most likely to lead to high damage awards if a patent-infringement case goes to trial. Therefore it will often be worth it to take the extra step and clear the product before proceeding.

Products in this category include, for example, televisions or cell phones. If a company has limited dollars to spend for clearance, products can at least be initially ranked in terms of value.

Products or services requiring a significant investment relative to the company’s total R&D budget should receive higher and earlier priority,

today’s gener al counsel feb/ mar 2013

Intellectual Property so that FTO results may be used to minimize costs or allow time for designing around any identified patents.

For products requiring less investment, FTO analysis may be deferred until nearer to the end of the project, but it should still be performed before release.

The danger of waiting until the product is fully developed lies in a simple fact: By then the business units will be champing at the bit to release the product, and an early release may result in litigation that was avoidable.

2. Consider whether similar products have sparked litigation.

Everyone has read about the recent patent litigations involving Apple, Google and their popular technologies. If your company is preparing to launch a product or service in these kinds of competitive markets, getting an FTO analysis beforehand is a no-brainer. Even in other markets, if you are preparing a high-profile launch of a new product or service, you should be prepared to find yourself in the crosshairs and proceed accordingly by identifying risk before launch.

Today, we have access to many search tools that can determine if a particular product class is highly litigated. For example, a Lex Machina search for litigations over the last 10 years shows that, after pharmaceutical drugs, the next most active areas involve computers, cell phones and communications, including data handling via the Internet. In their own but a related category are products or services using data security or encryption. Not far behind are consumer electronics, such as televisions and video games.

What is notable from this search is the significantly smaller number of litigations involving household goods and toys. Litigations involving household appliances do occur, but they are far less frequent.

This kind of information can help a company make an informed decision about obtaining an FTO. 3. Assess the competitive community for the product. How big and how saturated is the market? How many competitors are offering the product, and what has been the past history among the players

in that field? Is the field highly litigious, like the television and cell-phone industries, or are challenges coming mostly from non-competitors (aka nonpracticing entities, or NPEs)? In either case, the FTO analysis should include the patents in those litigations.

Your company’s own developers and technical people will likely be a good source of information. Ask the relevant business units to identify entities they believe may be highly motivated to keep the proposed new product off the market, and ask your technical people which competitors’ products most closely resemble the one you plan to offer. It is quite common in the marketplace for development groups to get inspiration from a chief competitor.

Also, scrutinize any patents or publications by academic institutions known to do research in the field.

4. Consider your source(s). What if you are sourcing all or some of your product or service from another company?

Wouldn’t that company bear the risk of patent infringement? Unfortunately, it doesn’t always work that way.

A company marketing and selling its own “private label” products – that is, products manufactured under contract by others for sale by the company under its own brand – will be the one sued, especially if it is perceived to have the deeper pockets or if it is based in the United States (providing jurisdiction).

While the company can, and should, require indemnification clauses in supplier agreements, indemnification may not provide enough protection. Foreign companies eager for the company’s business may be quick to agree to an indemnification clause while underestimating or not fully appreciating the risks of patent infringement, since many technologies patented in the United States are not patented in some foreign countries and the risk of damages in other countries is much lower.

When the time comes, your company may have limited success enforcing an indemnification clause against a foreign entity beyond the reach of the U.S. courts. As a result your company may be ultimately responsible for the infringement damages.

5. What are your company’s business objectives and risk tolerance? Before undertaking an FTO analysis, a company should give serious thought to how it will handle the results. Does the company seek to avoid litigation at all costs? Is it prepared to walk away from the new product , service or acquisition if the conclusions are unfavorable?

If the company will go ahead despite the results, FTO analysis may not be cost effective. This means the company should be comfortable with the risk of litigation and the possibility it will need to marshal sufficient resources to defend itself. Patent litigation costs, at least in the United States and Europe, can be significant – legal costs and damages for infringement can run as high as several hundred thousand up to hundreds of millions of dollars.

With that in mind, this strategy rarely seems prudent.

FTO analysis can play a valuable role in an IP strategy. It allows a company to identify, minimize and manage risk while frequently, at the same time, identifying areas where patent coverage is thin or absent and therefore present opportunities.

The only real downside to regular FTO analysis on all products is the cost.

Since few companies have an unlimited budget for legal fees, most companies consider their level of FTO analysis on new products and acquisitions in light of their budget and risk tolerance. An experienced patent attorney should be able to assist in developing a policy that is right for your company. ■

Linda Thayer is a partner in the Boston office of the intellectual property law firm Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, where she counsels clients on all aspects of worldwide patent portfolio development, including due diligence, clearance and assertion in federal courts. linda.thayer@finnegan.com

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E-Discovery

Staying Ahead on E-Discovery continued from page 27

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two other areas: statistics and linguistics.

Because TAR is based on the detection of linguistic patterns and statistical algorithms, linguistics expertise can inform the keywords used in searches, ensuring clients do not overlook related or variant terms. This increases the likelihood of finding responsive documents.

Statisticians can provide measurements that validate the reliability of sampling techniques and the quality of results. The metrics that are critical to TAR – precision and recall – can be measured and monitored far more closely by a statistician than a legal team.

The experts’ participation also incorporates a desirable level of third-party objectivity.

Bear in mind that, as with all discovery tools, the key consideration is not the technology itself. Success depends on how well a party can confirm that the human-based methodology behind the technology yields reliable results. The process followed and the appropriate documentation of that process is critical.

GREATER INFLUENCE OF MAC OS

Given the proliferation of Mac-based devices inside and outside the corporate firewall, the Mac OS will play a greater role in e-discovery. One year ago, almost half of all companies with a thousand or more employees were using Macs. This means corporations and their outside counsel will have to collect, review and produce an increasing volume of Mac data in their e-discovery projects, a task that has proven challenging because Mac data differs from Windows-driven PC data in numerous ways (e.g. different file systems, types and structures and different use of file extensions).

Furthermore, because most e-discovery software has not been able to handle documents or spreadsheets from native Mac applications, clients have resorted to converting the data to a different format – sometimes destroying metadata in the process and jeopardizing defensibility – or to using expensive manual review. A host of technologies able to

collect and process data from Mac OS devices has sprouted up in the past year to meet increasing needs in e-discovery.

E-discovery providers also are beginning to adapt their software to run on the Mac platform, allowing clients to cull, search, analyze and review data more defensibly utilizing Mac devices. This is a particularly important development, as even corporations that still rely on PCs are allowing employees to store corporate information on their iPhones and iPads.

We expect to see additional developments in this area over the coming year.

MANAGED SERVICES

With corporations and law firms focused on cutting costs and optimizing resources, the challenge of confronting Big Data in e-discovery is daunting. Organizations will increasingly turn to managed and shared services models for handling ediscovery. These approaches allow clients to predict costs, create efficiencies and control skyrocketing budgets despite data growth, frequent litigation and heightened regulatory scrutiny.

In a managed services model, the corporation and its law firms outsource every element of e-discovery. In shared services, the responsibilities are split between inhouse resources and an external discovery provider, in a way that optimizes the corporation’s existing IT infrastructure and resources. In both models, companies can outsource repetitive, day-to-day tasks, processes, workflows and project management – and even the technology of e-discovery – to experts who work as an extension of the legal department.

In addition to alleviating discovery headaches, these models generate cost savings by increasing efficiency. They allow legal departments to scale quickly without making permanent investments in headcount and technology. Moreover, advanced tools offered by e-discovery providers can reduce the volume of ESI by using pre-culling strategies, analytics and other methods. These tools can quickly digest large volumes of data, detect trends and find critical documents. They can

streamline repetitive tasks, such as manual redaction of identical text that appears across many documents, thus freeing up legal teams to focus on strategy.

These models can also help correct for another issue that persists when e-discovery services are required on numerous matters handled by various law firms: inconsistency. Traditionally, each law firm drives the e-discovery decision-making process in each matter, uses its own processes and technology and hires its own service providers. This siloed approach multiplies inefficiencies in an already costly process. Conversely, consolidating e-discovery services with a single provider allows clients to direct the process and increases defensibility by ensuring that replicable, client-vetted protocols and procedures are in place Organizations will adopt an appropriate managed services solution based on their budget, litigation profile and internal IT infrastructure and resources. Possible approaches include on-demand support for corporations facing infrequent litigation; insourcing upstream processes utilizing on-premise technology while outsourcing the more IT-intensive hosting and production tasks; and outsourcing the full range of e-discovery services, with the company’s data typically stored in a private cloud.

Each model allows organizations to leverage internal resources while incorporating the efficiency, flexibility and knowledge of an e-discovery services provider. ■

Gabriela P. Baron is an attorney and vice president, business development, for Xerox Litigation Services, where she assists the largest clients with regulatory investigations, major class actions, employment matters and commercial cases filed in federal and state courts.

Gabriela.baron@xls.xerox.com

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feb/ mar 2013 today’s gener al counsel

Intellectual Property

Theft of Critical Information

by Insiders

By Kurt Calia, David Fagan and Richard Shea

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today’s gener al counsel feb/ mar 2013

Intellectual Property

T

heft of trade secrets and other business critical information by employees and other insiders is increasing at alarming rates and costing businesses billions of dollars annually. In one recent case, DuPont was awarded nearly $1 billion in damages after a former DuPont employee was found to have shared confidential information with a competitor. The theft was obviously a problem for DuPont, but the damages award quickly became a serious problem for the competitor as well. And, the former DuPont employee ended up in federal prison.

Protecting business critical information is not simple. It involves identifying which information is critical, designating that information confidential, establishing practices, procedures, and policies to maintain confidentiality, and then being prepared to address immediately any breaches that occur.

Each step implicates several areas of the law, including data security, privacy, intellectual property, white collar crime, employment, employee benefits, executive compensation, corporate and securities law, insurance coverage and crisis management.

Protecting business critical information requires understanding the benefits the law offers and the legal limits on protective measures, often across multiple jurisdictions. Advance planning is critical.

Coordinating efforts to protect critical information therefore requires a comprehensive plan, and the responsibility could in most cases appropriately be placed on a company’s legal department.

A comprehensive plan to protect business critical information includes three related components: (1) preventing theft, (2) planning how to respond should a theft occur and (3) reducing risk of being accused of theft by others (e.g., through an insider who brings to your company business critical information from a competitor or former employer).

PREVENTING BREACHES

First, establish practices to keep business critical information confidential. In general, information is protected only if it is treated as confidential. For example, under the model Uniform Trade Secrets Act, widely adopted in the United States, information qualifies as a trade secret if, among other

requirements, “reasonable efforts” are taken to keep the information secret.

Whether efforts are reasonable will depend on the type of information and its relative importance to the company.

Practices to treat information as confidential include: • Limiting access. A company must not only determine which personnel may access information, but it must specify how information may be used and stored. A company needs to consider the extent to which employees and other insiders may use personal devices to access and store information. Employees may store confidential information on personal devices, which can be more easily lost or become accessible to individuals outside the company. Moreover, a court in New York recently ruled that a company did not have the right to access a former employee’s personal iPhone during discovery in employment litigation, even though the employee stored the company’s customer information on the iPhone.

