Today's General Counsel, V11 N1, February/March 2014 by Today's General Counsel

FEB/ MAR 2014 VOLUME 1 1 / NUMBER 1 TODAYSGENER ALCOUNSEL.COM

F O N I A T N U N O O I M T A A M

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el s n u o l C : What a r e n Ge Survey ng Now s ’ y a Tod iscovery Are Doi E-D mpanies Co

LABOR & EMPLOYMENT Retaliation Claims When the EmployeeInventor Leaves ERISA: 401k Sponsors Can Be Liable INTELLECTUAL PROPERTY Creative Damages Theories MANAGEMENT Using Metrics You Already Possess Building “Legal Operations” Butterflies: When In-house Counsel Is Deposed Mergers Arbitration and the Courts Political Risk in Overseas Ventures

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Editor’s Desk

If you decided to take on the “simple” task of information governance yourself, how much time do you think it would take? Way more time than you have, according to Conrad Jacoby, who makes the point with an interesting experiment he devised. In a column in this issue of Today’s General Counsel, Jacoby describes how he organized the task of cleaning up his unread email without deleting anything important. You could probably duplicate his experiment if you’re a skeptic, but be prepared to spend most of a week, and as Jacoby points out that time multiplies exponentially when complicated analysis is required. In another column, Rees Morrison shows legal departments how to derive some important management metrics from information their finance group already has and can easily provide. A degree in economics might be better preparation for understanding anti-trust enforcement than a law degree, but Jeffery Cross does a good job of explaining the basics. He notes that very few merger cases are litigated to conclusion, so the law has primarily been shaped by the Justice Department and the Federal Trade Commission, and he provides a primer on the theories of “market power” and “differentiated products,” which form the basis of enforcement rationale. Rosemarie Hill provides a list of measures a company can take to protect against retaliation claims. She notes that the U.S. Supreme Court says that even ex-employees can claim illegal retaliation, generally in relation to a job reference or some other post-employment action taken by the company. Gabriela Baron cautions that having a protocol in place for preserving evidence likely to be responsive in litigation is

much better than trying to figure one out when a legal hold is issued. She also observes that the process isn’t complete until the in-house team gives the all-clear to resume regular retention procedures. Without that final step, unnecessary costs for data storage can accrue quickly. For more articles and information from Today’s General Counsel and interesting sources world-wide, check out our website at http://www.todaysgeneralcounsel.com and click on our daily and weekly newsletters in your email box.

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

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feb/ mar 2014 todayâ&#x20AC;&#x2122;s gener al counsel

Features

EMOTIONS RUN HIGH WHEN IN-HOUSE COUNSEL IS DEPOSED Bradley J. Betlach Get ready for litigation stress syndrome.

A PROGRAM FOR BUILDING THE LEGAL OPERATIONS FUNCTION Jeffrey D. Paquin Everything the legal department does except legal work.

52 4

INTERPLAY BETWEEN ARBITRATION AND THE COURTS Bruce G. Paulsen and Jeffrey M. Dine Decisions made in one forum may have significant implications later in another.

NEW COMMERCIAL ARBITRATION RULES PROVIDE PREDICTABILITY Angela Zambrano and Casey Burton Third party depositions are sometimes compulsory.

Page 60

coluMns

28 What E-Mail Overload Says About Information Governance

44 Cheap, Simple and Useful Metrics from Your Own Finance Department

Conrad J. Jacoby An experiment in do-it-yourself programming.

Rees Morrison New ways to use available information.

IF YOUR LAW FIRM SUFFERS A DATABREACH, MAYBE YOU DO TOO Richard J. Bortnick It may be an insurable risk.

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feb/ mar 2014 toDay’s gener al counsel

Departments Editor’s Desk

Executive Summaries

Page 14

l AbOR & EmPlOymENT

14 Addressing EmploymentRelated Retaliation Claims Rosemarie Hill An expanding definition, and more lawsuits.

16 Patenting Headache When Employee-Inventor Leaves Paul Browning, Jennifer Roscetti, and Christopher McDavid What you can do to avoid a lawsuit.

18 New DOL Rules Heighten Duties, Personal Liability, of 401K Sponsors Kurt Winiecki Sponsors, advisors, and fiduciary responsibilities.

E-DISCOVERy

TGC SuRVE yS

GOVERNANCE

20 Too Much Data, Too Little Support

32 Predictive Coding Slowly Becoming the Norm

38 Factors Driving Merger Enforcement

How legal departments are handling e-discovery.

Jeffery M. Cross Market power as defined by the feds is the key.

Chris May In e-discovery, federal agencies are encountering some familiar issues.

24 Preparation Pays When Legal Hold Is Required Gabriela P. Baron Rehearsal is indispensable.

INTEllEC TuAl PROPERT y

36 Alternative Damage Theories in Patent Cases

40 Protecting Against Political Risk In Overseas Ventures

Christopher M. Scharff Profits are just one way of measuring an infringer’s gains.

Iain Donald A broad strategy including but not confined to insurance.

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Gabriela Baron Brad Betlach Richard J. Bortnick Paul Browning Casey Burton Jeffery Cross Jeff Dine Iain Donald Rosemary Hill Conrad J. Jacoby

Chris May Christopher McDavid Rees Morrison Jeffrey D. Paquin Bruce Paulsen Jennifer Roscetti Christopher M. Scharff Kurt Winiecki Angela Zambrano

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

today’s gener al counsel feb/ mar 2014

Executive Summaries l abor & employment page 14

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Addressing EmploymentRelated Retaliation Claims

Patenting Headache When Employee-Inventor Leaves

By Rosemarie Hill Chambliss Bahner & Stophel PC

By Paul Browning, Jennifer Roscetti, and Christopher McDavid Finnegan, Henderson, Farabow, Garrett & Dunner LLP

New DoL Rules Heighten Duties, Personal Liability, of 401K Sponsors

Illegal retaliation occurs when a company takes a punitive or adverse action against a person (usually an employee) in response to activity protected under state or federal statute. Most retaliation provisions are based on the theory that employees or former employees must be allowed to make claims, participate in internal or outside investigations and hearings, or complain of an illegal practice, without recrimination. Most federal and state employment-related laws prohibit retaliation, and hundreds of statutes unrelated to employment include anti-retaliation provisions. The Supreme Court recently said that even ex-employees can claim illegal retaliation, generally relating to a job reference or other post-employment behavior by the company. To win an action for illegal retaliation, a complaining employee has to show that he or she engaged in a protected activity, the employer was aware of it, and then took an adverse action in response. The employer would attempt to show a legitimate business decision for its actions, and the employee would then try to prove the business decision was a pretext for discrimination or harassment. The author provides a list of measures a company can take to protect against retaliation claims. She suggests having a formal anti-retaliation policy and emphasizing it; taking all complaints seriously and investigating them immediately; telling every person involved in an investigation that retaliation will not be tolerated; and keeping good documentation, particularly of any adverse actions against an employee who has complained of an illegal activity or action.

Patent applicants rarely worry about validity challenges based on applications filed later, but in some circumstances these can pose a significant obstacle under the doctrine of obviousness-type double patenting (OTDP). Designed to prevent applicants from improperly extending their exclusive rights, this doctrine prohibits applicants from obtaining claims not patentably distinct from the claims of an earlierissued patent, even if such patent was filed later in time. To illustrate, the PTO may apply OTDP to reject a genus claim reciting “a machine for shaping metals” over a later-filed but earlier-issued species claim covering “a machine for shaping iron.” The article addresses what happens when the genus application and species patent share a common inventor but lack common ownership, a scenario that could arise after an inventor changes employers. Companies should monitor the movement of inventors in and out of their institutions. When inventors leave and are likely to begin work related to their former position, prosecute all their pending patent applications expeditiously, and promptly present and prosecute at the PTO any unfiled subject matter they invented. This may entitle the former employer to a favorable two-way obviousness analysis, potentially precluding an OTDP rejection. Additionally, use non-compete agreements, or agreements that require the departing inventor to assign ownership of future inventions falling within a particular scope of the inventor’s former employment. Retaining ownership of follow-on inventions preserves the right to file a terminal disclaimer, subject to the enforceability of the agreement.

By Kurt Winiecki Winiecki Wealth Management

Business owners who offer a 401k plan are required to comply with the Employee Retirement Income Security Act, a complex federal statute designed as a consumer protection law. Failure to comply with ERISA exposes business owners and other employees who make important decisions about the plan (like general counsel, the CFO or the human resources director) to personal liability. New Department of Labor rules require every plan sponsor to obtain and analyze fee disclosures from every plan service provider. A sponsor that requested, but did not obtain, a fee disclosure must notify the DOL that the service provider failed to provide it and inform the DOL whether the service provider has been terminated. Hiring a fiduciary advisor and understanding what fiduciary advisors are, and are not, responsible for is important for understanding a plan fiduciary’s personal risk. Many plan fiduciaries wrongly believe that when they hire an investment company, bank, Wall Street firm or an insurance company, they are fulfilling their fiduciary responsibilities. Hiring a fiduciary is more problematic than one might think. It often leaves plan fiduciaries with the impression they are responsible for nothing. This is a serious legal disconnect, because ERISA imposes many duties beyond investment choices on plan fiduciaries. They often fail to realize that, for example, they must monitor the plan service providers using the new DOL fee disclosure rules. They must also provide disclosures to plan participants about fees, plan information and investment performance.

FEB/ MAR 2014 TODAY’S GENER AL COUNSEL

Executive Summaries E-DISCOVERY

TGC SURVE YS

PAGE 20

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PAGE 32

Too Much Data, Too Little Support

Prepare Far in Advance for Litigation Holds

Predictive Coding Slowly Becoming the Norm

By Chris May Deloitte Transactions and Business Analytics LLP

By Gabriela P. Baron Xerox Litigation Services

E-discovery trends for 2014

Federal agencies remain uneasy about their ability to manage e-discovery and electronic data, according to Deloitte’s “Seventh Annual Benchmarking Study of Electronic Discovery Practices for Government Agencies.” Only 53 percent of respondents felt adequately prepared to discuss e-discovery with opposing counsel. This represents a steep decline from the 2012 survey, when it was 90 percent. According to the survey, the federal government is far behind the private sector when it comes to using predictive coding. Government agencies are only half as likely as those in the private sector to use it. Respondents to the 2013 survey also considered themselves hamstrung by a lack of technical support on the e-discovery front. Only one in four respondents believed they had adequate technical support when dealing with opposing counsel. In the 2012 survey more than half thought they had enough support. These results reflect the reality that government attorneys are increasingly aware of the difficulties involved with aligning e-discovery technology to processes and capabilities. Some government agencies may find that years after installing new software, the technology doesn’t mesh with internal processes and skill sets. That means that even the best technology may compromise the ediscovery effort, rather than improve it. It appears that federal agencies and in-house departments have a lot in common. Both are grappling with cases that have large amounts of potentially responsive information, even as they face pressure to curb costs and improve efficiencies.

A legal hold is a protocol that preserves evidence likely to be responsive in litigation. The process is part of a company’s overall information governance program and requires cooperation and communication among the legal, information technology, records management and compliance departments. It pays to prepare for the legal hold before it happens. Companies should identify their ESI, create defined and documented processes and conduct training long before a legal hold is issued. The preservation process begins with an inventory of a company’s data, with a data diagram to identify all data sources and types, retention policies and locations. The IT department should determine how, technically, to achieve preservation for each system before the hold is imminent. Also, it is best to identify correct procedures for defensibly transferring data to third parties before it is turned over to outside counsel or a discovery vendor. And because data can be modified, deleted or corrupted quickly, staff must be trained and alert to events that may trigger such obligations in the first place. After the hold is issued, the company should track compliance. Although any form of tracking is acceptable, legal hold software can improve defensibility by automating the process. Once obligations are complete, the in-house team should promptly communicate the release of the legal hold and the okay to resume regular retention procedures. The is important to ensure that the company does not incur the cost of storing unnecessary data.

Survey results indicate that recognition of the risks posed by social media is widespread, but procedures for dealing with it are lagging. About three-quarters of respondents said their company had a policy for employee use of social media, but just over half had procedures for collecting and preserving in the event of an information request. According to Deborah Baron, CEO at Nuix NA, social media is to e-discovery today what email was before 2006 – viewed as a quagmire of unknown cost and risk. Leonard Deutchman, general counsel and vice-president of LDiscovery, LLC, points out that social media does not lend itself to collection and preservation as naturally as emails and e-docs. Because the data is on the provider’s site, it is not easy to preserve. Typically, a digital forensics expert is brought in for the task, which means out of pocket expense. Only 27 percent of survey respondents reported that their organizations had adopted predictive coding software, but there is a clear trend for larger departments to make use of that technology with greater frequency than medium or small departments. Slow adoption may reflect the fact that the technique requires significant time on the part of one or more senior attorneys to “teach” the case to the computer. The survey showed a clear trend of legal department responsibility for most aspects of the e-discovery process, including cost and risk analysis, culling and analysis, and review and production.

today’s gener al counsel feb/ mar 2014

Executive Summaries Intellec tual ProPert y

governance

Page 36

Page 38

Page 40

Alternative Damage Theories in Patent Cases

Factors Driving Merger Enforcement

Protecting Against Political Risk in Overseas Ventures

By Christopher M. Scharff McAndrews, Held & Malloy

By Jeffery M. Cross Freeborn & Peters LLP

By Iain Donald Control Risks

Infringers often make use of a patentholder’s rights in ways that yield no straightforward royalty or lost profit calculation. Infringers may give away an infringing product for free or minimal cost, for example, as a loss-leader for other products. The patent holder nevertheless can assert damages theories that the courts have applied over the years. The patent statute does not tie royalty rates to an infringer’s sales or profits. The Court of Appeals for the Federal Circuit has long held that even if the infringer is making no profit directly attributable to the infringement, the patent holder may still be improperly benefitting by infringing the patent, and it must compensate the patent holder accordingly. In 2003, in Micro Chem. Inc. v. Lextron, Inc., the Federal Circuit heard an appeal involving an infringing product that was given away by the defendant to its customers for free or, with a substantial loss, as a loss leader. The court affirmed the jury’s $1.5 million damage award, and it pointed out that the wellrecognized Georgia Pacific factors for determining a patent royalty include consideration of “the effect of selling the patented specialty in promoting sales of other products of the [infringer],” even if the patented product is not sold at all. Any company that is investigating patent infringement by a competitor, or for that matter a company that has concerns about its own exposure to patent liability, should consider usebased patent damages rather than just a traditional sales-based royalty.

Merger law has been primarily shaped by the Department of Justice and the Federal Trade Commission. Court decisions are rare because few merger cases are litigated to conclusion. Most mergers are resolved by consent decrees or by the parties abandoning the mergers. In 1968, the DOJ issued its first guidelines to help the business and legal communities understand factors they consider. After several revisions, new guidelines were issued in 2010. They specifically state that “mergers should not be permitted to create, enhance, or entrench market power or to facilitate its exercise.” Market power is the ability to raise prices or reduce output without losing so much market share that the price increase is unprofitable. This concept is at the heart of the unilateral competitive effects theory, which assumes that a merger between two “differentiated products” – meaning that the products vary in many ways, including color or shape – will allow the merged party to exercise market power because consumers view the acquired product to be a close substitute for the acquiring product. The agencies also employ a variety of econometric tools to determine if a merger of differentiated products will enable the merged entity to exercise market power. One such tool is known as the “gross upward pricing pressure index,” or GUPPI. Companies considering a merger should review internal documents to make sure they do not contradict otherwise pro-competitive evidence. Governmental agencies have great flexibility in analyzing the anti-competitive effects of a merger.

In recent years international companies have experienced expropriations, cancellations of operating licenses, and contract frustration, as the result of actions of host governments. However, it’s difficult to objectively discern any particular targeting of U.S. companies. Heightened awareness of political risk among U.S. executives likely derives from the fact that there is more U.S. investment to be impacted. More than half of foreign direct investment from the so-called “rich world club” came from the United States in the last quarter of 2013. Without taking risk no business could generate impressive value, but the absence of coordinated political risk strategies across all levels of international business reflects an implicit assumption that no practical measures can be taken to control these perils. Not true. Most companies that demonstrate good corporate governance have built assessment of country risk into their investment process. At best they develop a phased risk assessment and due diligence process that maps the investment life cycle. Few organizations, however, systematically build an analysis of local factors into the evaluation of their political risk exposure. The exposure of one company is often different from that of another in the same industry or the same country. Insurance is useful, but it indemnifies only against financial loss, not brand damage, loss of shareholder value and wasted time. The author outlines a practical mitigation strategy and observes that having such a strategy in place is useful when negotiating premiums with an insurer.

FEB/ MAR 2014 TODAYâ&#x20AC;&#x2122;S GENER AL COUNSEL

Executive Summaries FEATURES

PAGE 46

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Emotions Run High When InHouse Counsel is Deposed

A Program For Building the Legal Operations Function

Interplay Between Arbitration And The Courts

By Bradley J. Betlach Nilan Johnson Lewis PA

By Jeffrey D. Paquin Global Center for Corporate Counsel Excellence

By Bruce G. Paulsen and Jeffrey M. Dine Seward & Kissel LLP

This article examines the psychological effect on in-house counsel who are placed in the witness chair by their outside counsel, as well as the interpersonal dynamics that develop in that situation. By better understanding the power shift and emotions at play, attorneys can successfully navigate the deposition with relationships intact. Self-doubt manifests itself when inside counsel begin to question their own legal advice, or how their work product has resulted in the litigation, even if the allegations are without merit. Fear and anxiety surface when in-house counsel senses that their reputation and job are at stake, particularly where the real or imagined threat of institutional harm is great. Anger can be directed at opposing counsel, outside counsel who â&#x20AC;&#x153;failedâ&#x20AC;? to protect against the deposition, the judge that allowed it or others within the corporation or legal department. The author provides some advice, beginning with accepting being a target of litigation and preparing for a prolonged ordeal by engaging in the process while maintaining a work-life balance. In-house counsel should allow outside counsel to determine how much and what kind of preparation is required. Do not let pride or other commitments prevent the acquisition of key deposition skills. Be willing to block out significant portions of time, and to leave office and distractions behind. In-house counsel will rarely relish being deposed, but understanding and accepting the emotional and psychological dynamics at play will help them to successfully weather the experience.

Law departments require a variety of operational services in areas such as outside counsel management, intellectual property operations and electronic discovery. Many law departments are now focusing on building a centralized, comprehensive legal operations function to manage those services. While in-house counsel are experts at legal work, a law department is responsible for activities that are not optimally managed by counsel with day-to-day legal responsibilities. Those activities rely on a process-oriented approach with well-defined objectives and typically require significant technology. There are a few standard steps to building an excellent legal operations function. They include developing three to five-year strategic objectives with stakeholder buy-in, conducting needs assessments and developing funding, staffing and technological requirements. Recommendations are then formulated, using tools such as data analytics and general and industry benchmarking. Timely and cost-effective implementation by multi-disciplinary program or project teams is required. Defensible, stakeholderaccepted legal department and specific operational area performance indicators are developed, including use of relevant metrics, data analytics and similar tools. Legal departments should be setting clear objectives, and developing detailed strategies to achieve them. Rigorous use of data analytics and the use of metrics to measure progress serve a dual purpose. Tracking and reporting guarantee that key objectives are being met, and they can be used to demonstrate the value of the legal department to senior management, board members and investors.

Counsel choosing between arbitration and litigation when negotiating contracts need to consider the litigation implications of either decision. Parties choosing arbitration are not necessarily choosing to keep the matter out of court. Arbitration forums and the courts can interact in many ways, including judgment enforcement. Arbitration and litigation create a complex topography, and navigating it requires understanding and strategy; decisions made in one forum may have significant implications later in another. In house counsel and outside arbitration or litigation counsel therefore need to consider tactical steps in light of their strategic goals. The conduct of the arbitration needs to take into account the requirements of the venues where interim relief or recognition of the award may be sought and the resulting judgment executed. Prior to the initiation of arbitration, or during its course, parties may need to seek interim relief from actions of the other party. The availability of judicial remedies to parties who are bound to arbitration, even before arbitration begins, varies among federal circuits as well as under state law. Relief may also be found within the arbitration itself. Once judgment is entered, the award holder, now a judgment creditor, has the same rights as any other federal judgment creditor to enforce the judgment within the federal court. As disputes progress, counsel need to keep an eye on issues of asset dissipation and other efforts to thwart the award, and possibly complex, multi-jurisdictional efforts at judgment enforcement.

TODAY’S GENER AL COUNSEL FEB/ MAR 2014

Executive Summaries FEATURES PAGE 56

PAGE 60

New Commercial Arbitration Rules Provide Predictability

If Your Law Firm Suffers a DataBreach, Maybe You Do Too

By Angela Zambrano and Casey Burton Sidley Austin LLP

By Richard J. Bortnick Christie, Pabarue and Young

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“Informative and worth reading.” In 2013, the American Arbitration Association introduced two new sets of rules that apply to commercial arbitration disputes. The AAA revised its general Commercial Arbitration Rules, and it added a set of Optional Appellate Arbitration Rules. The Commercial Arbitration Rules were revised in four key areas. The first involves taking testimony from witnesses not located in the jurisdiction that is the site of the arbitration. The second is the incorporation of the emergency protection measures, which were formerly optional. The third is a rule related to dispositive motions. The fourth and most practically important change was the revision to provisions involving discovery. There is still no blanket entitlement to document production, but the new Rule R-22 makes clear that the arbitrator can require the parties to exchange documents on which they intend to rely. In a change that will likely have less impact on the day-to-day operations of those involved in arbitration, the AAA also created a set of Optional Appellate Arbitration Rules, which apply only when the parties stipulate to them or agree to them by contract. The revisions reflect the new reality that arbitration is increasingly used to resolve disputes between a broad range of parties, and that arbitration is frequently the dispute resolution mechanism of choice for contractual disputes between sophisticated business parties. Some practitioners may not like the new rules for various reasons, but parties may always choose to carve out certain rules by contract.

Lawyers often have access to clients’ sensitive commercial, operational and other information. But lawyers can also possess similar information about their clients’ clients and customers (such as when a lawyer represents a healthcare company). As a result, lawyers, like employees, face the risk of a lost, stolen or breached mobile device, laptop or – most problematic – data retention mechanisms that can affect their clients’ profits, and perhaps their continuing economic viability. Both clients and their outside counsel holding sensitive information are at risk of losing such data as the result of an adverse cyber incident, such as a hacker intrusion or loss of tangible property, such as laptops and hard drives. It doesn’t matter whether the harm is attributable to malicious activity or simple employee or third-party negligence, in many cases the effect of a cyber incident can be devastating to the economic viability of the business. Adoption of best practices will reduce the risk of a cyber, privacy and technology (CPT) incident. Outside counsel’s deployment of a best practices regime can help reduce the premium for CPT insurance. Insurers will review your vendors’ systems as well as yours, and the more robust your company’s and your vendors’ protections are, the lower your CPT premium. It’s a significant and critical risk/benefit analysis. In considering risks and exposures, you need to evaluate and account for those presented by outside entities and persons holding your company’s or law firm’s sensitive information.