• Monitoring compliance. Protecting confidential information might include regular policing of intranet and document management systems and checking outgoing emails for keywords or word combinations related to trade secrets. It is important, however, to structure these efforts to comply with local privacy laws.

• Establishing and communicating confidentiality policies. Policies should reflect the importance of confidential information and the breadth of information meriting protection. Some laws, such as insider trading prohibitions, are well established in company policies, but companies need to confront new ways confidential information may be created, used and disseminated.

For example, business critical information may be carelessly shared in the course of employees’ daily posts on social media. Drafting confidentiality policies requires understanding the extent to which companies may limit the use of social media, at work or outside of work. Establishing robust confidentiality procedures for employees might not be sufficient unless the company also requires vendors and other third parties to treat business critical information as confidential. For example, vendor contracts could require third parties to store

information on a separate server and not mingle it with information of other clients, who may well be competitors.

• Incentivizing compliance. Adding insult to injury, a company could be required to pay bonuses and incentive awards to a former employee even if that employee discloses the company’s business critical information. To avoid this result, and encourage compliance, employment agreements and incentive awards can be conditioned on compliance with confidentiality and restrictive covenants, such as covenants not to compete or solicit employees or customers.

However, in some cases, broad covenants not to compete or solicit could be invalidated under applicable law. Constructing effective restrictions involves careful analysis of local law. In addition, employment agreements can give a company the ability to protect more information than local laws by defining “confidential information” more broadly than the law defines trade secrets.

Employment agreements are therefore an important source of protection.

Don’t overlook the issue of insurance. Coverage may be implicated under a variety of policies, including first-party property, third-party liability, cyber-risk, employee dishonesty, crime, and director’s and officer’s coverage.

The time to consider whether and how to insure against losses from information theft is before an incident occurs.

RESPONDING TO INCIDENTS

While taking as many precautions as possible, companies should prepare for the worst. There is a need to act quickly in the event of a possible theft, so companies should develop a comprehensive incident response plan. It could include the following steps.

• Decide whether to investigate.

Whether a theft occurred may not be clear initially, and companies must determine whether to investigate with that question unresolved. Investigation can be costly and bring unwanted attention to the loss or vulnerability.

Investigations can range from forensic computer searches to interviews with employees. A company might need continued on page 36

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feb/ mar 2013 today’s Gener al counsel

Governance

Corporate Counsel in the Crosshairs

By William E. Hunt

I

34

n October of 2002, when a letter from the FDA requesting information about the marketing of Wellbutrin crossed the desk of Lauren Stevens, she could not have foreseen the ensuing chain of events. It would take nearly nine years to unfold.

As associate general counsel for a leading pharmaceutical company, Stevens was assigned responsibility for answering the letter. Wanting to cooperate with the government, she agreed to provide the requested information and set about attempting to do so. How she proceeded and the consequences of her actions led to an odyssey through the criminal justice system that has provided cautionary tales for corporate counsel everywhere.

The case against Stevens was eventually thrown out of court by the presiding judge, but only after costly and protracted litigation. No corporate counsel wants to go before a judge and jury, regardless of the outcome.

What went wrong that led to Stevens’ indictment for obstruction of justice and making false material statements to a government agency?

A search for that answer raises additional questions. In regulatory and criminal investigative matters, the corporate officer often faces a difficult dilemma. How do you balance your duty of loyalty to the corporation with your duty of care once you find out that there may have been corporate missteps along the way? Stevens arguably knew that her employer had allowed representatives to promote Wellbutrin for non-approved uses — what the FDA terms misbranding, or off label promotion.

The corporation itself ended up with half a billion dollars in fines and penal-

ties as a result. Yet the charges against Stevens related only to her actions in conducting an internal investigation and in responding to the government inquiry. The charges did not include any allegation that she was involved in the underlying conduct that gave rise to the investigation in the first place.

So why did the government also come after Stevens?

As Lanny Breuer, Assistant Attorney General in charge of the Criminal Division of the Department of Justice has put it, “If we find credible evidence of criminal conduct – by corporate executives or the lawyers and accountants who advise them – we will not hesitate to charge.”

So did Stevens intentionally mislead the government in her responses to

their inquiries, or was she merely advocating for her client? There is a safe harbor provision in the federal obstruction of justice statutes that explicitly states that providing lawful, bona fide, legal representation services in connection with, or anticipation of, an official proceeding is not prohibited.

What is best for the corporation in the long run – doing your duty to protect the corporation or your duty to stop wrongdoing? By going to the authorities are you depriving the corporation of the opportunity to correct and resolve the matter internally? By not doing so, would you be risking a potentially worse result once the matter, not divulged, comes to light?

Both Dodd-Frank and the Sentencing Guidelines allow a reasonable time

today’s Gener al counsel feb/ mar 2013

Governance

for a company to conduct an internal investigation of alleged wrongdoing before reporting the matter to authorities. A thorough investigation, done promptly, will not penalize the company. In fact, a thorough investigation that results in appropriate remedial measures will be beneficial to any subsequent regulatory or judicial outcome.

After conducting an internal investigation into matters that may be of interest to the government, a decision needs to be made. Do you self-report?

Or, in the circumstance where the government is already investigating, do you offer cooperation by turning over your findings? Diversion, probation, the severity of sanctions, or corporate integrity agreements may all hang in the balance.

Assuming that your investigation includes the work product of either inside or outside counsel and communications by employees to those counsel, attorney-client privileged material will be a part of the investigation. The general rule is that voluntary disclosure to one third party waives the ability to claim attorney-client privilege with respect to all third parties. This includes the government.

The government itself has recently tried to get around this rule, attempting to limit the scope of the waiver by writing confidentiality agreements that say the parties agree that the material is being provided only to the government.

But in a recent 9th Circuit case, in re Pacific Pictures (a fight over residual licensing rights to “Superman”), the court refused to honor just such an agreement, holding that a party forever waives its attorney-client privilege by turning over privileged documents to the government.

The corporation in that case turned over certain privileged documents to the U.S. Attorney’s office in an effort to convince the government to criminally prosecute a former employee. Private litigants in an independent but factually related civil case were held to be entitled to the same materials.

All of this becomes important in the context of deciding whether to divulge privileged information that may later end up being discoverable in collateral litiga-

tion, shareholder lawsuits, and the like.

A company can’t pick and choose among opponents, waiving the privilege for some and invoking the privilege as to others.

There is great incentive to want to cooperate with the government.

Lesser sanctions, lower litigation costs and quicker resolution of potential problems all factor into the equation.

What if a company wants to assert an advice-of-counsel defense? By definition it is going to have to divulge the advice counsel gave and waive its privilege.

Stevens’ mistake, if she made one at all, might have been that she promised too much too early. Agreeing to provide information regarding her company’s marketing practices before she and the company had gathered all the facts painted her into a corner.

If there is a lesson to be learned here, it is that any time you choose to communicate with the government, you had better be accurate and complete in the information you provide. The consequences of proceeding otherwise can be found in numerous criminal statutes. Traditionally the government has relied on 18 U.S.C. section 1001 to prosecute false statements made to a government agency. Now there are separate statutes in play for falsifying, concealing, or covering up matters relating to a health care benefit program, altering documents to be used in an official proceeding, and for preventing or obstructing the communication of information.

The list goes on. The subtext here is a perception that corporations regard the fines levied in regulatory and other litigation as merely the cost of doing business.

They pay the fine and move on. Thus has arisen a sentiment, both in Congress and the Justice Department, that only when individuals are held responsible for corporate misconduct will a company change its ways of doing business.

The risk isn’t limited to criminal exposure. There can be collateral administrative consequences as well. Stevens’ case was followed by the case of Howard Udell, corporate counsel for another major pharmaceutical firm. In that case, corporate executives entered guilty pleas to misdemeanor misbranding offenses under what has become known as the Park Doctrine. That doctrine, named for

a Supreme Court case, holds corporate officials responsible if they are in a position where they should have known about and had the authority to stop corporate wrongdoing, but didn’t do so.

This strict liability for failure to prevent has traditionally been limited to the public safety arena, food and drug offenses and environmental crimes. Key to Udell’s case is that he and the other executives did not admit to any personal wrongdoing and did not admit to any fraudulent intent.

Health care regulation, however, includes broad sanctions for conduct related to fraud, and as a consequence of their pleas, Udell and the other executives were excluded from participation in any health care related industry by administrative ruling of the secretary of HHS. Their recent appeal of the exclusion, in Friedman v. Sebelius, resulted in requiring the HHS secretary to revisit the length of the exclusion, originally 20 years, but upheld her authority to exclude under the circumstances described by the Park Doctrine. These are potentially career ending collateral consequences.

The current regulatory environment, coupled with a punitive governmental mindset and its facilitation of treasure-seeking whistleblowers, combine to warrant extreme care, as corporate counsel weigh the risks and responsibilities of good stewardship to their employer. ■

Bill Hunt is a member of the White Collar Crime Group at Dinsmore & Shohl LLP, practicing out of the firm’s Cincinnati office. He has more than 30 years of experience handling white collar criminal matters. As the Criminal Chief of the U.S. Attorney’s Office, he was responsible for all criminal litigation in the Southern District of Ohio. In addition, he has served as First Assistant U.S. Attorney and Acting U.S. Attorney. He is a former officer and military judge in the U.S. Marine Corps. william.hunt@dinsmore.com

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feb/ mar 2013 today’s gener al counsel

Intellectual Property Theft of Critical Information by Insiders continued from page 33

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to investigate to determine whether internal controls (which are sometimes imposed by law) are functioning.

Many jurisdictions, including the U.K., may require investigation to ensure that subsequent employment action is procedurally fair and legally compliant.

Thus, a plan of action should address how to decide whether to investigate.

• Decide on employment action.

If a company suspects theft by a current employee, it might consider whether to immediately terminate employment or wait and investigate. Employment agreements and – particularly outside the United States – employment laws may limit the actions a company may take.

Furthermore, a hasty termination may result in losing the ability to collect evidence and verify suspicions. On the other hand, immediate action may be required to prevent further loss. A plan of action should include a process to make immediate employment decisions and assess whether to bring in outside counsel and forensic experts to gather evidence quickly.

• Decide on disclosure. An incident response plan should include an approach to determine whether disclosure of a theft (or possible theft) is necessary or desirable, and to whom it would be disclosed. Several areas of the law may be implicated, including privacy, securities, and data breach laws. If customer data has been taken, the company might have a legal obligation to notify customers or regulatory agencies (e.g., the U.K. Information Commissioner’s Office).

Furthermore, the theft might violate criminal laws. For example, in the United States, the Economic Espionage Act of 1996 makes it a federal crime to attempt to take, or conspire to take, a trade secret. A company might therefore wish to involve federal investigators. For public companies, securities laws also might require disclosure.

• Notify insurers. When there is a loss, companies should notify potentially-implicated insurers immediately and consider retaining coverage counsel and other professionals to assist with navi-

gating the claims process and ensuring that insurers honor policy obligations.