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feb/ mar 2014 today’s gEnEr aL counsEL

Labor & Employment

Addressing Employment-Related Retaliation Claims By Rosemarie Hill

llegal retaliation claims are on the rise. In 2012, 38 percent of charges filed with the Equal Employment Opportunity Commission contained retaliation claims, up from 27 percent in 2002. Illegal retaliation occurs when a company takes a punitive or adverse action against a person (usually an employee) in response to an activity protected under a state or federal statute. There are many protected activities – complaining internally (either formally or informally) about an illegal

activity, whistleblowing against what is perceived as an illegal act or omission, filing or participating in a discrimination-related lawsuit, or even assisting or testifying for someone else who has brought a claim. Most retaliation provisions are based on the theory that employees or former employees must be allowed to make claims, participate in internal or outside investigations and hearings, or complain of an illegal practice without recrimination. Engaging in a “protected activity” must not result in retaliation.

Hundreds of statutes unrelated to employment include anti-retaliation provisions. They include the Patient Protection and Affordable Care Act, the Safe Drinking Water Act, the 2010 Dodd-Frank Wall Street Reform Act, the Consumer Protection Act, and the FDA Modernization Act, which amended the Federal Food, Drug, and Cosmetic Act. Most employment-related laws, both federal and state, prohibit retaliation. These include the Civil Rights Act (Title VII) which prohibits discrimination

today’s gEnEr aL counsEL feb/ mar 2014

Labor & Employment against employees in protected categories including gender, religion or race; the Age Discrimination in Employment Act; the Americans with Disabilities Act; and other laws such as the Family Medical Leave Act and the Uniformed Services Employment and Reemployment Rights Act. EXPANDED REACH

Retaliation claims expand the coverage of these underlying laws. For instance, complainants can claim illegal retaliation in their original complaint to an agency (such as OSHA, the Department of Labor, or the Equal Employment Opportunity Commission) or in a lawsuit, and then amend the initial filing to include further retaliation claims based on events that occur post-filing. The U.S. Supreme Court has recently said that even ex-employees can claim illegal retaliation, generally relating to a job reference or other post-employment behavior by the company. In one instance of illegal retaliation, a company fired a discrimination complainant’s fiancé, also an employee, because of the complaint. As a result of that case, the U.S. Supreme Court created an additional retaliation cause of action for persons who did not themselves engage in protected activity, but suffer retaliation because they are close to someone who did. Persons in this category may include, in addition to a fiancé, a child, spouse or parent, and the list is likely to expand. An employer can be liable for retaliation even if the retaliatory behavior occurs outside the workplace. In one example, a supervisor threatened an employee who had complained about his discriminatory behavior by saying he was going to spread rumors about her throughout the community. Another offending employer stopped inviting the complaining employee to regular out-of-the-office happy hour meetings where business was discussed. Both actions were held as retaliatory. The courts have indicated that any action discouraging an employee from making a claim under most employment-related laws may be deemed illegal retaliation. Employers and employees alike face post-complaint problems. An employee

might worry about being terminated for engaging in protected activity, or conversely, decide that filing the complaint constitutes a “free pass” to no longer follow company policies. An employer might fear it is held hostage to a retaliation claim if, in the normal course of business, it has to discipline an employee who has made a complaint, particularly one who appears to purposely underperform. Because of the sensitive nature of the situation, both employer and employee must carefully consider the post-complaint actions taken by an accused, by management and by the claimant’s peers. An employee can lose an underlying claim, but still win a retaliation claim. For example, a jury might find that there was no religious discrimination against a particular employee, but that once he complained to his manager about such discrimination, he received bad reviews when they were previously favorable, was moved to a less desirable shift, denied a promotion, or even that he was moved to an office without windows. FUNDAMENTALS OF COMPLAINT AND DEFENSE

To win an action for illegal retaliation, a complaining employee has to show that he engaged in a protected activity, that the employer was aware of the activity, and that the employer took an adverse action in response to the protected activity. If the employer then makes the case that there was a legitimate business decision for its actions, the employee would then need to prove that this business decision was a pretext for discrimination or harassment. Of course, laws have differing retaliation provisions. Companies must know the standard for the particular complaint they face. There is some recent court-created assistance in defending these claims for employers. The Supreme Court ruled last year, for example, that in retaliation claims under Title VII the employee has to prove that “but for” his or her protected activity, the adverse action would not have been taken. This is important because in the underlying discrimination claim, employees have to prove only that illegal discrimination was a “motivating factor” in their treatment, not that it was

the “but for” factor. It is a higher standard for the employee to prove that “but for” the complaint, the company would not have fired him. There are often mixed motives for employee discipline, and this ruling makes defense of a retaliation claim somewhat easier. PREEMPTING CLAIMS

Most companies are all too aware that once they are embroiled in litigation they are already being drained of resources, time, energy and money. Therefore, stopping retaliation on the front end should be the goal. Here are some measures a company can take:

1 2 3

Have an anti-retaliation policy and emphasize it. Take all complaints seriously and investigate them immediately.

Tell every person involved in an investigation that retaliation will not be tolerated.

Keep good documentation of your investigations and actions, and particularly of any adverse actions against an employee who has complained of an illegal activity or action. In summary: Retaliation is serious business and requires serious, consistent, immediate and ongoing attention. ■

Rosemarie Hill is a shareholder at Chambliss Bahner & Stophel PC and chair of the firm’s Labor and Employment Section. She provides advice relating to discrimination claims, wages/ overtime pay and retaliation claims, and medical and other kinds of leave. A member of the American College of Trial Lawyers, she represents clients in federal and state courts and before government agencies. rhill@chamblisslaw.com

feb/ mar 2014 todayâ&#x20AC;&#x2122;s gEnEr aL counsEL

Labor & Employment

today’s gEnEr aL counsEL feb/ mar 2014

Labor & Employment

Patenting Headache When EmployeeInventor Leaves By Paul Browning, Jennifer Roscetti, and Christopher McDavid

hen considering potential challenges to an application before the U.S. Patent and Trademark Office (PTO), a practitioner rarely worries about a patent filed later. But a later-filed patent may pose a significant obstacle under the doctrine of obviousnesstype double patenting (OTDP). Designed to prevent applicants from improperly extending their exclusive rights, this doctrine prohibits applicants from obtaining claims not patentably distinct from the claims of an earlier-issued patent, even if such patent was filed later in time. To illustrate, the PTO may apply OTDP to reject a genus claim reciting “a machine for shaping metals” over a later-filed but earlier-issued species claim covering “a machine for shaping iron.” If the genus application and species patent are commonly owned, the applicant may overcome the OTDP rejection by filing a terminal disclaimer, in which the applicant disclaims a patent term extending beyond the expiration date of the earlier-issued species patent. But what happens when the genus application and species patent share at least one common inventor but lack common ownership? As one might imagine, this scenario could arise after an inventor changes employers. The Federal Circuit in a 2013 case, In re Hubbell, addressed precisely this issue and applied the doctrine of OTDP to bar a former employer/assignee’s genus claims over an ex-employee’s later-filed, but earlier-issued, species claims, where the exemployee was a common inventor. The court confirmed that for the doctrine of OTDP to apply, applications and patents need not be commonly owned or have identical inventors. Mere overlap in the named inventors is sufficient. Because there was no common ownership in this case, the court further held that a terminal disclaimer was impermissible, leaving the former employer and the listed inven-

tors of the genus claims without recourse. This case starkly illustrates the potential risks to an employer’s pending or planned patent applications after an employed inventor leaves the company or institution. This article explains how to potentially safeguard against a similar, undesirable outcome.

patenting rejection. And the Board of Patent Appeals and Interferences affirmed an OTDP rejection of the ‘509 application over the ‘685 patent because: (1) the ‘509 application’s genus claims were not patentably distinct from the ‘685 patent’s species claims; and (2) the ‘509 application and the ‘685 patent shared at least one common inventor. The applicants appealed.

THE REJECTED CLAIM

The dispute on appeal in the Hubbell case at the Federal Circuit concerned an OTDP rejection of the pending claims in Application No. 10/650,509 (the ‘509 application) over the issued claims of Patent No. 7,601,685 (the ‘685 patent). The ‘509 application, owned by the California Institute of Technology (CalTech), is part of a patent family claiming priority to 1997 and claims a genus directed to tissue repair and regeneration, namely “[a] bidomain protein or peptide comprising a transglutaminase substrate domain and a polypeptide growth factor.” In 1998, during prosecution of the patent family, two of the ‘509 application’s four inventors left CalTech and joined Eidgenossische Technische Hochschule Zurich (ETHZ). At ETHZ, the two inventors conducted additional research related to the ‘509 application, resulting in a new family of patent applications filed in 1998, eventually leading to the issuance of the ‘685 patent in 2009. The ‘685 patent, jointly assigned to ETHZ and Universitat Zurich, indisputably claims a species of the ‘509 application’s transglutaminase substrate domain and polypeptide growth factor. As a result of the employment change, the ‘509 application and the ‘685 patent lack common ownership, yet have overlapping (but not identical) inventorship. The ‘685 patent was unavailable as prior art against the ‘509 application due to its later priority date. This issued patent could, however, form the basis of a double

THE FEDERAL CIRCUIT DECISION

On appeal, the applicants argued that: (1) OTDP between an application and a conflicting patent should not apply in the absence of common ownership; (2) if OTDP does apply, the PTO should accept a terminal disclaimer at least as an equitable measure to overcome the rejection; and (3) a two-way obviousness analysis is appropriate. The panel majority rejected each argument. First, judges O’Malley and Wallach for the majority held that an OTDP rejection is appropriate even in the absence of identical inventorship or common ownership. To support its holding, the court initially took judicial notice of a provision in the Manual of Patent Examining Procedure that explicitly contemplates that OTDP can exist between a conflicting patent and application filed by “the same inventive entity, or by a different inventive entity having a common inventor.” Next, relying upon In re Van Ornum, a 1982 case from the Court of Customs and Patent Appeals, and In re Fallaux, (Fed. Cir. 2009), the majority emphasized that its holding furthered the principle of preventing harassment of an alleged infringer by multiple distinct patentees asserting essentially the same patented invention. In this regard, the majority did not consider it relevant that CalTech did not cause the bifurcated assignments of the ‘509 application and the ‘685 patent. Instead, it was concerned only with the present ownership status, recognizing continued on page 23

feb/ mar 2014 today’s gEnEr aL counsEL

Labor & Employment

New DOL Rules Heighten Duties, Personal Liability, of 401k Sponsors By Kurt Winiecki a summary of the new 401k rules, common areas of non-compliance and best practices for administering a 401k plan. BACKGROUND

usiness owners who offer a 401k plan are required to comply with the Employee Retirement Income Security Act (ERISA), a complex federal statute designed as a consumer protection law. Failure to comply with ERISA exposes business owners and other employees who make important decisions about the plan (like general counsel, the CFO or the human resources director) to personal liability.

Often employees who are delegated plan administrative duties know nothing about ERISA or the personal liability to which they are exposed. This is neither appropriate nor the best way to help employees prepare for retirement. Because plan fiduciaries can be sued personally for imprudent plan decisions, understanding 401k fiduciary responsibility is one of the best ways to protect them from personal loss. This article provides

Plan participants (employees who participate in the 401k plan) often pay much, if not all, of the plan’s investment and administrative services. They pay fees directly from account deductions or through the investments’ expense ratios (those ongoing fees a mutual fund or other investment product charges to manage that product). Plan fiduciaries dictate how much plan participants pay for services and are held responsible for those decisions. ERISA requires plan sponsors to ensure plan expenses are reasonable. Historically, however, 401k plan services and fees have confused plan sponsors. Poor performance reports, misleading sales statements, convoluted fee disclosures and other kinds of reports often fail to provide information in a way that helps a plan sponsor assess services and fees. As a result of poor reporting, poor service and overpaying for many services, the U.S. Department of Labor recently enacted new rules to help plan sponsors better assess services and fees. The new DOL rules require every plan service provider to give a fee disclosure. Because the DOL’s enforcement authority is similar to that of the IRS, failure to comply with these rules can result in serious consequences. Moreover, lack of familiarity with the new rules may be just the tip of the noncompliance iceberg. The DOL’s new rules highlight a trend toward heightened scrutiny of plan administration, fees and decisions. As employees near and enter retirement, they too will scrutinize the prudence of plan decisions more closely.

today’s gEnEr aL counsEL feb/ mar 2014

Labor & Employment THE NEW DOL RULES

The new DOL rules require every plan sponsor to obtain and analyze fee disclosures from every plan service provider. The deadline for obtaining the disclosures was July 1, 2012. (Failure to have obtained the appropriate fee disclosures would have been an ERISA violation.) A plan sponsor that requested, but did not obtain, a fee disclosure had to notify the DOL that the service provider failed to provide it and inform the DOL whether the service provider has been terminated. The plan fiduciary must examine the fee disclosures, focusing on whether the fees are reasonable. Sponsors commonly assess fees in one of two ways: by comparison among the bids for servicing the plan, or by obtaining through a third party a “benchmarking” report that compares the plan’s fees to those paid by similar plans. Failure to objectively assess fees opens the door to an argument that the fees are not reasonable. HIRING FIDUCIARY HELP

When it comes to the investment decisions, the DOL provides guidance. In its publication “Meeting Your Fiduciary Responsibilities,” the DOL advises that if a plan sponsor lacks investment expertise, “a fiduciary will want to hire someone with that knowledge to carry out the investment ... functions.” The DOL has also published a fact sheet entitled, “How to Tell Whether Your Adviser is Working in Your Best Interest: A Fiduciary Guide for Individual Consumers.” It advises individual investors “to make sure the adviser you select is working in your best interest,” but hiring a fiduciary advisor over a non-fiduciary is prudent advice for 401k plan sponsors, as well. Hiring a fiduciary advisor and understanding what they are and are not responsible for is important to understand a plan fiduciary’s personal risk. Unfortunately, many plan fiduciaries wrongly believe that when they hire an investment company, a bank, a Wall Street firm or an insurance company, they are fulfilling their fiduciary responsibilities.

Often, those entities and their sales reps have no fiduciary duty to the plan participants. Equally problematic are those “fiduciary” advisors that exploit conflicts of interests that place the advisor’s interests ahead of the plan participants’ interests. One way this can happen is when plan sponsors who use an investment company for services also use the company’s investment products for most or all of the plan’s investments. Using companies that have a financial incentive to sell certain products often results in investment choices that are not in the plan participants’ best interests, violating a plan fiduciary’s duty to offer only the best investment solutions to its plan participants. Some plan fiduciaries hire a “financial advisor” to help choose investments. However, a “financial advisor” is not a fiduciary. They may be highly incentivized by money, bonuses, or trips to sell plans certain investment products. A plan fiduciary may believe the financial advisor offers investment expertise, when actually the advisor is simply selling certain products in his or own best interest. Accordingly, accepting biased recommendations from a non-fiduciary entity or advisor, without a comparative analysis, is not prudent. It runs counter to ERISA and subjects the plan fiduciaries to risk. ERISA requires prudent decisions. Using investment options from only one company may be prudent, but that must be demonstrated in order to protect the plan fiduciaries. Plan fiduciaries must use a process for investment selection - that duty falls entirely on the plan fiduciaries, not on a biased seller of products. Both the decisions and the decisionmaking process must be documented. If the funds perform poorly, it is the documentation in the files that will demonstrate that a prudent decision was made. Importantly, monitoring each investment option is an ongoing duty. Winning a “prudence” argument is nearly impossible without documentation. Help is available through a Registered Investment Advisor. RIAs are legal fiduciaries, who like the plan

fiduciaries act in the best interests of the plan participants. RIAs should declare their fiduciary status in writing and have a documented procedure to choose and monitor investment choices. Some fiduciary investment advisors are co-fiduciaries: They share the responsibility for investment decisions, which does not relieve the plan fiduciaries of responsibility. Other fiduciaries take full fiduciary responsibility for investment decisions, relieving the plan fiduciaries of any liability for investment options. Hiring a fiduciary is more problematic than one might think. It often leaves plan fiduciaries with the impression they are responsible for nothing. This is a serious legal disconnect, because ERISA imposes many duties beyond investment choices on plan fiduciaries. They often fail to realize that, for example, they must monitor the plan service providers using the new DOL Fee Disclosure rules. They must also provide plan participants with disclosures about fees, plan information and investment performance. ERISA is a complex federal law that exposes knowing and unknowing plan fiduciaries to personal liability. This is an area getting more scrutiny from Congress, the DOL, attorneys, the press and employees. Failure to understand and comply with responsibilities under ERISA can have dire personal consequences, for plan fiduciaries and participants alike. ■

Kurt Winiecki, formerly a law firm attorney, began a financial services career in 2007. In 2011, he founded Winiecki Wealth Management, a Registered Investment Advisor that provides fiduciary advice to 401(k) plan sponsors. He is a CPA and an Investment Advisor Representative registered with the state of Illinois. kurt@winieckiwealth.com

FEB/ MAR 20 14 TODAY’S GENER AL COUNSEL

E-Discovery

Too Much Data, Too Little Support How Federal Agencies Feel About E-Discovery Now By Chris May

ike many attorneys and IT departments in the private sector, the professionals in federal agencies remain uneasy about their abilitiy to manage e-discovery and the vast stores of data they compile. Barely half of them feel ready to discuss matters regarding e-discovery with opposing counsel. Those are among the findings from Deloitte’s “Seventh Annual Benchmarking Study of Electronic Discovery Practices for Government Agencies.” This year’s survey provides insights into the concerns that government agencies have about e-discovery, their relationships with upper management, their technological challenges and where pain points exist.

FACING OPPOSING COUNSEL

Only 53 percent of respondents felt adequately prepared to discuss ediscovery with opposing counsel. This represents a steep decline from the 2012 survey, when 90 percent of respondents said they felt adequately prepared to discuss e-discovery matters with opposing counsel. Respondents to the 2013 survey also considered themselves hamstrung by a lack of technical support on the e-discovery front. Only one in four respondents believed they have adequate technical support when dealing with opposing counsel, compared with the 53 percent of respondents in 2012.

These results reflect the reality that government attorneys are increasingly aware of the difficulties involved with aligning e-discovery technology to processes and capabilities. Some government agencies may find that years after installing new software, the technology doesn’t mesh with internal processes and skill sets. That means that even the best technology may compromise the ediscovery effort rather than improve it. PREDICTIVE CODING

According to the survey, the federal government is far behind the private sector when it comes to using predictive coding. Government agencies are only half as likely as those in the private sector to utilize this approach. Moreover, the survey showed no yearto-year increase in the use of technology-assisted review: Seventeen percent of respondents have used predictive coding in at least one of their cases in both 2012 and 2013. More than half of respondents, 55 percent, had never used predictive coding. This compares to 35 percent of private sector legal teams who have used predictive coding, according to Fulbright & Jaworski’s annual litigation trends survey report for 2013. However, government agencies involved in e-discovery may soon find themselves dragged into the use of predictive coding, on account of the same pressures that are driving in-house counsel and law firms to experiment with technology-assisted review techniques. When asked what issues are driving upper management

TODAY’S GENER AL COUNSEL FEB/ MAR 2014

E-Discovery

When asked if they felt confident their to explore more advanced electronic The drive towards more advanced discovery solutions, 20 percent of re- agencies could demonstrate that their technology also could be increasing spondents cited the need to respond to ESI was accurate, accessible, complete the unease among survey respondents. increasing amounts of data, while 16 and trustworthy if challenged, 42 per- Like their private sector counterparts, cent reported that they were “not at all government agency personnel are strugpercent pointed to the need to lower confident. That was gling to manage the explosive increase discovery costs nearly double the and/or decrease in the amount of data being produced. response in 2012. time. Fourteen SURVEY DEMOGRAPHICS Those who reported percent saw the This year, for the first time, When asked if they felt they were “someneed to respond Deloitte conducted the survey what confident” to their increasat the annual Electronic Discovconfident their agencies also plummeted, ing case load, ery Symposium for Government from 68 percent in while 12 percent Agencies. Of the nearly 125 could demonstrate that 2012 to 38 percent were looking respondents to this year’s survey, in 2013. to decrease risk more than three-quarters of the their ESI was accurate, Reasons for the and nine percent respondents (80 percent) were steep decline may sought to proattorneys, followed by IT proaccessible, complete and be linked to the vide the tools fessionals and paralegals, who heightened scruto get the job each comprised seven percent of trustworthy if challenged, tiny of e-discovery done. However, respondents. Another six percent, processes, as well 19 percent of when asked to describe their 42 percent reported as the need for atrespondents roles, responded “other.” Nearly torneys to adhere reported that all of the respondents said their that they were “not at to ethics standards upper manageroles involved handling, processfor competence. ment was not ing, and reviewing of electroniall confident.” All these factors actively looking cally stored information. could be elevating for an e-discovconcern about how ery solution. When asked about the top chalwell attorneys, staff lenges in identifying relevant ESI during QUESTIONS ABOUT EFFECTIVENESS and agencies can withstand increased discovery, respondents ranked volume Attorneys and staff at federal agencies attention to the way they handle data of data, obsolete or proprietary data also reported widely varying levels of and e-discovery. and insufficient manpower at the top, confidence when it comes to their ability to manage e-discovery and handle ESI. Overall, respondents to this year’s survey remained about as confident as PREDICTIVE CODING STILL SCARCE last year’s when it comes to managing e-discovery. Seventy-three percent said they felt “about the same” or “more confident” in this area, compared to 74 percent in 2012. However, results from the last two years represent a marked Have you used Predictive What issues are driving upper mandecline from 2011, when 90 percent Coding in any of your cases? agement to explore more advanced of respondents reported confidence in electronic discovery solutions? their ability to manage e-discovery. Respondents are far less confiRespond to increasing amounts of data 20% 17% dent when it comes to their agencies’ Upper management is not actively looking 19% for an eDiscovery solution abilities, though. When asked how 28% Lower discovery costs and/or decrease time 16% effectively their agencies manage the challenges of e-discovery, only 59 perRespond to increasing case load 14% cent felt they were either very effective 55% Decrease Risk 12% or somewhat effective, compared to 73 Provide tools to get percent last year. 9% the job done Questions of confidence in federal Don’t 5% know/NA government agencies extended beyond No Yes Don’t know/NA e-discovery to the information itself. Other 4%

only 17% have used it

Source: Deloitte

feb/ mar 20 14 toDay’s gEnEr al counsEl

E-Discovery

ConfidenCe varies in CritiCal areas

73%

84%

80%

of respondents felt as confident or more confident in their ability to manage eDiscovery in their cases

of respondents feel somewhat or not at all effective in their agency’s ability to deal with the challenges of eDiscovery

of respondents feel somewhat or not at all confident that if challenged their agency could demonstrate that their ESI was “accurate, accessible, complete and trustworthy

demand for personnel, teChnology remains high What are your top three challenges in identifying relevant ESI? 22

2012

2013

Insufficient manpower

Volume of data

Lack of technology

Obsolete or proprietary data

Volume of data

Insufficient manpower

Insufficient time

Processing multiple forms of data

Lack of technology

Obsolete or proprietary data

Insufficient time

Other

Chris May

prepared to address edisCovery Do you feel adequately prepared to discuss matters regarding eDiscovery with opposing counsel?