• Assess litigation. Although a costly remedy, companies may determine that civil prosecution is necessary to obtain an injunction or recover damages. Quick action may be required. Trade secret theft may result in civil and criminal proceedings, which will run on separate tracks with separate agendas. A plan of action would include identifying the process for assessing litigation options, including pursuing rights under employment agreements and trade secret laws.

• Avoid receipt of improperly taken information. A company may be liable if it receives confidential information taken by an individual from another company.

A comprehensive plan would include procedures to address this possibility.

In 2006, Pepsi received a faxed letter from an individual claiming to be a top-level employee at Coca-Cola offering confidential information to the highest bidder. Pepsi responded by sending this letter to Coca-Cola, who then involved the FBI. The two individuals behind the scheme now face prison sentences.

While Pepsi acted wisely to avoid liability, many incidents of receipt of trade secret theft may be subtler than a letter with an explicit offer. Companies should clearly state in employee policies and handbooks that receipt and use of another company’s trade secrets is prohibited.

Upon hire, new employees could be asked to acknowledge that they have not and will not bring in any trade secrets from another company. Employees do not always understand what information is confidential, and further probing may be necessary to determine whether the individual has anything at home or in electronic form that might belong to a former employer.

Finally, if information of a former employer is uploaded onto the new employer’s systems or otherwise shared, careful attention needs to be given to how to remedy the problem, whether and how to inform the prior employer, and how to return the information. ■

Kurt Calia is a partner at Covington & Burling LLP, practicing in the areas of complex civil litigation, patent litigation, intellectual property, life sciences, and patent prosecution. He is a former cochair of the firm’s Patent Group, and he currently serves as the vice chair for the Trade Secrets Committee of the Intellectual Property Owner’s Association (IPO). kcalia@cov.com David Fagan is a partner at Covington & Burling LLP. His practice covers national security law, international trade and investment, cybersecurity, and global privacy and data security. He has represented clients before government agencies and Congress in connection with regulatory approvals of international investments, national security-related criminal investigations, high-profile congressional investigations, cybersecurity matters, and federal and state regulatory and enforcement actions involving data security. dfagan@cov.com

Richard Shea is a senior partner in Covington & Burling’s employee benefits and executive compensation practice. He is an authority on cash balance, pension equity, and other complex benefit plan designs.

Before joining Covington in 1991, he served as Associate Benefits Tax Counsel at the Treasury.

Department.rshea@cov.com

feb/ mar 2013 today’s Gener al counsel

Governance

Top In-House Legal Salaries are Up, Reflecting Greater CLO Role

By Lauren M. Chung

W

38

ith greater responsibility comes greater reward, as the saying goes, and it has proven true for chief legal officers. CLOs are taking on more responsible and visible roles, and they are being compensated accordingly.

According to the 2012 HBR Law Department Survey, total compensation – which includes base salary, cash bonus and the value of longterm incentives for the chief legal officer – has hit a peak.

(The compensation data in the 2012 Survey was effective as of March, 2012.)

Total compensation for the chief legal officer at the companies surveyed — primarily larger companies — averaged $1.96 million, while the median figure was $1.67 million.

The 2011 Survey – effective March, 2011 – reported an average of $1.87 million and a median of $1.73 million in total compensation.

The rise in salaries tracks the CLO’s broader responsibilities, requiring business as well as legal acumen. The role of the CLO has evolved to include far more than the traditional duties of practicing law and setting legal policy for the organization. As members of the C-suite, CLOs are serving as strategic business partners and providing oversight in such areas as corporate governance and compliance and risk management, in an increasingly complex regulatory environment.

today’s Gener al counsel feb/ mar 2013

Governance

As a point of comparison, for all in-house attorney levels, average total compensation per the 2012 survey was $314,700, with a median of $257,200. (The 2011 survey reported an average of $310,400 and a median of $243,600.) Among all in-house lawyer levels, total compensation increased an average of 2.6 percent and a median one percent according to the 2012 Survey.

Following is a closer look at how CLOs and their staff are faring in terms of the three components of total compensation – base salary, cash bonus and long-term incentive pay.

• Base Salary Chief legal officers received the highest base salary increase among all lawyer levels surveyed – an average of five percent and median of 3.5 percent.

According to the 2010 and 2011 Surveys, the increase in base salary for chief legal officers was an average of 4.3 percent. For the past five surveys, their average base salary increases have ranged from 2.4 percent to 5.3 percent.

In the 2012 survey, the average CLO base salary was $521,000, with a median of $500,000. That was the highest in five years. The 2011 survey reported an average of $493,800 and a median of $473,000. Over the past five surveys, the average CLO base salary has increased from $462,000 in the 2008 survey to this year’s $521,000.

Among all levels of in-house counsel, modest salary increases appear to be the new norm, with 79 percent of the survey participants indicating modest increases in compensation. Only 19 percent said compensation levels stayed flat. Two percent reported a modest decrease.

For in-house lawyers at all levels, the 2012 survey found a slightly higher rate of base salary increase. The average salary increase was 3.4 percent, with a median of 2.6 percent, up from an average increase of 3.3 percent (median of 2.6 percent) reported in the 2011 Survey. Since the 2009 survey, base salary increases for all in-house lawyers have ranged from 2.6 per cent to 3.4 percent.

In the 2012 survey, the average base salary for all attorney levels was

$183,800 (median: $175,700). The 2011 Survey reported an average of $177,600 and a median of $169,600.

• Cash Bonus CLOs received an average five per cent increase in cash bonus compared to the prior year. Average cash bonus was $518,000 (median: $439,300). Bonuses made up over 44.5 percent of the average total cash compensation for chief legal officers. Over the past five surveys, the average cash bonus ranged from $448,500 to $565,300.

In recent years, with the uncertain economic climate, bonus levels have tended to fluctuate. (Ninety-two percent of survey participants noted that attorney bonuses are tied to overall financial performance of the company.)

Across all in-house attorney levels bonuses are increasing, although at moderate levels. The 2012 survey found an average 3.4 percent increase in cash bonus for all attorneys, although the median was a 6.3 percent decrease. The average cash bonus for all attorney levels was $62,500, with a median of $46,300. The 2011 Survey reported an average of $66,700 and a median of $45,000.

• Long-term Incentives The value of long-term incentives awarded to chief legal officers was an average of $913,500 (median $775,000). Long-term incentives were defined to include non-stock (i.e. cash-based) long-term incentive programs and stock-related compensation (stock options, restricted stock/stock units, performance plan awards). Values reported in the 2012 survey are up from the average of $889,000 (median $825,000) reported in the 2011 Survey.

In the 2012 survey, the average among all attorney levels was $93,000 (median $41,000), compared to $95,000 (median $41,000) reported in the 2011 survey.

Looking forward, key opportunities for overall compensation increases for the chief legal officer and the legal staff will be in variable pay

– e.g., bonuses and other incentive pay. Among this year’s survey participants, 78 percent indicated that they are moving more base compensation to variable pay. This trend, which is based on a pay-for-performance model, is likely to continue as the norm. For chief legal officers, as the economy gains momentum and their role in the organization expands, the doors are open. ■

About the Survey Data in the 2012 Survey is effective as of March, 2012, and looks back one year. References to the data from the 2011 Survey reflect compensation data as of March 2011.

The HBR Law Department Survey gathers data from more than 6,000 attorneys across nine levels, and more than 5,000 non-attorney staff. Sixty-three chief legal officers were included in the 2012 Survey.

The median company in the report would have 32 lawyers worldwide and more than $9 billion in worldwide revenues.

The HBR survey is unique among law department surveys in its continuity over the past 26 years and the extent to which larger law departments are represented. This year, 68 percent of participant firms had revenues at or above the Fortune 500-level.

Lauren M. Chung is the editor of the HBR Law Department Survey, and a senior director in the Law Department Consulting Practice of HBR Consulting.

She has 15 years of management consulting experience. lchung@hbrconsulting.com

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FEB/ MAR 2013 TODAY’S GENER AL COUNSEL

Canada/Cross–Border

Competition, Cartels and Canada Courts are Putting Leniency Agreements at Risk

By Nikiforos Iatrou and Mandy Seidenberg

A

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ntitrust agencies in the United States and Canada have programs designed to encourage cartel participants to alert the authorities about the existence of a cartel, and to cooperate in the ensuing investigation and prosecution of other cartel participants. In exchange, the cooperating parties receive immunity from prosecution, or leniency in the form of lower recommended sentences.

These programs have proven to be among the most useful tools antitrust agencies have to expose, investigate, and punish cartel-like activity. Forms of such programs have been developed in more than 60 countries worldwide. In the increasingly global economy, a company seeking leniency or immunity in one jurisdiction for its participation in cartel-like activities – pricefixing, bid-rigging or a market allocation scheme – will typically seek protection in the other jurisdictions in which it operates.

Determining how to deal with an antitrust agency’s cartel investigation requires a company to consider the potential effects everywhere it operates.

A recent case of the Federal Court of Canada, R. v. Maxzone Auto Parts (Canada) Corp., has indicated that obtaining court approval of sentences determined under the Canadian Leniency Program is less certain than antitrust lawyers had previously thought. This has important implications for companies that operate in Canada or supply products into Canada.

LENIENCY IN CANADIAN LAW

Canada’s Competition Bureau has two related programs that encourage cartelists to confess and cooperate with the Bureau: the Immunity Program and the Leniency Program. Their operation is similar to that of the Corporate Leniency Policy of the U.S. Department of Justice Antitrust Division.

The Immunity Program permits defendants who are “first-in” (i.e., the first to contact the Bureau about

the existence of the offence) to receive full immunity, provided the conditions of the immunity program are met. For parties who come to the table later, the program presents an opportunity to obtain a more lenient sentence, typically in the form of lower fines or shorter custodial sentences. To qualify, the cooperating party must have both voluntarily contacted the Bureau to admit its guilt and terminated its illegal conduct.

The order in which parties contact the Bureau under the Leniency Program has important consequences, as the Bureau takes a tiered approach to the treatment of leniency applicants.

For example, while the first leniency applicant may receive a reduction of up to 50 percent of the recommended fine, the next leniency applicant may qualify only for a reduction up to 30 percent.

Typically, a party seeking immunity or leniency will contact the Bureau to obtain a “marker” establishing the applicant’s position in line relative to other businesses seeking to cooperate. Once a marker is recorded, the applicant has a limited period of time to provide the Bureau with a statement that describes the illegal activity, its effects in Canada and all the evidence the Bureau would need to substantiate a case. This statement is known as a “proffer.”

The party’s legal representatives will typically meet with Bureau representatives to provide the information needed by the Bureau for its investigation. This is known as “perfecting the proffer.”

Once the proffer is perfected, the Bureau will make a leniency recommendation to the Public Prosecution Service of Canada (PPSC).

today’s gener al Counsel feb/ mar 2013

Canada/Cross–Border Typically, the PPSC accepts the Bureau’s recommendation for leniency and works with the Bureau and the company to strike a plea agreement, setting out the applicant’s obligations to provide full, frank, timely and truthful disclosure, as well as cooperation throughout the Bureau’s investigation and any subsequent prosecutions.