YES

n/a

53% 19% 28% Source: Deloitte

When dealing with opposing counsel regarding electronic discovery, do you feel that you have adequate technical support? YES

followed by processing multiple forms of data, lack of technology and insufficient time. In comparison, last year’s respondents ranked their top concerns, in order, as insufficient manpower, lack of technology, volume of data, insufficient time, processing multiple forms of data and obsolete or proprietary data. When queried about their top challenge when it comes to handling, processing, reviewing or producing ESI in compliance with the Federal Rules of Civil Procedure, respondents listed internal systems and processes for the sixth year in a row. For the first time, though, buy-in from senior management ranked second, followed by communicating with IT and budgetary issues/ constraints. In last year’s survey, communicating with IT ranked second and budgetary issues/constraints was third. This doesn’t necessarily mean that working with IT and dealing with budget challenges have become less critical for government agencies. Rather, agency leadership may be distracted by budget constraints imposed by the Congress and the President. In appears that in today’s litigation environment, federal agencies and in-house departments have a lot in common. Both are grappling with cases that have large amounts of potentially responsive information, even as they face pressure to curb costs and improve efficiencies. ■

n/a

25% 51% 24%

is a principal with Deloitte Transactions and Business Analytics LLP, where he leads the Government Sector Discovery practice. He has worked with federal agencies for more than 19 years, helping them define their litigation approach, use of technology and security procedures as they relate to e-discovery. He has also guided the stand-up of a litigation technology service center to support both federal criminal and civil litigation. chrismay@deloitte.com

today’s gEnEr aL counsEL feb/ mar 2014

Labor & Employment Patenting Headache continued from page 17

that the harassment justification is “particularly pertinent in cases where, as here, the application and the conflicting patent are not commonly owned.” Second, regarding a terminal disclaimer, the majority underscored the relevant federal regulation, which states that to be enforceable, a patent granted on a terminally disclaimed application must be commonly owned with the conflicting application or patent. Here, because the ‘509 application and the ‘685 patent were not commonly owned, the applicants failed to qualify for a terminal disclaimer. Declining to “rewrite the statutory text,” the court also refused to permit a terminal disclaimer as an equitable measure. Third, the court prohibited a two-way obviousness analysis. As a general rule, obviousness-type double patenting is determined by a “one-way” test, which asks whether the application’s claims are obvious over the claims of the conflicting patent. Under the two-way test, however, an examiner cannot issue an OTDP rejection unless the application’s claims and the claims of the conflicting patent are each obvious over the other. As a narrow exception to the general rule, the two-way test is designed to prevent OTDP rejections in situations where second-filed claims issue before first-filed claims through no fault of the applicant. The key, however, is that a two-way obviousness analysis will apply only if (1) the conflicting claims could not have been filed together and (2) the PTO is solely responsible for the delay in causing the second-filed application to issue before the first. Here, the record showed that the applicants were at least partly responsible for the delay, which led to the issuing of the ‘685 species patent before the ‘509 genus application. For example, several years before the ‘685 patent issued, the PTO allowed claims very similar to those on appeal. The applicants, however, abandoned the allowed claims in favor of filing the ‘509 application, resulting in the foreseeable consequence that the ‘685 patent would issue first. Further, the applicants admitted on the record that they shared responsibility for the delay with the PTO and conceded that the claims of

the ‘509 application could have been presented earlier in time. On these facts, the Court refused a two-way obviousness analysis. Dissenting, Judge Newman found the majority’s holdings contrary to statute and case precedent. In her opinion, double patenting cannot apply if the conflicting claims are separately owned and have separate inventive entities. According to Judge Newman, the appropriate examination in such situations is “on the merits of the invention, through the interference or derivation procedures, or other standard protocol as may apply in the particular situation.” In her opinion, “[i]f there indeed is obviousness-type double patenting, then a terminal disclaimer is necessarily available.” TAKEAWAYS

Practitioners must understand that a single overlapping inventor on two applications with conflicting claims can trigger a doublepatenting rejection. Yet, simultaneously, a lack of common ownership will preclude a terminal disclaimer. Thus, companies should monitor the movement of inventors in and out of their institutions. When inventors leave the company and are likely to begin work related to their former position, it is important to prosecute all their pending patent applications as expeditiously as possible and to promptly present and prosecute at the PTO any unfiled subject matter they invented. This strategy will decrease the probability of a later-filed, separately owned species or improvement patent barring a former employer’s generic claims. Further, expeditious prosecution may entitle the former employer to a favorable two-way obviousness analysis, potentially precluding an OTDP rejection. An additional strategy for dealing with departing inventors is the use of employee agreements, such as non-compete agreements, or agreements that require the departing inventor to assign to you, as the former employer, ownership of future inventions falling within a particular scope of the inventor’s former employment. Retaining ownership of follow-on inventions preserves the right to file a terminal disclaimer. This strategy, however, is subject to the enforceability of the agreement. On the flip side, companies may be able to use the Hubbell decision to their advan-

tage in a deliberate effort to bar competitors’ patent applications. By monitoring inventors who join their institution, practitioners may be able to expeditiously prosecute species and improvement patents to bar an unwary competitor’s generic claims. ■

Paul W. Browning, Ph.D., is a partner at Finnegan, Henderson, Farabow, Garrett & Dunner LLP. He focuses on on patent litigation and appeals, primarily in the chemical and pharmaceutical areas. His practice includes offensive and defensive discovery, drafting and arguing dispositive motions, cross-examining witnesses, drafting appellate briefs, and presenting oral argument on appeal. paul.browning@finnegan.com

Jennifer H. Roscetti is an attorney at Finnegan, Henderson, Farabow, Garrett & Dunner LLP. She practices patent litigation in a range of chemical and pharmaceutical fields before U.S. district courts and the U.S. International Trade Commission. She has particular experience in representing pharmaceutical patent holders in litigations arising under the Hatch-Waxman Act. jennifer.roscetti@finnegan.com

Christopher L. McDavid is an attorney at Finnegan, Henderson, Farabow, Garrett & Dunner LLP. He focuses his practice on patent litigation, prosecution, and client counseling, primarily in chemical, pharmaceutical, and alternative energy technologies. christopher.mcdavid@finnegan.com

FEB/ MAR 20 14 TODAYâ&#x20AC;&#x2122;S GENER AL COUNSEL

E-Discovery

TODAY’S GENER AL COUNSEL FEB/ MAR 2014

E-Discovery

Prepare Far in Advance for Litigation Holds By Gabriela P. Baron

itigation is like bad weather. Gray skies for sure, but you don’t know just how unpleasant it will get. But when the early signs are there, corporations need to be prepared with a capable team, the latest tools, and tested protocols, including a solid legal hold process. A legal hold is a protocol that preserves evidence likely to be responsive in litigation. When a triggering event occurs and a legal hold obligation arises, the organization is required to quickly suspend its routine destruction of electronically stored information. The process is part of a company’s overall information governance program and requires cooperation and communication among the legal, information technology, records management and compliance departments. Where there is employee turnover, human resources also needs to be involved. For example, HR must notify the IT department regarding a departing employee so that IT doesn’t routinely wipe the departing employee’s devices. Advance preparation is key. Prepare for litigation when the skies are sunny and clear. Companies should identify their ESI, create defined and documented processes and conduct appropriate training long before a legal hold is issued. TAKE STOCK

The preservation process begins with a comprehensive inventory of a company’s data and the creation of a data diagram. It should identify all the company’s data sources and types, retention policies and locations. Committee notes in the 2006 Amendment to Rule 34(a)(1) of the Federal Rules of Civil Procedure state that the definition of discoverable ESI is “expansive and includes any type of information that is stored electronically.” Furthermore, the rule covers “information ‘stored in any

medium,’ to encompass future developments in computer technology.” The IT department should determine how to technically achieve data preservation for each system before implementation of a legal hold is imminent. It is best to identify correct processes and procedures for defensibly transferring data to third parties before it is turned over to outside counsel or a discovery vendor. DOCUMENT THE DETAILS

To make rational decisions in this area, business leaders must understand the cost implications of how the company structures, manages and preserves its data. Implementing a legal hold can have a significant financial impact. That means the company should devise strategies to preserve only the necessary and potentially responsive data. A carefully crafted plan for executing a legal hold can mitigate the financial and legal risks and minimize data storage and preservation costs, e-discovery costs, legal service fees and legal sanctions. Once the legal hold process is defined, it should be tested, and from then on regularly calibrated to changing circumstances, kept up-to-date technologically, and re-tested periodically. This is complicated but important, especially where multiple “cascading” legal holds cover shared data. The company should ensure that it has systemic technology in place to manage and oversee cascading legal holds. “Freeze everything” is never a good approach, and can result in increased data processing and storage costs, extended timelines and inability to release data without affecting the integrity of legal holds for other matters. Another important consideration is the manner in which the company will preserve its data: preserving in place or collecting to preserve. Preserving in place keeps the data in its native repository, locking data from

feb/ mar 20 14 toDay’s gEnEr al counsEl

E-Discovery

user modification and suspending routine destruction protocols. Although this approach eliminates the need to copy data, it may interfere with daily operations. The collection approach gathers the physical media where data is stored and then stores it in a safe location. This may have a disruptive effect, as well, because the company will typically have to replace the media to continue with productivity. Another similar method involves collection of data by making defensible copies. This is the most common approach. CONDUCT TRAINING

Because data can be modified, deleted or corrupted quickly, companies must act swiftly to implement legal holds when the duty to preserve arises. Not only must staff know how to comply with a legal hold, but they must also be alert to events that may trigger such obligations in the first place. In the seminal Zubulake v. UBS Warburg LLC cases, Judge Shira Scheindlin set the standard for when the duty to preserve electronic evidence attaches: at the time litigation is “reasonably anticipated.” A company’s legal department must educate the workforce about this concept. There is no bright-line rule for when litigation is reasonably anticipated, but employees should be instructed to alert the legal department if they learn of any threats or grievances that could develop into litigation. Staff should be encouraged to err on the side of caution in this process. Moreover, because the central focus of the inquiry will be the reasonableness and good faith of the litigant, the legal department – protected by the attorney-client privilege – should carefully annotate its decision-making when determining whether to institute a legal hold based on particular circumstances. According to the Sedona Conference Commentary on Legal Holds, Guideline 4, regarding when litigation should be reasonably anticipated, factors to consider include the nature and specificity of the complaint; the business relationship between the accused and accusing parties; whether the party making the claim is known to be aggressive or litigious; whether the company has learned of similar claims and the experience of the industry.

There are other factors as well, and staff must understand the expectations and risks of noncompliance for the legal hold process to be effective. When litigation is reasonably anticipated, the company must act swiftly to implement its legal hold process. The legal department must analyze the potential issues, determine which custodians may hold potentially responsive ESI and identify where such data is stored within the company and/or cloud. Next, the legal department must draft a notice to custodial recipients, addressing the scope of the legal hold as well as

the company does not incur the cost of storing unnecessary data. The team should also review its legal hold processes at this point, and if necessary revise them to incorporate lessons learned. Always keep in mind the importance of preparation and advance training of staff before litigation is reasonably anticipated. Once litigation it is reasonably anticipated, act quickly to implement the process. Analyze potential issues, identify custodians and data sources, draft and issue legal hold notices, and track and audit compliance using legal hold software to automate the process. Make

Employees should be instructed to alert the legal department if they learn of any threats or grievances that could develop into litigation. individual responsibilities with respect to the preservation plan. A legal hold is most effective when it identifies the custodians and data stewards most likely to have relevant information. The notice should be written, and it should be composed in a way that helps custodians take effective action. It should also provide information on how to preserve data, and address features of relevant information systems that may prevent retention of potentially discoverable information. After issuance, the company should track and audit compliance with the legal hold. Although any form of tracking is acceptable, manual processes are timeconsuming and make it more challenging to monitor compliance, particularly where multiple holds may be in place simultaneously. Legal hold software can improve defensibility by automating the process, by sending periodic reminders to custodians about the terms of the hold, for example, and creating an auditable record of the steps taken to comply. Once preservation obligations are complete, the in-house team must communicate the release of the legal hold and resume regular retention procedures. This is an important step to ensure that

sure to communicate legal hold releases and resume regular retention procedures. Effective communication with all stakeholders and tracking compliance are key to managing the legal hold process consistently from inception to completion. Finally, remember it is important to test and calibrate legal hold processes periodically to ensure that they incorporate lessons learned, reflect changed circumstances (such as an acquisition), and take into account new technologies. ■

Gabriela Baron is senior vice president at Xerox Litigation Services. She joined Xerox Litigation Services’ predecessor company, Amici LLC, as general counsel in 2004 and later transitioned into business development. She has assisted 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 2014 TODAY’S GENERAL COUNSEL

WHAT E-MAIL OVERLOAD SAYS ABOUT INFORMATION GOVERNANCE by CONR AD J. JACOBY COLUMN

any commentators have spoken and written with eloquence about the advantages that technology brings to the task of information governance. We’re told that all kinds of technological tools, from full text search through human-trained artificial intelligences provide continually faster, better, cheaper solutions to managing our mountains of accumulated electronically stored information. If we’re disappointed with current offerings, simply wait another few months. While some of this is hype, there is a great deal of truth about the power of technology. However, it’s equally important to remember how we arrived at this situation. Absent technology, it was impossible to analyze and organize even a tiny fraction of our accrued ESI. We have no choice but to embrace technology to assist us. Let me provide a personal example. I recently resolved to clear out a single Yahoo! e-mail account that I use to register software and to subscribe to listserv groups. Through several years of inattention, the inbox had grown to 24,500 unread items, with approximately

Conrad Jacoby is the co-founder and senior consultant of Seventh Samurai, LLC, an e-discovery consultancy. He is a former senior attorney with Winston & Strawn, where he managed the firm’s eDiscovery Review Center and consulted with legal teams on discovery and review strategy. He was founding chair of the E-Discovery Committee of the Washington DC Bar Litigation Section from 2006-2009. He is also an adjunct professor at the Georgetown University School of Continuing Studies. conrad.jacoby@seventhsamurai.com

20-30 new pieces of e-mail arriving daily. How much effort would it take to clear things out? Although I wanted to generate some metrics about human-based document analysis, I did cheat a bit by first sorting the inbox by sender and date. This permitted me, for example, to bulk-tag and delete voluminous and increasingly frantic e-mail messages from Borders Bookstore from the time I registered with their loyalty program until the close of their final store in 2011. I was similarly able to bulk-tag other recurring sources of promotional and spam e-mail. Over the course of about 3 hours, I was able to isolate and bulk-delete approximately 6,000 e-mail messages. That left 18,500 messages, consisting almost entirely of listserv digests, for individual message review.

Because of the nature of the messages I could adopt a highly binary protocol for message analysis. Listserv digests all start with a list of the subject lines of the messages in the digest. As part of my protocol, I scanned each of these listings. If none of the subject matter lines interested me, I would delete the digest. If I did find a relevant re: line, I would read that message. This approach intentionally did not adjust for topic drift, an inevitable part of any e-mail “conversation.” However, because only a small portion of the listerv traffic pertained to topics that interested me, I reasoned that I’d see enough repeated content that I would likely find almost everything I sought. Using my highly simplistic protocol, and using the Yahoo! e-mail interface, continued on page 30

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feb/mar 2014 today’s general counsel

email overload continued from page 28

I began spending an hour or so per day on my project. As expected, my cache of unread e-mail had a very low level of “richness,” and I was able to dispose of 90-plus percent of all digests simply by reading the table of contents. Indeed, by legal document review standards, I achieved remarkable “throughput,” often crashing through 150-175 digests in a single, focused hour. By comparison, human-based litigation document review, which requires methodical review of the full content of a document, has historically performed at 45-60 documents per hour, with much slower speeds when complicated analysis, such as examining documents for legal privilege, is required. Indeed, the moment

I paused to read even a single paragraph in a digest, my own throughput would slow dramatically. Looking at trees instead of the forest, I was blazing through my review. However, in more absolute terms, I remained stuck in the middle of the forest. One month into my project, I had managed to review just over 4,500 e-mail messages – with another 14,000 left to go. Were I to continue at this pace, I would finish this project in another three months. There’s also a second metric worth mentioning. In setting a daily goal and working diligently at it, I spent over 30 hours, or nearly a full-time working week, on top of everything else I do, to review my Yahoo! e-mail trove. Assuming I continue on my current pace, I’ll need to spend a total of 123 hours, on top of my existing work obligations, just to categorize these messages using

the extraordinarily simple analytical rubric I developed. Those time estimates multiply exponentially when complicated analysis is required. I have over 39,000 e-mail messages in my primary e-mail account, and the majority of those messages have far more substance and importance than the digests and spam I’ve been gleefully scanning and deleting. How long would it take me to intelligently re-read these more substantive messages, craft an organizational framework and categorize them without the help of sophisticated technology? The time estimate, absent some technological help, is frighteningly large. Conclusion? Human-based information governance on a scale required by corporations and other complex organizations is a practical impossibility. ■

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TGC Surveys

Predictive Coding Slowly Becoming the Norm Frustrated by “Any and All” Requests Today’s General Counsel has initiated a series of surveys, to be published in this and subsequent issues. The first, which closed on December 9th of last year, queried in-house counsel on how their company deals with e-discovery matters. The results yield trends, broken down by both company and legal department size.

urvey results indicate that recognition of the risk social media can pose is widespread, but systematic procedures for dealing with that risk are lagging. Roughly three-quarters of respondents said that their company had a policy for employee use of social media, but only about one-fourth had instituted procedures for collecting and preserving social media in the event of an information request. According to Deborah Baron, CEO Nuix North America, social media is to e-discovery today what email was before 2006 – viewed as not worthy of consideration, a quagmire of unknown cost and risk. “Legal teams avoided email like the plague until seminal rulings and case law with spoliation sanctions and adverse inference judgments jolted organizations into action,” she says. “The evolution of email from infrequent discovery to common practice began with government rules for retention and production in regulated industries. Violation of the rules led to court battles, and the rest is history. By comparison, rules regarding retention of social media were introduced in January 2010. In 2013, a ‘sweep’ letter was issued, which provides for periodic spot checking for compliance with the rules. Will history repeat itself? Who would volunteer to be the test case?” According to Leonard Deutchman, general counsel and vice-president of LDiscovery LLC, businesses are lagging

in respect to their own social media largely because they have yet to be placed in an untenable legal position because they didn’t institute procedures. “In respect to personal social media used by their employees,” he says, “several states have passed laws prohibiting employers or potential employers from compelling employees or applicants to provide login credentials to their personal social media accounts. That means there is no easy way to deal with those uses of social media.” Deutchman points out that social media does not lend itself to collection and preservation as naturally as emails and

e-docs. “People don’t think of preserving it, any more than they think of ‘preserving’ their old clothes when they buy new clothes. And because the data is on the social media provider’s site, it is not easy to preserve. Typically, a digital forensics expert is brought in to do it, which means out of pocket expense.” “We have policies related to social media,” says Doug Grawe, of Advantage Management Corporation, who serves as in house counsel for the Dart Network of Companies, a mid-size organization that includes Dart Transit, a trucking company. “Fortunately we haven’t needed to collect from our own social media in respect to litigation, but we have collected it from opponents in litigation many times.” Dart Networks has not held formal training sessions yet, but it has had informal discussions with people charged with collecting documents and data in the event of a litigation hold. “We’ve experienced litigation involving employee use of social media,” says Allison L. Brecher, Senior Litigation Counsel and Director of Information Management & Strategy at Marsh & McLennan, a Fortune 200 company. Brecher declined to discuss the specifics of the litigation, but says her company has a written policy regarding the preservation of records related to litigation, which includes social media and many

What is your organization’s policy for how long it will archive electronic records? There is a specific expiration period Our policy also applies to social media

Forever

There is no policy yet

I am unaware of such a policy

67.6% 12.2% 11.2% 9.6% 4.8%

TODAY’S GENER AL COUNSEL FEB/ MAR 2014

TGC Surveys

What are the biggest e-discovery challenges your organization is facing today?

60.1%

Cost and review analysis Cost of preserving and managing e-matter

54.8%

Compliance with preserving, managing e-matter

48.9% 46.8%

The need to educate Privacy and risk issues in dealing with sensitive info

37.2%

The need to simplify the process

36.2% 34.6%

Collection needs to be made easier Predictive coding and concept searching

15.4%

Coming to agreement internally regarding who’s in charge

13.8% 33

other record types. “We have held numerous training sessions internally and for our outside counsel,” says Brecher. CODING REQUIRES SENIOR ATTORNEY HOURS

Only 28 percent of survey respondents reported that their organizations had adopted predictive coding software, but there is a clear trend for larger departments to make use of that technology with greater frequency (44 percent) than medium (30 percent) or small departments (19 percent). Slow adoption of predictive coding may reflect the fact that the technique requires significant time on the part of one or more senior attorneys to “teach” the case to the computer. Predictive coding is a technology-assisted review method that classifies a large set of documents based on decisions made by attorneys who review and code a smaller sub-set of documents for relevance. In their article in the April/May 2013 issue of Today’s General Counsel, Fernando A. Bohorquez Jr. and Alberto Rodriguez of the BakerHostetler firm noted that it is imperative that the attorneys most knowledgeable about the

case be involved from the beginning of the predictive coding review, meaning that senior associates or even partners have to do the document review and train the system. The process cannot be delegated. “The fact that a higher paid attorney will be doing the review for predictive coding should not deter anyone from

using it, for two reasons,” says Deutchman. “First, it is more likely that a senior associate would be doing the reviewing, rather than a partner. It requires an attorney who knows the facts of the matter in great detail, and that most likely will be the senior associate working with the partner. Second, even if the partner reviews the senior associate’s

Does your organization have a written policy and procedure for the collection and preservation of . . . electronic information?

social media?