Usually, this will result in the drafting of a Statement of Admissions, which is relied on by the court to determine guilt and impose sentence. Even though the parties will typically make joint submissions on sentence, the court has ultimate decision making power over the appropriate sentence to impose.

THE MAXZONE CASE

Maxzone came before the Federal Court as a joint sentencing submission, arrived at through the Bureau’s Leniency Program. Maxzone Auto Parts (Canada) Corp. was an affiliate of a Taiwan-based manufacturer and U.S. distributor of after-market automotive replacement lighting parts. The statement of admissions disclosed that Maxzone’s foreign affiliates had entered into a price fixing agreement with competitors in the automotive parts market.

Maxzone pled guilty to an offence under section 46 of the Competition Act, which prohibits following a foreign directive “for the purpose of giving effect to a conspiracy, combination, agreement or arrangement” that was entered into outside Canada, but would have been illegal under Canada’s competition laws.

Offences under the Competition Act that are criminal in nature can result in a maximum prison sentence of up to 14 years, depending on the section under which a party is charged. In determining what sentence to impose, the court must follow certain sentencing principles found in the Criminal Code of Canada, including consideration of relevant aggravating or mitigating factors, proportionality to the gravity of the offence and a list of other factors, such as the degree of planning involved in the offence and the duration and effect of the activity.

Chief Justice Crampton’s decision in Maxzone expresses a general concern that sentences being proposed under

the Leniency Program are being established in too mechanical a manner, with fine calculations following a perfunctory formula too closely, without consideration of general sentencing principles.

Citing the impacts of “hard core” cartel agreements like price-fixing on the economy, the Court asserted such offences “ought to be treated at least as severely as fraud and theft, if not even more severely than those offences.”

Accordingly, any fine imposed should ensure that the accused does not profit from its illegal conduct, and should include a significant additional amount to communicate the recognition of the severity of nature of the offence.

To be an effective deterrent, the Court held, the fine should effectively disgorge all expected profit from the activity and should reflect a multiple for the combined probability of detection, prosecution and conviction.

For example, where estimated “overcharges” would net a company $1 million, and the combined probability of detection, prosecution and conviction is 50 percent, the fine should exceed $2 million to serve as a deterrent.

The Court held that substantial upward adjustments of fines reached under the Leniency Program may also be appropriate where the offender is the “ringleader” of the offence, has previous offences, or has concealed or converted assets to diminish the fine or restitution it would be required to pay.

The Court indicated that in the future it will be looking for prison terms for directors, officers or employees to play an increased role in sentencing under the Leniency Program. The fact that prison sentences were imposed on individuals associated with a foreign affiliate will not be a consideration in determining whether prison sentences should be imposed in Canada, as well.

While it recognized the public interest in refraining from handing down prison sentences to the “first-in” leniency applicant, the Court nonetheless will require submissions to explain why a fine alone suffices to meet sentencing objectives for a cartel offence. The concern is that sentences focused on fines alone run the risk of becoming simply

“the cost of doing business” and failing to effectively deter white collar crime.

Lastly, the Court focused on the extent of the evidentiary record and submissions that supported the recommended fine, and viewed the record as deficient. One element that was lacking was an estimate of the illegal profits attributable to the cartel agreement, or evidence the accused paid restitution to the ultimate victims of the cartel agreement.

The Court noted that the Leniency Program requires the applicant to disclose evidence to the Bureau about the conduct’s impact, such as pricing and its effects and the volume of commerce in Canada involved. Going forward, the Court held that the parties will have to advance such evidence so as to allow the court to determine whether the proposed joint sentencing submission should be accepted.

This has a real impact on companies, as that information forms part of the public record. Not only may that information be sensitive, it can also be used in any subsequent civil lawsuits or class actions by consumers or others who suffered damages from the cartel offence. The Court recognized this possibility, but took the view this provides more reason for the accused to provide restitution to or settle with victims before making a guilty plea.

TOP DOWN

The Maxzone decision raises some very real and practical concerns about the predictability of sentences reached under the Bureau’s Leniency Program. While it remains to be seen how future sentencing submissions will be treated, it is evident that there will be increased scrutiny of the evidence, and an expectation that fines be less formulaically calculated and prison sentences for employees more frequently considered, even for companies that cooperate with the Bureau.

The increased focus on prison sentences echoes the trend of focusing on individual criminalization under the U.S. Corporate Leniency Policy in recent years. Indeed, Justice Crampton’s judgment appears to be motivated by the goal of increasing enforcement. However, the interesting difference is that in the United continued on page 45

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feb/ mar 2013 today’s geneR al counsel

Human Resources

What Does DACA Mean for Employers?

By Jeffrey C. P. Wang and Agnna Varinia Guzman

W

ith the advent of the Deferred Action for Childhood Arrivals (DACA) initiative, employers will encounter a segment of the U.S. workforce that will pose unique challenges as well as opportunities in hiring and employment.

Although little guidance on DACA has been provided by the U.S. Department of Homeland Security (DHS), the challenges can be mitigated through a uniform company policy, due diligence and with the advice of immigration counsel. Ultimately,

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DACA can have a positive impact on employers, by enabling access to a multi-lingual and talented hiring pool of over 1.2 million candidates.

The DACA initiative is a temporary solution for undocumented immigrants, specifically adults and children who are 15 to 30 years old, as well as for future applicants who are now 5 to 14 years old. Applicants must have been brought to the United States as children and have been educated in the U.S. educational system.

DACA recipients receive deferred

action, which is a determination by the U.S. government to defer removal action on the basis of executive prosecutorial discretion. Deferred action provides only temporary relief from immigration enforcement and may be revoked by the DHS at any time.

However, recipients of deferred action are now authorized by the DHS to be present in the United States and are considered to be lawfully present during the period deferred action is in effect.

This is a change in immigration policy by the DHS, as of January 18, 2013.

today’s geneR al counsel feb/ mar 2013

Human Resources

Prior to that time, DACA recipients were considered unlawfully present.

Now, employers have the assurance of knowing that DACA recipients who are employees are lawfully present in the United States. Obtaining lawful presence is distinct from being granted work authorization.

DACA recipients may be granted open-market work authorization with any U.S. employer through an Employment Authorization Document (EAD) card, for an initial period of two years.

Renewals are available in two-year increments as long as the recipient remains eligible under the DACA initiative. This gives employers the opportunity to retain DACA recipients on a long-term basis. Recipients will be issued a valid social security number and may qualify for “advance parole” (permission to leave and re-enter the United State) and a driver’s license, depending on the state.

Two key issues emerge when an employer hires a DACA recipient: I-9 verification and the anti-discrimination provisions under immigration law.

Pursuant to the Immigration Reform and Control Act of 1986 (IRCA), completion of a Form I-9 is required for all employees hired after November 6, 1986. Employers are responsible for conducting I-9 verification and for ensuring the Form I-9 is completed by the employee’s third day of employment.

According to guidance by the U.S. Citizenship and Immigration Services (USCIS), an unexpired EAD card issued to a DACA recipient is sufficient to demonstrate both employment eligibility and identity, and it is considered a “List A” document for the Form I-9. The EAD card, which will have a category code of C-33, must appear genuine to the employer. Upon presentation of the card, an employer may not request additional proof that the

employee is authorized to work.

In the hiring context, employers need to be mindful that most of IRCA’s antidiscrimination provisions also apply to job applicants who are DACA recipients.

The Office of Special Counsel of the Department of Justice issued guidance that says DACA recipients, by virtue of having employment authorization, are protected from national origin discrimination, document abuse, and retaliation for exercising their rights under the anti-discrimination provisions. However, they are not protected from citizenship status discrimination, because they do not have citizenship status that would put them within that protection.

In response to this guidance, employers should ensure that their employment discrimination policies are updated to reflect the citizenship status exception for DACA recipients.

Employers can mitigate liability by ensuring that job applicants who are DACA recipients are not subjected to unfair documentary practices in the employment eligibility verification process. Communicating and enforcing a uniform company policy would reduce the potential for employer sanctions (civil and criminal penalties and fees).

Certain other issues may arise when employees are DACA recipients. Due diligence in the area of I-9 verification and understanding of when there may be “actual or constructive” knowledge could be vital to resolving these issues. (See below.)

The latest guidance from USCIS requires greater due diligence among employers in the realm of I-9 compliance for existing employees. When a DACA recipient who is an existing employee presents an unexpired EAD card, the employer must decide whether to complete Section 3 of the existing Form I-9 for the employee or a completely new Form I-9. If the employee’s name, date of birth, citizenship attestation or social security number in Section 1 of the existing Form I-9 has changed, then the employer should complete a new Form I-9 with the original hire date in Section 2 and attach the new form to the existing form.

If no Section 1 biographic information has changed at the time the EAD

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feb/ mar 2013 today’s geneR al counsel

Human Resources

card is presented, then the employer need only conduct re-verification in Section 3 of the existing form I-9.

This new guidance contradicts long-standing I-9 verification practice, where a change in name, date of birth, citizenship attestation or social security

fications. Assisting a DACA applicant may implicate civil liability if it is later construed there was actual or constructive knowledge of an employee’s lack of authorization for employment.

Also, if an existing employee is granted deferred action under DACA

DACA may bring access to a multi-lingual and talented hiring pool of over 1.2 million candidates.

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number does not require re-verification in Section 3 of an existing Form I-9 or completion of a new form. Since this new policy applies only to DACA recipients, it behooves employers to conduct due diligence by properly identifying an EAD card and by training its I-9 preparers to recognize the distinction between completion of Section 3 of an existing Form I-9 or completing a new Form I-9.

Immigration regulations define actual and constructive knowledge, with the latter being “knowledge which may fairly be inferred through notice of certain facts and circumstances which would lead a person, through the exercise of reasonable care, to know about a certain condition.” This standard is applicable in the hiring and continued employment of DACA recipients, in that it requires employers to avoid unauthorized employment when relevant facts and circumstances become known.

Sometimes an existing employee will decide to apply for DACA and, to establish eligibility, request employment verification from the employer. If the employer has gained sufficient “actual or constructive knowledge that the employee may lack employment authorization,” the company could be subject to sanctions for knowingly hiring or continuing to employ an unauthorized worker. When faced with this potential problem, the employer should notify immigration counsel.

Moreover, employers should refrain from assisting a current employee with his or her DACA application until an immigration attorney has been consulted regarding possible legal rami-

and the employer becomes aware that he or she may not have had valid employment authorization, the employer should consult immigration counsel to determine if there is potential exposure for the past hiring and continued employment of the employee.

In all these scenarios, employers should refrain from any adverse employment action against the employee prior to seeking immigration advice.

The company should be sure at all times it has followed a uniform policy that encompasses proper and non-discriminatory hiring and employment.