Don’t know 2%

Other 5%

Other 6%

No 19%

Yes 27%

Don’t Know 11%

Yes

73%

57%

FEB/ MAR 2014 TODAY’S GENER AL COUNSEL

TGC Surveys

results, the cost in billing coupled with the cost of using the predictive coding app should pale in comparison to the cost of having attorneys review all of the documents.” Deutchman believes that as people become comfortable with predictive coding, it will be used more frequently in middle-sized and big ticket cases, but it may not be cost efficient in smaller cases. “We have not used predictive coding thus far,” says Grawe, of Dart Networks. “Our discovery is generally related to performance data, and not to e-mails, contracts, or other types of data that might be found in typical civil business litigation. From what I’ve read about predictive coding, it seems like it would be beneficial in at least some circumstances. We do find ourselves responding to more data requests, more detailed

Has your organization adopted predictive coding software yet?

data requests, and in my opinion some absurd data requests.” Pressed on what kind of requests he considered “absurd,” Grawe replied: My frustration is with the request for ‘any and all’ data we have, without a caveat for relevance. They just request any and all data related to performance of our company or our equipment. “Once we get something like that, as you would imagine, the litigation takes on a much more contentious tone. There are portions of the plaintiff’s bar putting on seminars and putting together play books on how to attack trucking companies. We are starting to see the same discovery requests, and they’re right out of the play book. It typically has the plaintiff’s lawyer sending out a preservation letter right away, with 50 or so requests/ instructions for preservation, not

including sub-parts. Those kind of requests used to have 10-15 requests/ instructions.” The survey showed a clear trend of legal department responsibility for most aspects of the e-discovery process, including identification of relevant information, compliance monitoring, cost and risk analysis, culling and analysis, and review and production. Data reservation and collection is generally the purview of the IT department. Outside vendors are frequently responsible for data culling and analysis, as well as review and production, especially in larger legal departments. Litigation was identified as the primary type of e-discovery request, according to 85 percent of respondents. HR/employment and intellectual property suits were the most common, followed by product liability. ■

What is the most pressing thing that needs to be changed or resolved about e-discovery?

28.5%

Scope

26.8%

Costs

Yes

27.7% No

72.3%

24.4%

Consensus

7.3%

Clarity

5.7%

Improved Technology N/A Quality Control

4.9% 0.8%

TODAY’S GENER AL COUNSEL FEB/ MAR 2014

TGC Surveys

What is the primary type of e-discovery request your organization receives? Gov’t Inquiries & Investigations 8.5%

Other 6.4%

Litigation

85.1%

Who is responsible? Usually it’s the Legal Department 100%

Legal Dept.

IT Dept.

Dept. responding to request

Outside vendor

90% 80% 70%

60% 50% 40% 30% 20% 10% lle D ct at io a n co

ris C k os an t al an ys d is Pr es er va tio n

C m om on pl ito ian rin ce g

lli an ng al an ys d is

di re sco qu ve es ry ts Id en in of r tific fo el at rm ev io at an n io t n Re pr vie od w uc an tio d n

E-

0% lH

here was a clear trend showing that the legal department was responsible for most aspects of the e-discovery process, in the majority of organizations. Those include e-discovery requests, identification of relevant information, legal holds, compliance monitoring, cost and risk analysis, culling and analysis, and review and production. However, when it came to data preservation and data collection, the IT department was more frequently responsible. About two-thirds of respondents reported that their organization had a specific expiration period that determined how long electronic records would be archived. Many respondents chose to add a qualifier: that expiration dates were based on the type of record or other factors. There was a solid trend showing that outside vendors were frequently responsible for data culling and analysis, as well as review and production, especially in larger legal departments. Another solid trend showed that the department responding to the request was often responsible for the preservation of electronic records. E-discovery related to litigation was by far the most prevalent kind of request, according to 85 percent of respondents. Of those requests, the most frequent related to HR/employment and intellectual property, followed by product liability. The majority of respondents reported that the biggest e-discovery challenges their organizations face have to do with cost review and analysis (60 percent), and the cost of preserving and managing e-matter (55 percent). Respondents from small and mid-size organizations indicated more concern

Summary of Survey Findings

E-Discovery Trends 2014

with the need to educate than respondents from larger organizations. Asked in an open-ended question to describe what is the most pressing thing that needs to be changed or resolved about e-discovery, a significant percentage of respondents mentioned the scope (29 percent), the costs (27 percent), and the need for consensus about standards and rules (24 percent). When asked to mention which companies they used for e-discovery, the 188 respondents mentioned 110 different companies. There were no clear leaders, but the most frequently mentioned were Symantec (14 percent), Guidance Software (12 percent), and Kroll Ontrack (11 percent). ■

What are the chief concerns? Sometimes it depends on the size of the organization. 70% 60% 50% 40% 30% 20% 10% 0%

1 to 99 employees

100 to 499 employees

500 to 4,999 employees

5,000 to 10,000 employees

Cost of preserving, managing e-matter Compliance with preserving, managing e-matter The need to educate

feb/ mar 2014 today’s gener al counsel

Intellectual Property

Alternative Damages Theories in Patent Cases By Christopher M. Scharff

company may suspect that one of its biggest competitors is infringing one of its patents. The company may investigate and determine that the competitor does clearly infringe, and that the patent is very likely to withstand any validity challenges. But then the company must always ask, is it worth going after the competitor? Today even a simple patent infringement lawsuit can cost millions of dollars to litigate. When companies try to answer that question, often they simply focus on the competitor’s sales of the infringing product, their own lost profits or lost market share, or the value of an injunction. That’s because the most common type of damages award in a patent case is a straightforward royalty based on sales of infringing products sold. For example, recent patent cases making headlines include the $48.5 million in damages awarded to Enzo Biochem (six percent reasonable royalty rate on infringing sales) or the $115 million in damages awarded to Syntrix Systems (also a six percent reasonable royalty rate). In these types of cases, if the infringer is selling tens of millions of dollars per year of infringing product, the decision to enforce the patent can be an easy one. But what can a company do if a competitor is simply giving away infringing product free or for minimal cost as a loss-leader for other products? What if the competitor is only using the patented invention to improve the efficiency of its manufacturing process, but does not actually sell a product covered by the patent? In these situations there is no straightforward royalty or lost profit calculation. Is the company holding the patent powerless? USE-BASED DAMAGES

The answer is no. There are in fact alternative damages theories that have been applied by the courts over the

years. It is important that the patentholding company know that these options exist, and that their applicability is discussed with counsel. The Patent Statute itself does not tie royalty rates to an infringer’s sales or profits, and does not provide for any specific amount or percentage of damages. Rather, the Patent Statute (35 U.S.C. § 284) only provides that: “Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.” The Court of Appeals for the Federal Circuit (which hears patent appeals) has long held that there is no rule that a royalty can’t be higher than the infringer’s

net profit margin. Even if the infringer is making no profit whatsoever directly attributable to the infringement, the patent holder may still be improperly benefitting by infringing the patent, and must compensate the patent holder accordingly. In 1999, a case in the Northern District of Ohio, Acromed Corp. v. Sofamor Danek Group, presented a situation where an accused infringer was giving away infringing product free to “enhance goodwill” with customers, which presumably would result in higher overall sales. The court in that case recognized that: “Giving away a product is still a business decision and was almost certainly a calculated move to enhance Danek’s goodwill before Danek was enjoined from either selling or giving away the product.” The court therefore awarded damages of $324,777

today’s gener al counsel feb/ mar 2014

Intellectual Property for products the infringer gave away, in addition to damages for sold products. Then in 2003, in Micro Chem. Inc. v. Lextron, Inc., the Federal Circuit heard an appeal involving an infringing product that was given away by the defendant to its customers as a “loss leader.” The court recognized that the defendant had been giving away infringing animal feed systems in order to encourage customers to buy its nonpatented animal feed products, and it affirmed the jury’s verdict awarding damages of $400 per month per system against Lextron, which amounted to $1.5 million. The court recognized that it was proper to assess a high royalty on the feed systems in view of the ancillary value the infringing product gave in selling non-patented feed products. The court pointed out that the wellrecognized Georgia Pacific factors for determining a patent royalty include a consideration of “the effect of selling the patented specialty in promoting sales of other products of the [infringer],” even if the patented product is not sold at all. This damage award stood in stark contrast to the theory presented by Lextron, which had argued that damages should have been only $12,717, based on a royalty of “imputed revenue” for the infringing feed system. In other words, the court looked at the real benefit the patented technology gave to the infringer, and required compensation accordingly. In any “loss leader” situation, therefore, both the patent holder and a potential defendant should be aware of this legal authority. The patent holder need not throw up its hands in defeat if a competitor is giving away infringing product for free, and a competitor company should not simply assume that its loss leader actions are immune from patent damages. INDIRECT VALUE

The expansive compensation policy behind the patent statute also has other applications. Again, the patent statute requires compensation to the patent holder “for the use made of the invention by the infringer.” Imagine, for example, a patent on a new gear for a manufacturing machine. The gear may only cost $10 to make and install, but putting that gear into

the manufacturing machine may allow the machine to be run at a much higher speed, allowing more product to be made at a cheaper price. Is the patent holder limited to a royalty on the $10 cost of the gear? The courts have addressed this question as well, and have again held that the patent holder is entitled to compensation for the benefit provided by the patent, not just a royalty on profits.The most on-point decision is the Federal Circuit’s 2011 decision in Powell v. Home Depot U.S.A., Inc. In that case, Powell was an individual who had been working with Home Depot on the installation and repair of radial saws used to cut lumber at the Home Depot stores. As the Federal Circuit’s decision describes, Home Depot took note around 2004 of an “alarming trend” – its employees were suffering serious injuries while operating radial saws to cut lumber for customers. Employee injury claims alone had cost the company nearly $800,000. Home Depot’s competitors, however, offered cut lumber, and Home Depot feared that if it discontinued cutting lumber it would not only lose those sales, but sales in other related departments as well. In response, Powell came up with a new saw guard apparatus in 2004, which he presented to Home Depot, and for which he obtained a patent. Instead of purchasing Powell’s saw guard apparatus, however, Home Depot contacted another company to build and install saw guards. After a fourteen-day jury trial, Home Depot was found to have willfully infringed Powell’s patent. One of the issues that the parties hotly contested, therefore, was the proper amount of damages. Home Depot argued that the damages should be a 3-5 percent royalty on the $1,295 per unit that it paid the third party for the infringing saw guards, which would have amounted to a total damages award of less than $1.3 million. Powell, however, pointed to the amount that Home Depot spent to replace saws that were incompatible with the new saw guards ($8,500 per unit), the money Home Depot had lost due to employee injuries before the saw guards were installed, and the sales that Home Depot avoided losing if it were forced to stop using radial saws. Powell argued that the royalty should be more than just a percent-

age of the cost of installing saw guards. The court agreed with Powell and affirmed a jury award of $7,000 per unit, amounting to $15 million dollars. The court stated that: “We have held that when considering the amount of a use-based reasonable royalty adequate to compensate for the infringement ... a jury may consider not only the benefit to the patentee in licensing the technology, but also the value of the benefit conferred to the infringer by use of the patented technology. Thus, it was proper for the jury to consider Mr. Powell’s evidence regarding Home Depot’s desire to keep its radial arm saws to maintain a competitive advantage over other home improvement stores that did not offer custom-cut lumber services, and protect its profits from sales of goods often sold in conjunction with custom-cut lumber.” The court recognized that the “reasonable royalty for the use made of the invention by the infringer” could be well in excess of any direct cost or profit directly attributable to the infringing product. This case therefore again illustrates the pitfalls in focusing too much on profits and sales in ascertaining patent damages, while ignoring the true value conferred on an infringer by its infringement. In conclusion, any company that is investigating possible patent infringement by a competitor, or has concerns about its own exposure to patent liability, should consider use-based patent damages rather than just a traditional sales-based royalty. In addition, IP licensing executives and counsel should also consider the indirect value of a patent in negotiating licensing rates. At the end of the day, the goal of the patent laws is full compensation for use of a patent, not just a share in an infringer’s profits. ■

Christopher Scharff is a shareholder/ equity partner at McAndrews, Held & Malloy in Chicago. His practice includes intellectual property, antitrust and unfair competition litigation. cscharff@mcandrews-ip.com

feb/ mar 2014 todayâ&#x20AC;&#x2122;s Gener al counsel

Governance

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today’s Gener al counsel feb/ mar 2014

Governance

What’s Driving Today’s Merger Enforcement? By Jeffery M. Cross

ith several high profile mergers in the last couple of years challenged by the antitrust enforcement agencies, it’s a good time to consider what factors they are considering. Mergers and acquisitions are generally evaluated pursuant to Section 7 of the Clayton Act. This statute is forward-looking and asks whether the future effect of a merger or acquisition “may be substantially to lessen competition, or tend to create a monopoly.” Merger law, however, has been primarily shaped by the Department of Justice Antitrust Division and the Federal Trade Commission. The Supreme Court hasn’t issued a substantive merger decision since 1974. Court decisions are few because few merger cases are litigated to conclusion. For the fiscal year ending September 30, 2012, for example, 1,429 mergers were reported to the government pursuant to the Hart Scott Rodino Act. Only ten matters were challenged in court, and none were litigated to conclusion. Most mergers are resolved by either consent decrees or the parties abandoning the mergers. Given the fact that merger analysis is primarily shaped by the enforcement agencies, what are their guideposts? The agencies have released guidelines. The Department of Justice issued its first guidelines in 1968. These were revised in 1982 and 1984. And in 1992, the Department of Justice and the Federal Trade Commission issued joint guidelines for horizontal mergers. In 1997, the joint guidelines were revised to address efficiencies. In 2006, the agencies published commentary to the guidelines. Then, in 2010, the agencies issued new guidelines.