The confidentiality provisions of the DACA initiative allow USCIS to share information from a DACA application for purposes other than removal with national security and law enforcement agencies, including U.S. Immigration and Customs Enforcement (ICE). These other purposes include assistance with a DACA application, identification or prevention of fraudulent claims, national security, or for the investigation or prosecution of a criminal offense.

USCIS has emphasized that documentation verifying a DACA applicant’s employment will not be shared with U.S. Immigration and Customs Enforcement for civil immigration enforcement purposes unless there is evidence of egregious violations of criminal statutes or widespread abuses.

DHS has also stated that it seeks to focus its enforcement on public safety threats and that it would investigate the existence of a widespread pattern and practice of unlawful hiring or abusive employers who are violating other criminal laws.

A tricky dilemma has now arisen for employers in the DACA context since employment verification is a standard business practice. Employers may resist issuing employment verification letters or other such documentation for fear of civil or criminal prosecution.

Much depends on what information is shared by an employee when making the request. To counter this uncertainty, employers are encouraged to institute an employee policy on employment verification that clearly communicates that no reason is required from the employee when making such a request. In any event, it’s prudent for an employer to consult with an immigration attorney prior to providing a DACA applicant with employment verification.

Despite insufficient guidance from DHS, with proper legal advice employers can address DACA-related hiring and employment issues. By doing so, they could benefit from access to an educated and motivated workforce and benefit their company for years to come. ■

Jeffery C.P. Wang is managing partner at WHGC, PLC, and a member of the Litigation Practice Group and the International Corporate Transaction Group. His practice focuses on handling legal concerns of international and domestic corporations, with an emphasis on international technology corporations.

JeffreyWang@WHGCLaw.com

Agnna Varinia Guzman is an associate in the Immigration and Employment Practice Group at the Newport Beach office of WHGC, PLC. She advises domestic and global companies on business immigration and immigration-related consequences of federal and state laws.

AgnnaGuzman@WHGCLaw.com

Competition, Cartels and Canada continued from page 41 States the policy shift has been agency driven and “bottom-up.” In Canada it is court directed and “top down.”

It is unclear at this point if the Bureau will adopt the reasons in Maxzone in its future approach to negotiating sentencing agreements. Ironically, the decision in Maxzone might actually decrease enforcement activity. If parties cannot be sure that the court will honor their joint sentencing agreement, they may be less likely to come forward in the first place.

In the end, the Court in Maxzone accepted the parties’ joint sentencing recommendation, but the reasons signal a shift. While it was always possible for the court to decline approval of an agreed sentence, traditionally these agreements received deference. Maxzone indicates this may not continue to be the case. For foreign companies doing business in Canada, it is important to be aware of this uncertainty when determining how to deal with authorities in relation to cartel offences. ■

Q: Interested in Section 337?

A: Contact the experts with 30 years of success.

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Nikiforos Iatrou is a partner at WeirFoulds LLP. Formerly counsel at Canada’s Competition Bureau, he now advises private clients on all aspects of antitrust law and complex business litigation. niatrou@weirfoulds.com

© 2012 American Bar Association

Mandy Seidenberg, an associate at WeirFoulds LLP, has a practice focused on commercial and trusts litigation. She advises clients on a range of related matters, including antitrust law. mseidenberg@weirfoulds.com

www.adduci.com

feb/ mar 2013 today’s gener al counsel

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Litigation-Arbitration Choice Not Always Obvious

By Anthony Pierce and Jonah McCarthy

C

ompared to traditional litigation, arbitration is often viewed by in-house and outside counsel alike as a preferable method of resolving commercial disputes. Many in the corporate legal community have long held this to be the case, based on the assumption that arbitration is less costly, speedier and less adversarial than litigation. These assumptions have been bolstered by overt pressure from federal and state courts and legislatures to encourage arbitration.

today’s gener al counsel feb/ mar 2013

But despite its many perceived advantages, arbitration should not always be the default method for solving corporate disputes. When choosing between arbitration and the courthouse, counsel should make an informed decision to get the best result for their clients. Often it is assumed that arbitration and traditional litigation vary greatly, but on the contrary both methods involve most of the same elements and embody many of the same fundamental concepts. Witnesses testify and are cross-examined, evidence is submitted, opening and closing statements are made. Both involve motions practice and varying forms of discovery.

In addition, protective orders are available and enforceable in both forums.

Because a number of the core procedures are for the most part the same, the disputes that traditionally arise in both forums – particularly very costly ones such as discovery disputes – are virtually identical. The net result is that it often takes the same amount of time and expense to resolve a dispute through arbitration as it does through litigation.

Along with the basic similarities, there is one noticeable and often overlooked difference.

In arbitration, the parties must pay someone to resolve the dispute. Arbitration, including administrative fees, are no small cost, especially in instances where there are complex issues and a panel of arbitrators.

An arbitrator, unlike a judge, is personally affected by the outcome of the dispute precisely because arbitrators are paid by the parties.

Moreover, the parties must also pay legal fees to counsel. And because the procedures for both arbitration and litigation are appreciably similar, commercial litigation clients should not expect to see a dramatic savings in legal fees by opting for arbitration; a deposition costs roughly the same no matter if it is taken in an arbitration or in litigation.

Another key difference counsel must consider pertains to injunctive relief. Many arbitration clauses expressly exclude the opportunity for injunctive relief altogether. Moreover, in many jurisdictions, arbitrators have no independent authority to grant injunctive relief. This can be a significant problem, given that in many commercial disputes preserving the status quo while the parties work through the legal dispute may actually be more important than the ultimate resolution.

Accordingly, when drafting arbitration agreements, counsel should consider including a clause that explicitly provides for injunctive relief. Otherwise they should opt for litigation, where courts, subject to applicable rules, are free to issue injunctions as they see fit.

An advantage unique to arbitration, one that cannot be overlooked and in many instances is the main reason for a corporations to seek arbitration, is that it can shield disputes from the public eye.

As a rule, arbitration proceedings are much more private than court proceedings. Unlike in court proceedings, there are generally no public “dockets,” and the arbitration hearing itself is usually not open to the press. Most arbitration clauses expressly call for confidential proceedings. Moreover, arbitration rulings are not regularly published, which in turn makes it possible for the parties to keep the entire dispute private.

Another advantage to arbitration is that arbitrators, usually individuals with industry experience, are often more knowledgeable about the subject matter of disputes they are tasked with resolving than are judges and juries. Often the time it takes to educate a judge and jury about the complexities of the subject matter of the dispute makes arbitration the most efficient resolution method.

Usually supporters of arbitration over litigation also claim that the lack of required discovery in arbitration makes for streamlined dispute resolution, and thus decreased costs. The truth is that while discovery is not required in arbitration, the large multinational corporations that often contract for arbitration nearly always (as they should) opt for it.

Moreover, the inability to obtain full discovery can be considered a cost, not a benefit of arbitration. While it may be true that eliminating or severely restricting discovery can shorten the time it takes to final resolution of a dispute, doing so actually negates one of the primary purposes of alternate dispute resolution: facilitating expedient settlements. Robust discovery provides each party with the opportunity to learn the true strengths and weaknesses of the other side’s case, which in turn permits both sides to take better and more reasoned settlement positions. Because settlement is often the most efficient way to reduce costs, the lack of discovery can actually hamper the dispute resolution process by adding unnecessary time and expense.

Another problem with discovery in arbitration is that in some jurisdictions, the arbitrator has no authority to subpoena documents from non-parties prior to the hearing. Consequently, it may be that the only time counsel is able to review critical documents from third parties is at the arbitration hearing itself, which is a clear disadvantage when compared to litigation. It’s both backward and inefficient. Without actually seeing a document continued on page 51

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anthony t. Pierce is a partner at Akin Gump Strauss Hauer & Feld LLP, where he serves as the partner in charge of the firm’s Washington, D.C., office. He has throughout his career handled a variety of arbitrations, as well as complex disputes in state and federal courts, including commercial litigation, intellectual property matters, employment matters and internal investigations. apierce@ akingump.com

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TODAY’S GENER AL COUNSEL FEB/ MAR 2013

Government Knowledge Defense

AGAINST WHISTLEBLOWERS

By Michelle L. Merola and Reetuparna Dutta

T

he False Claims Act, a federal statute that imposes liability on those who present false claims for payment to the government, allows private persons, known as “relators” or “whistleblowers,” to bring suit on behalf of the government and share in any recovery obtained. The FCA often generates multimillion dollar recoveries, thus providing a big incentive for ordinary employees to turn on their employers.

Every day brings a new article or press release headlining another company’s payment of huge sums of money to settle claims, and this trend seems unlikely to stop. According to The Taxpayers Against Fraud Educational Fund, fiscal year 2012 brought federal and state governments over $9 billion dollars in revenues under the FCA and its state counterparts, ensuring that both government and potential relators will be on the lookout for companies to target.

The FCA is problematic for companies because violations are broadly defined and penalties are draconian. Liability under the statute can include not only those who have actual knowledge of false claims, but also those who act in “deliberate” or “reckless” disregard of the truth or falsity of the information underlying a false claim. Intent to defraud is not necessary for there to be liability under the FCA. For each false claim, the government is entitled to receive a civil penalty of between $5,000 and $10,000, as well as treble damages.

For cases involving hundreds or thousands of false claims as, for example, where numerous claims for payment are presented under a contract, the penalties and damages can reach into the millions of dollars, or more. Avoiding liability should, therefore, be a key priority for company management.

PRIOR GOVERNMENT KNOWLEDGE

One of the best ways to accomplish this is through the government knowledge defense. Be-

fore 1986, the False Claims Act itself contained a complete “government knowledge” defense: If the government possessed the information underlying an action, the court had no jurisdiction to proceed.

The government knowledge defense can show that neither gross negligence nor willful blindness was present.

The 1986 amendments eliminated this statutory defense, but government knowledge remains relevant to show that a defendant did not act with the required state of mind when submitting or presenting the false claim.

The FCA does not require an intent to defraud. Some element of gross negligence or willful blindness is sufficient for a defendant to be liable. The government knowledge defense can show that neither gross negligence nor willful blindness was present.

The typical example of the successful application of the government knowledge defense is where government contracting officers are aware of, and approve, a defendant’s alleged deviations from the terms of the contract.

For example, in Hooper v. Lockheed Martin Corp., a 2012 case in the Ninth Circuit, the relator alleged that Lockheed Martin defrauded the Air Force under a contract relating to software and hardware to be used to support Air Force operations. The relator claimed that Lockheed violated the FCA by using a specific type of software that did not convey all intellectual property rights and by failing to perform

Michelle Merola is a partner at the law firm Hodgson Russ LLP. She defends corporations and individuals in criminal and regulatory investigations, including those premised on allegations of false claims. mmerola@ hodgsonruss.com

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feb/ mar 2013 today’s gener al counsel

Reetuparna Dutta is an associate at Hodgson Russ LLP. She concentrates her practice in the areas of white-collar criminal defense and the False Claims Act. rdutta@ hodgsonruss.com

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all the required testing under the contract.

With respect to claims of use of improper software, Lockheed responded by showing that it sent the Air Force letters in which it disclosed its use of software with less than unlimited rights. The letters included a description of the software, the name of the manufacturer, the product in which it was used, the intended use, and the software license type. The letters requested that the Air Force review the items and approve them, which it did. Indeed, the Air Force Contracting Officer testified on behalf of Lockheed that she “interacted daily” with Lockheed employees and never believed that their use of the software was prohibited.

As to the allegations of improper testing, Lockheed provided evidence showing that it invited the Air Force and its consultants to observe program testing, that the consultants had keys to its facilities and, in fact, that some even had offices in those facilities.

Lockheed invited the Air Force and its consultants to observe program testing, the consultants had keys to its facilities, and some even had offices in those facilities.

Thus, the court found that Lockheed submitted “overwhelming evidence” that it shared with the Air Force the use of the software and its testing procedures such that it could not have violated the Act with respect to those claims.

AUTHORIZED LOOPHOLE

In United States ex rel. Williams v. Renal Care Group, Inc., a 2012 Sixth Circuit case, relators alleged that the defendants improperly created a wholly-owned subsidiary company to take advantage of loopholes in the Medicare regulatory scheme to increase profits.

Before implementing the plan to create the subsidiary, the defendants made inquiries into the plan’s legality. Specifically, outside counsel sought clarification from a federal official with Medicare on the legality of establishing an entity like the sub-

sidiary. Counsel had a conversation with the official and later memorialized it in a letter. In the letter, the attorney noted that she had asked the official about the propriety of the plan and noted his reply to the effect that the plan was appropriate as long as the subsidiary company had its own provider number and was established as a separate entity.

Moreover, the defendants presented evidence that Medicare was aware of the subsidiary’s business operations and ownership structure through site investigations and the subsidiary’s own disclosures.

The court reviewed the relevant statutes and regulations and found that they were ambiguous as to whether the structure of the defendant company and its subsidiary was appropriate. Thus, the court turned to the defendants’ interactions with the government. It noted that defendants “consistently sought clarification on the issue . . . and were forthright with government officials over [the subsidiary’s] structure.” It therefore found that defendants did not act with the requisite state of mind to be liable under the FCA. The lessons of these cases are clear: Keep the government informed. While not all companies can have government contracting officers on-site and observing every action taken under a contract, companies should strive to be as transparent as possible. This is particularly true when embarking on a course of conduct that is not clearly permitted or prohibited under the terms of the applicable contract, or by way of the statutory and regulatory scheme.

Even when making a decision that does not appear to be outside the terms of a contract or regulation, companies can protect themselves by fully disclosing their decisions to the relevant government officer and seeking approval – which may simply be the lack of an objection.

Making a record of disclosures can help to obtain dismissal of False Claims Act cases before companies have to spend significant funds preparing for trial. At the very least, this type of record can put a company into a stronger negotiating position when discussing settlement or damages.

The False Claims Act is heavily weighted in favor of the government and relators. Therefore, companies cannot be too careful in their dealings with the government. The government knowledge defense, while not a complete defense against liability, puts the onus on the government. These actions, which cost the company little or nothing, may help forestall the penalties, damages and legal fees that False Claims Act charges often bring. n

today’s gener al counsel feb/ mar 2013

Litigation or Arbitration? continued from page 47

beforehand, it is extremely difficult to determine its relevance to the legal proceeding.

Moreover, a witness’s presence may be completely unnecessary if a document at issue is irrelevant to the dispute; it is a waste of time and expense to require a person to appear if he or she does not need to testify. Thus the power to subpoena documents from third parties should be an available component of the arbitration process. If it is unavailable, counsel should strongly consider litigation as an alternative.

Another important consideration when deciding between arbitration and litigation is whether your client wants a jury. In many disputes against corporations, particularly those involving consumers, arbitration is preferred because there are no juries. In corporate-consumer disputes, where jurors are more likely to be swayed by the sympathetic plight of their fellow consumers, it generally makes sense to avoid a jury. Having a neutral arbitrator as the ultimate decision-maker is preferable to being subjected to a jury’s whims.

However, corporations need not always fear the jury. The “good guy-bad guy” dynamic that often permeates corporate-consumer disputes does not play a significant role in most corporate-corporate disputes. As a result, jurors are more likely to decide the issues in a dispassionate way, and rely less on sympathies or allegiances to either side. Most trial lawyers prefer a jury because it forces the parties to simplify the case as much as possible, and it highlights the persuasive powers of the lawyer in convincing the average citizen of the rightness of a client’s position. Even when those powers fail, the rules of evidence and other legal protections are designed to insulate parties from unfair jury determinations.

Before opting for litigation over arbitration, counsel in the position of defending a client should consider whether their client would likely be met with a hostile or unfavorable jurisdiction. If it’s an unfavorable jurisdiction, the opportunity to remove a case from state to federal court is available to defendants who satisfy the federal question, or the minimum amount in controversy requirement. Removal is designed to ensure fairness for such defendants.

Nonetheless, the decision to remove a case should not be taken lightly and should be carefully considered on a case-by-case basis. Litigating in federal court is usually more difficult, and can be more expensive than litigating in state court.

With regard to international disputes,

arbitration is generally the better option, particularly in disputes involving international parties with relatively equal bargaining power. Too often in traditional litigation involving international parties, one party is unduly prejudiced by having to litigate under the other party’s laws and court proceedings.

To avoid this pitfall, it is generally better to opt for international arbitration, with a neutral arbitrator, and with rules that both sides have chosen and specifically contracted for in the arbitration agreement.

Mediation and arbitration are often mentioned in the same breath, but while the pros and cons of arbitration and litigation are noted above, mediation only has pros. Each side learns about the strengths and weaknesses of the other’s case, and there is a chance the entire matter can be resolved before incurring the cost of litigation.

A good mediator can help bridge differences that the parties cannot bridge themselves because of prior history, personalities or other issues. Many corporate litigators complain that mediating is a sign of weakness, but that is mostly nonsense driven by something other than seeking a prompt resolution for a client. Mediation can and often does fail, but the client will benefit from the process regardless of the outcome. Therefore, whether a contract calls for arbitration or traditional litigation, the parties should include some form of mediation of the dispute before litigation commences.

When deciding between litigation and arbitration, it is critical for both in-house and outside counsel to be strategic, and to really think through the costs and benefits of both dispute resolution mechanisms. Only then will counsel be able to effectively advise a client as to the most efficient way to resolve the dispute.

If you determine that arbitration is the best route, you must be sure that the arbitration agreement completely defines the ground rules – from where it will take place and the extent to which discovery will be permitted, to whether preliminary relief will be available. Be creative.

For example, if you think it will be advantageous to limit the number of witnesses, or even the number of days of the hearing itself, include language to that effect in the agreement. You can make your own rules in arbitration, but you must be sure the rules you make are the rules you want to play by. n

Jonah E. McCarthy is counsel at Akin Gump Strauss Hauer & Feld LLP. He focuses his practice on complex civil litigation and arbitrations, as well as the representation of corporations in white collar internal and government investigations. jmccarthy@ akingump.com

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Technology Can Improve Law Department Performance

BY ERIC LAUGHLIN

52

Thomson Reuters recently completed a survey of more than 500 legal department leaders, attorneys and staff.

We asked about their key tasks and how they complete them. In addition, we spoke directly to more than 100 legal department leaders and attorneys to get a richer understanding of their daily challenges.

Legal department leaders who were interviewed often mentioned how a typical day involves task-jumping and putting out fires. As one GC described it, “Whatever I plan for the day is never what I do for the day.� Having to deal with these workflow challenges on a daily basis makes it difficult to organize and prioritize tasks, reduces efficiency, hinders quality control, negatively affects outcomes and makes it difficult to demonstrate return on investment.

The survey examined the current workflow environment in legal departments and identified three key challenges: keeping track of matter details and tasks; managing work product; and addressing increased expectations of 24/7 availability and global collaboration.

The survey and interviews identified specific workflow bottlenecks and opportunities to apply technology solutions in ways that would address them.

Digging deeper into those challenges, respondents identified specific pain points, such as document retrieval, task management, prioritization difficulties, and trying to manage tasks while mobile. In addition, respondents outlined what their ideal technology requirements would be to successfully meet those challenges.

The survey and interview results identi-

TODAY’S GENER AL COUNSEL FEB/ MAR 2013

PERCENT OF LAW DEPARTMENTS THAT HAVE ADOPTED TECHNOLOGY FOR SEVEN CRITICAL TASKS 78%

40% 20%

LEGAL HOLDS

21%

22%

40%*

28%

COMPLEX COMPLIANCE ENTITY CONTRACT TRANSACTIONS MANAGEMENT MANAGEMENT

LEGAL RESEARCH

MATTER AND SPEND MANAGEMENT

*This figure includes those that have either a full matter and spend management system or a stand-alone matter management system, in addition to those utilizing a homegrown or other technology solution.

53 The survey examined specific critical tasks that are widespread among corporate legal departments. It defined critical tasks as those that respondents identified as (1) core to the legal department’s role and (2) those that would result in highly negative business impact if errors were made carrying them out. “Widespread tasks” were defined as tasks performed by more than half of surveyed law departments.

The survey found that certain critical tasks are currently being addressed through the use of vendor-provided automated software tools. fied specific bottlenecks, and opportunities to leverage technology in order to improve work flows and productivity, and a growing appetite for applying technology solutions to improve efficiency, increase productivity, reduce costs, improve outcomes, manage risk and demonstrate return on investment.

Automated solutions by themselves are no panacea, but selecting and applying the right technology solution can often improve efficiency by automating time-consuming, repetitive tasks. The survey found that while legal departments are frequently applying automated solutions to certain tasks, there are significant gaps where technology is not being widely applied.

Respondents said that currently there were unmet needs for greater integration between tools and mobile offerings that can handle complex tasks.

The vast majority of law departments (78 percent) use vendor tools for legal research.

Matter and spend management tools have been adopted by 40 percent of respondents.

Contract management also ranked high in this regard, with 40 percent of respondents currently using a vendor-provided solution.

continued on page 57

Litigation Risk for Website and Mobile Apps Marketing 54

“Online Behavioral Advertising� Could be Challenged

By Dominique Shelton

today’s gener al counsel feb/ mar 2013

T

he year 2013 began with more than 180 pending consumer class actions regarding the relatively common practice of companies using technologies to track user behavior on line and via mobile devices. Any company that advertises using a website or mobile apps should pay close attention to this trend.

Online behavioral advertising (OBA) is the term used to describe this process of tracking consumers’ on line activities in order to target them for advertising directed at their specific interests. Digital advertising is a $80.2 billion industry, and with online ad spending now exceeding that for print advertising, OBA is coming under greater scrutiny. Even when ads are not served, tracking itself can lead to liability.

During December 2011 through January 2012, for example, some 60 class actions were filed against the mobile industry for tracking user behavior for internal analytics purposes, and not for ad serving.

Tracking children’s habits is especially risky.

In December 2012, for example, Google and Viacom were sued in California for alleged illegal tracking of children’s video viewing activities to serve targeted advertising. This lawsuit is consistent with a half dozen other class actions, with similar allegations, that were filed near the end of 2012 in a number of states, including New Jersey and Illinois. Also in December, 2012, the Center for Digital Democracy requested the FTC to investigate Nickolodeon for its app that allegedly tracked the online activities of children younger than 13.

Increasingly, companies across many industries are availing themselves of new technologies and platforms to connect with their customers, market their products, assess product development and track trends that are of interest But it’s clear that the wide-spread use of OBA has captured the attention of class-action attorneys.

As class action targets, companies may be called upon to defend their marketing practices, both direct and through vendors that create microsites and smart phone apps for them.

Given these developments, it’s essential for any company marketing through mobile applications, websites and social networks to understand the evolving issues relating to tracking and behavioral advertising.

Federal regulators have already taken action based on existing federal statutes, and there are proposed amendments that would expand existing legislation to encompass OBA. The Federal Trade Commission defines OBA as a process

that involves “tracking consumers’ activities online to target advertising.”

The process often, but not always, includes a review of the searches consumers have conducted, the Web pages they visited, the purchases they made and the content they viewed, in order to deliver advertising tailored to individual interests.

Tracking children’s habits is especially risky.

In December 2012, for example, Google and Viacom were sued in California for alleged illegal tracking of children’s video viewing activities to serve targeted advertising.

In a March, 2012, FTC report entitled “Protecting Consumer Privacy in an Era of Rapid Change: A Proposed Framework for Business and Policy Makers,” the FTC proposed a Do Not Track option, in order to prevent targeted advertising without consumer consent. In addition, the FTC expanded the scope of questionable practices to include gathering not only personally identifiable information, but also information that is “reasonably linkable” to an individual.

The agency also clarified that so-called “anonymized data” will be considered as such only if a company publicly pledges that neither the company nor its vendors will ever attempt to re-identify it.

Tracking has triggered enforcement actions.

In August, 2012, the FTC reported that Google agreed to pay a record $22.5 million civil penalty to settle FTC charges that it “misrepresented to users of Apple Inc.’s Safari Internet browser that it would not place tracking ‘cookies’ or serve targeted ads to those users, violating an earlier privacy settlement between the company and the FTC.” In 2011, the FTC announced four other enforcement consent orders against companies for delivering OBA without consumer consent.

With regard to children and online behavioral advertising, in December of last year the FTC adopted amendments to the Children’s Online Privacy Protection Act rules (COPPA), expanding the definition of “personal information” to include OBA information.

Another law, The Electronic Communications Privacy Act (ECPA), prevents tracking of user behavior without consent, and sections of

55

feb/ mar 2013 today’s gener al counsel

this law have become the basis of claims asserted in many of the pending class actions.

The Federal Wiretap Act is part of the ECPA. It provides for statutory damages of $10,000 per violation, or $100 per day. The Stored Electronic Communications Act (SCA) is also part of the ECPA.

Consent is a complete defense to ECPA claims, and some courts have shown a willingness to infer consent if a consumer has reviewed a privacy policy that discloses tracking.

56

Dominique Shelton is a partner in the Intellectual Property department of Edwards Wildman Palmer LLP, in the Los Angeles office.

Her practice focuses on complex commercial litigation, with an emphasis on unfair competition, antitrust, and privacy matters, and intellectual property, particularly in the areas of digital distribution and new media. dshelton@ edwardswildman.com

Consent is a complete defense to ECPA claims, and some courts have shown a willingness to infer consent if a consumer has reviewed a privacy policy that discloses tracking. Lack of harm also may be a viable defense in federal court, as Article III of the Constitution requires putative plaintiffs to have suffered actual injury in fact.

However, the harm defense became suspect when the Supreme Court, in June of last year, refused to consider the Ninth Circuit’s holding in Edwards v. First American Financial, that statutory damages can themselves be sufficient to establish the requisite “injury in fact” to satisfy Article III. That said, in Low v. Linkedin, decided in July of 2012, one judge in the Northern District of California held that the plaintiffs’ failure to allege that Linkedin had in fact used their OBA data took away their standing to pursue the claim in federal court. In another decision, in August of 2012, a California court held that mere assertion of claims with statutory damages was sufficient to satisfy Article III. The Computer Fraud and Abuse Act (CFAA) makes it unlawful to track user browsing behavior if it results in $5,000 in economic loss.

Where economic harm is not specified, courts have been willing to dismiss CFAA complaints.

Most of these cases were decided before the Supreme Court’s decision in Edwards.

There are several Do Not Track bills pending in Congress. In September, 2012, in response to the filing of at least 60 class actions against the mobile industry for tracking for non-OBA analytic purposes, Representative Ed Markey (D. Mass.) introduced the “Mobile Device Privacy Act.” It

would require companies to disclose to consumers the capability of software to monitor mobile telephone usage and require users’ express consent before their usage could be tracked, whether or not such tracking was for advertising purposes.

Moreover, in July of 2012, NTIA (the National Telecommunications and Information Administration – an advisory agency that is part of the Commerce Department), initiated a multi-stakeholder series of meetings to arrive at consensus regarding the types of disclosures that must be made in mobile apps. These meetings were convened pursuant to President Obama’s February 2012 “Privacy Framework,” which defined the scope of national legislation relating to tracking. While adoption of a code of conduct will not preclude future FTC enforcement actions, it will be a mitigating factor.

Companies are advised to participate in the NTIA meetings.

Meanwhile, the state of California has proposed a Do Not Track bill that contains a private right of action and statutory penalties.

Mobile marketing and tracking is definitely coming under scrutiny by regulators. In February of 2012, the California attorney general announced that all mobile applications must post a privacy policy under California’s online privacy protection act, partly in response to the rash of mobile device class actions that had been filed. In December 2012, the California AG filed a complaint against Delta Air Lines for its “Fly Delta” app that collected information without posting a privacy policy.

This lawsuit signals greater enforcement with regard to tracking in California. OBA is also being addressed by regulators in Canada and countries in the European Union, among others. OBA is an international issue.

In late 2011, the SEC issued a guidance calling for publicly-traded companies to disclose material cyber-risks in their public filings. Being named in a Do Not Track class action is, of course, information that must be disclosed.

Today, any company that advertises online or through mobile phone applications, that has a website or otherwise collects, uses or stores consumer data is potentially exposed to “Do Not Track” claims. To identify and minimize risks, companies should take steps to: understand exactly what tracking is taking place through their websites and apps; include the requisite insurance and indemnity provisions in their vendor agreements; and include appropriate disclosures in their privacy policy and website/app disclosures, to inform consumers and obtain their consent. n

today’s gener al counsel feb/ mar 2013

Technology Can Improve Law Department Performance continued from page 53

However, the survey pinpointed four critical and widespread legal department tasks that currently are addressed with automated vendor solutions by fewer than 30 percent of organizations. Legal departments are actively seeking innovative technology that fills those gaps. In some cases, such as legal hold and compliance tools, more than 25 percent of legal departments intend to purchase solutions within the next two years.

In addition, the survey found a need for new approaches that go beyond applying single-point solutions to specific pain points. Respondents identified currently unmet needs for greater integration between tools and mobile offerings

flows, rather than merely offer another layer of technology and complexity to an already overloaded workflow.

Over the past decade there has been a dramatic evolution of corporate law departments from reactive risk managers to key corporate strategists. In turn, the needs of corporate counsel have changed when it comes to technology, and workflow solutions in particular.

Effective solutions must involve more than simply automating manual tasks. They need to provide more powerful analytics, collaboration, and mobility that can be embedded within existing work flows. By managing, analyzing and sharing informa-

Key Law Department tasKs anD their technoLogy requirements Key Challenges

Challenge Details

teChnology RequiRements

Keeping track of all matter details and tasks

• Organizing • Prioritizing • Tracking • Calendaring

• One solution connecting legal-specific tools with enterprise tools • Single search across tools • No duplicate data entry • Dashboard with task overview • Analysis and reporting capabilities • Automatic calendaring from courts, task lists, MS Outlook

Managing work product

• Finding documents • Version control • Repurposing

• Low cost, minimal setup • Dedicated system built for legal department • Easy upload/input • Powerful searching/results

Increased expectations of 24/7 availability and global collaboration

• Difficulty managing paper documents • Cumbersome laptops • Difficulty reading/editing on smartphones

• Permissions-based collaboration • Smartphone and tablet document access • Mobile apps for key legal tasks

that can handle complex tasks. No matter how effective an individual solution is, the bigger need is for integrative approaches that combine key information with helpful analytics and intuitive user interfaces. It is important for information, software and user interfaces to work together to simplify and streamline work

tion more effectively, greater efficiency and productivity can be achieved.

The challenge for technology solutions providers is to listen to customers, understand what they need next, then deliver solutions that will improve the ability of counsel to efficiently deliver greater value to their organizations. n

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Eric Laughlin is managing director of the Corporate Counsel Segment in Thomson Reuters. He is responsible for information, software and service offerings for corporate legal departments. eric.laughlin@ thomsonreuters.com

Caution Required when Using Managerial Accounting Data in Court

By James Rosberg and Eric Korman

M 58

anagerial accounting data is typically collected and configured for corporate strategy purposes, so that company executives can evaluate various cost and pricing scenarios and make rational decisions about their business practices. Often, however, this data can end up as a central input into expert analyses conducted in at least two types of antitrust litigation: predatory pricing and price fixing.

A central allegation in predatory pricing cases, for example, is that a company is pricing its products below what is profitable in order to drive competition out of the market and create a monopoly. That was the claim in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. (1993), in which cigarette manufacturer Brooke Group alleged that its competitor was selling generic cigarettes at a loss by setting its retail prices below its production costs. Profitability is typically measured by looking at price in excess of variable cost, so a factual question that often must be answered in cases such as this is whether the defendant priced its products below a measure of its variable cost. Managerial cost data can be used to calculate that variable cost.

Meanwhile, the central allegations in price-fixing cases are that a cartel has colluded to raise prices and that purchasers were damaged because they were charged a higher price than would have been set in a competitive market. In some states, indirect purchasers, or those who have bought products at one or more steps removed from the alleged cartel, can also claim damages, as in the case of In re Dynamic Random Access Memory (DRAM) Antitrust Litigation, a multidistrict matter involving a number of North American makers of computer memory chips.

A key economic question in indirect-purchaser cases is how much of the overcharge — the difference between the market and the cartel price — was passed through the direct purchaser(s) to the indirect purchaser(s). Managerial accounting data may be used to measure prices at different points in the distribution chain and to study the relationship between these prices, thereby revealing the

extent to which the overcharge has been passed through.

In both types of cases, the use of managerial accounting data is not as straightforward as it might appear.

Because the information generally will have been gathered and managed for non-litigation purposes, the quality and appropriateness of the data may come into question when it is being considered for introduction into court.

The effective use of such information at trial requires careful quantitative and qualitative analyses by managerial accounting experts. Otherwise, counsel may risk introducing analyses with inaccurate conclusions.

PREDATORY PRICING CASES Managerial accounting data is at the core of many of these matters, where a key question often is: Did the company price its products below its variable cost?

Higher-level cost data, such as that found on financial statements, often reflects a mix of fixed and variable costs and therefore may overstate a company’s variable cost. The cost of goods sold, for example, which typically measures those costs that are directly attributable to the production of the goods the company sells, could include labor, parts, depreciation and overhead — only some of which may be fixed costs.

Granular data from managerial accounting systems is therefore required to obtain a more precise estimate of variable cost. But not all managerial accounting data measure whether a cost is fixed or variable. For example, the depreciation reported on a piece of manufacturing equipment may not be an accurate measure of the direct usage of the machinery. Depreciation is determined by standard schedules that are associated with the “useful life” of a piece of equipment, and

59

that may be influenced by tax considerations. Therefore, depreciation may not accurately measure the actual variable cost incurred when a piece of machinery is used to make a product.

In all cases, it is best for experts to validate results by speaking with company managers, who can have important insights into whether a cost is variable or fixed. For example, company managers can provide additional information about how frequently a piece of machinery is replaced or repaired and whether this is influenced by the rate of machine usage or by other environmental factors unrelated to direct usage. (Consider that the depreciation of a car may be affected as much by the car’s exposure to weather as by the number of miles it has been driven.)

Company managers can also be a good sounding board for evaluating the results of the analyses that experts perform on all the individual cost items. Statistically speaking, it is important to have this extra validation because of the large number of separate analyses conducted on the different cost items in a typical assessment of variable cost. The more cost items that are analyzed statistically, the more possible it becomes that the managerial accounting expert could find spurious correlations.

Company managers can help identify such problems by indicating cost items which they are relatively certain are fixed or variable. These interviews can help the managerial accounting expert ascertain whether managers continued on page 64

Fi ve Trends to Watch as Power, Responsibility, Shift to In-House Legal Departments

By Bill Young

60

today’s gener al counsel feb/ mar 2013

A

s in-house legal teams take greater leadership roles in their work with outside firms, and general counsel assume more influence at the executive level, there has never been a more interesting and exciting time to be in-house. For general counsel and the in-house legal departments, here are some key trends to watch for in 2013: • (1) Maturing law departments will align themselves more tightly with business goals and strategies for growing the business, at the same time they continue in their traditional role of mitigating corporate risk.

In recent years there has been much emphasis on cost-containment and resource efficiency within legal departments, sometimes described as “running the department like a business.” While this is an essential and worthy

of functions and areas that aren’t strictly ‘legal’ under the traditional way of viewing legal departments,” he says. “For example, the product safety group reports to the head of our litigation group. So when there are product notices or recalls, Legal gets involved early. And on the other hand, if the litigation lawyers identify a litigation trend or lesson learned associated with a certain product, they can quickly connect with Rockwell’s engineers.”

“Our team is holistic, going beyond the boundaries of a typical law department,” adds Lisa Girmschied, Rockwell’s head of legal operations. “Besides our lawyers who work with Product Safety, we have paralegals and other specialists who support the group, such as product liability paralegals, intellectual property paralegals, paralegals who review marketing materials, the Records Manager, etc. Litigation paralegals attend product safety meetings and risk-assessment meetings, so they are not just involved if there is an incident. They are also part of the proactive team.”

61

“Our legal department has taken on a wide variety of functions and areas that aren’t strictly‘legal’under the traditional way of viewing legal departments.”

goal, it is important to remember that it’s only a means toward an end: moving away from being reactive to a position that is proactive and aligned with business goals and priorities, within a department whose people, processes and technology all work in harmony to further the primary goals of the company.

Consider the example of Rockwell Automation, Inc., as described by Gary Ballesteros, Rockwell Automation Vice President Law. “To minimize legal risk, lawyers need to be where the action is. That’s why our legal department has taken on a wide variety

• (2) Legal enterprise software will continue to become more like consumer software and applications.

If there is one thing we have learned from the success of readily available consumer applications, it is that ease of use, device portability and intuitive functionality are essential for success. Consumers now expect the same from enterprise applications.

Complex is out, simple is in.

The way we interact with software has evolved as the result of our ubiquitous smart phone and tablet apps. After spending a weekend using cool smartphone applications like

feb/ mar 2013 today’s gener al counsel

62

Bill Young is Product Line and Legal Department Operations Executive at Bridgeway Software, a provider of legal enterprise resource planning (ERP) solutions.

Bill.Young@ bridge-way.com

Around Me and Field Trip, it’s disappointing to come back to the office on Monday morning and open a traditional business application. Dull and bloated, complex and difficult to navigate, are no longer acceptable to the business app consumer. It’s important that everything possible be done to make people more productive and passionate about their work, and to facilitate their ability to do it well. Like a consumer application, enterprise legal software will need to be easily accessible, appealing to the eye and enjoyable to use.

The way that in-house attorneys and their business counterparts work has changed over the past few years. For example, the world’s fascination with Twitter resulted in the discovery of an excellent collaboration tool, one that allows real-time flow of information between people. Companies have found that Yammer does this within the enterprise. By the time Microsoft bought Yammer, it already boasted four million users, garnered in just four years.

• (3) Enterprise legal management software will provide mobile attorneys more information on-the-go, delivered through their mobile devices.

Like other professionals, lawyers increasingly need “always on” connectivity. Tablets, iPads and hand-held devices are taking over where desktop computers and even laptops formerly reigned. Even if a department has given attorneys a corporate smart phone, many are still carrying their personal iPads to manage email and research on the web.

They want their desktop and systems to follow them and to be accessible when and where they want to work.

One way to empower the mobile attorney is to allow access to matter management and e-billing data via the “IT-sanctioned” application they are most familiar with, email. The ability to review matters and approve or reject invoices through an email application like Outlook and Lotus Notes increases the efficiency and productivity of a law department.

• (4) There will be increasing sophistication and accountability in “Software as a Service” or SaaS-based applications.

Purchasers will demand more from their SaaS vendors. The new SaaS-based products will be expected to ensure that legal data is compliant with data security and privacy regulations, such as GLBA, SOX and HIPAA, and that corporate assets are protected from natural disasters and outages. These solutions will need to be flexible enough to move

seamlessly from on-site to SaaS and back again, depending on IT mandates.

In a recent global cloud survey of legal professionals, 51.8 per cent of respondents reported that “their opinion about cloud computing had improved over the last year,” with nearly all respondents acknowledging that in the legal industry cloud computing would ultimately overtake on-premise computing; 56.9 percent predicted that “cloud computing would prevail in five years.”

Business continuity, flexibility, and mobility were cited as the three top advantages of cloud computing. Cloud computing allows for more efficient use of computing resources, in turn leading to significant cost savings.

The end user is no longer burdened with the expense of hefty annual licenses, server maintenance, and software updates and patches. These IT costs are assumed by the cloud computing provider.

Security and privacy continue to be concerns, but many SaaS offerings meet enterprise cloud-security requirements. No type of data storage system is risk free, but to meet demand, providers are continuing to address both security and flexibility.

• (5) Via the use of portals, information-sharing between corporate law departments and outside counsel will continue its dramatic increase, further driving efficiencies and cost savings.

Richard Harbridge“Senior SharePoint Architect/Evangelist” at the consultancy Portal Solutions, sees specialized extranets as key in this process.

“Law Firm extranets have been available for some time now, providing support for the delivery of legal services among groups of cooperating law firms and their clients. However, the trend for more specialized extranets is on the rise,” Harbridge says. “They will provide additional ability to monitor and coordinate workflow between and among professionals working in different organizations and different locations. This is an additional growing trend which places a focus on more transparency and accountability, further reinforcing the need for better reporting and coordination between firms.”

As the shift of power from law firms to corporate in-house continues, important changes in how in-house does business are occurring, as well. More attorney-friendly and mobile-accessible software, with better collaboration between stakeholders, will mean greater efficiency and more cost savings. n

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CAUTION USING MANAGERIAL ACCOUNTING DATA continued from page 59

have accurately categorized fixed versus variable costs and thus can help the expert develop credible testimony.

A managerial accounting expert’s prior experience working with managerial accounting data can also be a useful reference point for interpreting statistical results that are not clear cut. For example, if the expert is assessing data from multiple factories, and some results indicate that a cost item varies with output and some results do not, the expert’s prior experience with the typical behavior of this type of cost item may lend additional insight into whether the cost is fixed or variable.

James Rosberg, a 64

vice president in the San Francisco office of Analysis Group, Inc., has expertise in conducting managerial accounting analyses for antitrust litigation and investigations. jrosberg@ analysisgroup.com

Eric Korman, a manager in the San Francisco office of Analysis Group, has worked on a number of antitrust cases involving allegations of pricefixing and attempted monopolization. ekorman@ analysisgroup.com

PRICE-FIXING CASES In price-fixing cases, managerial accounting data may be used to measure pass-through of overcharges from a cartel to indirect purchasers. Pass-through analyses measure the extent to which changes in prices charged by the alleged cartel are reflected in changes in prices paid by indirect purchasers. Therefore it is important in such analyses that the data used reflect actual prices paid.

Here, however, the use of managerial accounting data may be problematic.

A 2002 survey found that 76 percent of U.S. companies use the “standard costing” method of accounting, as opposed to the “actual costing” method. In the former, the costs of material, labor, and overhead are derived from managerial estimates. In the latter, the costs are derived from actual transactions.

Standard costs are predetermined estimates of how much an input will cost and thus do not reflect actual transaction prices. If such costs are used to estimate pass-through, then accurate measures will not be obtained. The managerial accounting data being used also may not fully reflect all the discounts or rebates that a company received or paid. Additionally, some transactions between affiliated parties may involve administratively determined transfer prices, which are set to conform to tax regulations but might not reflect a “true” transaction.

THE DEPRECIATION REPORTED ON A PIECE OF MANUFACTURING EQUIPMENT MAY NOT BE AN ACCURATE MEASURE OF THE DIRECT USAGE OF THE MACHINERY.

Further complicating matters, in some cases, the alleged overcharge may pass through numerous levels of a distribution chain – for example from the producer, to the direct purchaser, to a distributor, to a wholesaler, to the final customer.

This means that different companies in the pass-through analysis may be using different managerial accounting methods.

Taking these potential data limitations into account, a managerial accounting expert may, when feasible, directly ask the company that produced the data whether any of the previously mentioned issues are present. The expert will then examine the data. If there is data produced by the buyer and seller in the same transaction, the expert can compare the price recorded by each. If they are a close match, the expert can be relatively comfortable that the transaction price has been captured accurately. The expert can also compare purchases or sales of the same product by different companies and, where there is a similar data pattern for each company, can be comfortable that the actual prices or costs are accurately reflected.

The use of managerial accounting data in litigation is generally not a matter of “one size fits all,” given the types of data collected and the differences among companies’ managerial accounting systems and approaches. Managerial accounting expertise, methodical analysis, and clear communication with the company managers involved can enhance the accuracy and credibility of analyses based on such data. ■

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