THE HYPOTHETICAL MONOPOLIST

Prior to the 2010 horizontal merger guidelines, the primary predictor of future anti-competitive effect was

“market structure.” The guidelines reflected what was called the “structureconduct-performance paradigm.” Market structure, consisting of the number and relative size of competitors, was deemed an appropriate predictor of future anti-competitive effects. To determine market structure, the relevant market had to be defined and then market shares determined. To determine the relevant market, a test known as the “hypothetical monopolist” test was used. A product was identified and then the agencies considered the substitutes that consumers would turn to in response to a small but significant non-transitory increase in price (also called the “SSNIP” test). The agencies frequently used a hypothetical price increase of five to ten percent. If consumers turned to another product in response to this hypothetical price increase, that product was included in the market. This process continued until consumers did not substitute any additional products in response to the SSNIP. A hypothetical company that controlled all of the products that were substitutes was a “hypothetical monopolist.” This same process was applied to determine both the relevant product and geographic markets. Once the relevant markets were determined, market shares were calculated. In the early days of merger enforcement, the government looked at four-firm and eight-firm concentration ratios. More recently, the agencies have used the Herfindahl-Hirschman Index (HHI), which is the sum of the squares of the market shares. This index is used to reflect the competitive significance of large companies. A market with one large company with 80 percent of the market and four small companies with each only five percent of the market each will have a much higher HHI (6500) compared, for example, to five companies each with

20 percent of the market (2000). The agencies use the size of the post-merger HHI as well as the change in HHI from pre-merger to post-merger to predict future anti-competitive effects. The 1992 horizontal merger guidelines remained unchanged for seventeen years. The agencies, however, began to use other tools to predict future anticompetitive effects. This anomaly between the guidelines and actual practice led to criticism of the agencies by the bar and business leaders. In addition, it resulted in some significant court losses for the government. Although the guidelines are not binding on the courts, many used them as persuasive guideposts for the application of Section 7 of the Clayton Act. The courts, therefore, were applying the 1992 guidelines, but the government was asserting a different analysis. UNILATERAL COMPETITIVE EFFECTS THEORY

In 2010, the DOJ and FTC substantially revised the horizontal merger guidelines. The 2010 guidelines downplayed the role of market structure as a predictor of future anti-competitive effects. Instead, the new guidelines emphasize a theory known as unilateral competitive effects. This theory was applied to both homogeneous products and differentiated products. Because the latter are much more common, the theory of unilateral competitive effects for differentiated products has become a key focus of merger enforcement. This is borne out by studies of consent decrees entered into by the merging parties and the government as well as closing statements for mergers that the agencies issue after deciding not to challenge a merger. The importance of the unilateral competitive effects theory for differentiated products is also continued on page 43

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Governance

Protecting Against Political Risk in Overseas Ventures Map Your Strategy Before You Call Your Insurance Broker By Iain Donald

ompanies with cross-border interests have always grappled with the challenge of making their enterprises resilient to the policies and whims of foreign governments. Political risk is not new, but interconnectedness, fast-paced economic change and international complexity are changing its contours, especially for U.S. companies. Almost half of the U.S. executives who participated in Control Risks’ recent survey on international business attitudes toward corruption named political risk as one of their top two concerns, while only 25 percent of the larger global executive pool ranked it so high. What explains this discrepancy? Are U.S. businesses asymmetrically affected by political risks? Have domestic commercial interests been particularly disadvantaged by the actions of governments or other authorities in recent years, or is this primarily an issue of perception?

In recent years international companies have indeed experienced high-profile expropriations, cancellations of operating licenses and instances of contract frustration by host governments. A wave of resource nationalism in certain regions has also changed the commercial landscape for foreign investors. But it is difficult to objectively discern any targeting or even an implicit general trend of disadvantage to U.S. companies in particular. MORE INVESTMENT, MORE RISK

Recent examples from Latin America make the point. The suspension of South American Silver’s operating license in Bolivia (and the subsequent expropriation) impacted a Canadian mining company, and the Argentinian government’s expropriation of a 51 percent private stake in the national oil company YPF caused an estimated $10bn loss for Spain’s largest oil company. In the latter case, the investment environment in Argentina has actually

led to an American oil giant – Chevron – leading the charge for investment into the giant Vaca Muerta unconventional field in the Nequen basin. Interestingly, out of the 178 cases pending with the International Centre for Settlement of Investment Disputes (ICSID) when this article was written, only 30 involved U.S.-headquartered companies. Heightened awareness on the part of U.S. executives likely derives from the fact that there is simply more investment to be impacted: the OECD estimates the U.S. share of foreign direct investment from the so-called “rich world club” for the last quarter of 2013 at $95.5bn of a total $154.9bn. Timing is also likely to have played a role in forming attitudes. The Control Risks survey came in a period of domestic political uncertainty, culminating with November’s partial government shutdown. Under these circumstances, it’s not inconceivable that respondents would broaden the conventional definition of political

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Governance

risk – often associated with emerging or frontier markets – to something a little closer to home. Dollar for dollar, at a global level, political risk impacts companies of all nationalities, largely without prejudice. Thus the more pressing question is: “How can the most dynamic international businesses make their enterprises resilient against physical and economic force?” The answer lies in individual exposures and local dynamics, and most importantly the effective application of influence. At the country level the nationality of the impacted investor may be a factor, but this geopolitical component is likely to play only a bit part in the face of unconventional economic policy, local social pressures, local and national stakeholder interests, complex political dynamics at a variety of levels, and factors related to the attractiveness

of an industry or the effectiveness of the business itself, often tied in with a measure of corruption. The first step in protecting an international enterprise from political risks is to assess them. Nowadays most companies that demonstrate good corporate governance in other areas have built some assessment of country risk into their investment process. Indeed, this good governance may help explain the risk-awareness of the executives involved in the Control Risk survey. The best of them have developed a phased risk assessment and due diligence process that maps the investment life cycle and risk ownership, and ensures that the growth of the business is complemented by appropriate risk oversight. In addition to a range of other benefits, this tends to help avoid costly and time-consuming forays into

the unforeseen and exotic that never sit well with shareholders or the board. Few organizations, however, systematically build an analysis of the “micro” or local factors into their evaluation of political risk exposure. The exposure of one company is often quite different from that of another in the same industry and in the same country. While case studies are useful and companies can learn from each other’s experiences, the complexity of how each company’s profile and strategy interact with the specific local environment demands a more personalized view. MITIGATE BEFORE YOU INSURE

Insurance is an exceptionally useful tool. The brokers at Lloyds, for example, have honed their products over 325 years, and can present an array of sophisticated approaches to protecting international

Perceived risks in doing Business overseas Risks associated with ensuring the smooth running of the business (e.g. demands for bribes from customs, police officers, tax inspectors)

58% 54% 52%

Risks associated with the company’s relationship with third parties (e.g. commercial agents, consultants)

41% 29%

Risks associated with winning business (e.g. demands for bribes to secure contracts)

34% 25%

Risks associated with doing business in particular countries

45% 12%

Risks associated with business partners (e.g. joint venture partners, politically exposed persons)

11%

KEY

total

u.s.

feb/ mar 2014 today’s Gener al counsel

Governance

businesses against political perils. But insurance indemnifies only against financial loss (a reimbursement after a deductible, the size of which is tied to the complexity of each case) and cannot compensate for brand damage, loss of shareholder value and the wasted time at all levels of the organization that large political risk events tend to generate. There are supplementary risk mitigation options that bear exploring first. The prospect of protecting against the monolith of government power can be bewildering, but embrace it. Remember, it’s impossible to eliminate downside risk, and more important, without taking risk no business would generate impressive value. Nevertheless, the general absence of coordinated political risk strategies across all levels of international business reflects an implicit assumption that no practical measures can be taken to control these perils. Not true. The focus has to shift, however, to influence strategies, rather than notions of dominance and control. A company can to a certain degree control its supply chain, and to a more limited degree it can control its brand image. It cannot control a government. However, most international businesses are well-positioned to exert influence in a variety of ways. A practical mitigation strategy simply requires a coordinated effort, and here’s a guide:

Create a power map. All businesses exist within a web of different and often competing influences. In many emerging or frontier markets the declared or “public” power dynamics tell only a fraction of the story and are influenced by cultural factors (involving clans, tribes, religion or ethnicity, for example), or various undeclared interests. Map the key influencers in the political structure, national and local, the regulatory system, the unions, social groups and beyond. Who wields the most power on particular issues like taxation, local content or access to foreign exchange? What motivates them?

Map relationships. The company may have strong relationships with some significant players, but others may

be unknown or underappreciated. Often the companies faring best in situations of political change are those that built productive relationships at multiple levels, and at all points on the political spectrum.

it can identify the warning signals and plan to scale resources and investment exposure as a situation worsens.

In most international businesses, many of these actions are already part of the responsibilities of the strategy group, the government affairs team, the corporate communications department, the corporate social responsibility group, or security, risk and compliance. By combining approaches to address diverse issues – from local media impact to social issues, environmental impact, changing legislation, security threats and lobbying concerns – the organization can prepare itself to be nimble and influence its political environment. However, the flip side is also true: Uncoordinated activities threaten to work against each other. Stories of security operations derailing painstakingly-prepared community programs, or ill-advised local stakeholder engagement initiatives unrealistically raising expectations and confounding contract negotiations with the host government, are not uncommon. There is no total solution, but with better visibility on the fundamental dynamics and a practical risk mitigation strategy, the conversation with the insurance market can take a different tack, and coverage can be aligned more closely to the un-managed portion of the risk. The practice of assessing risks, evaluating key stakeholder relationships and implementing a management strategy throughout an investment life cycle drives productive discussions about premiums, even in the hardest markets. ■

Assess social impacts and mitigate them. While aggressive and unwarranted government action does occur “out of the blue,” many political risk events arise within a context of a groundswell of public opinion. All governments – even the most autocratic – speak to a domestic constituency. When companies are singled out for attention it is often because grievance has been left to fester. The easiest way to avoid this is to develop a clear idea of the social impacts of the enterprise and put a plan in place to address them. In addition to the ethical and best-practice benefits, examining your organization’s social footprint can support a positive local reputation, lower or eliminate negative media attention, and foster strong and useful communications with the powers that be.

Plan holistically, and with a long view. By assessing risks and working through the above activities in advance of proposed business changes, it is possible to plan growth and evolution in a way that is harmonious with the investment environment. By recognizing the importance of the organization’s interaction with its host community and its dialogue with government, a variety of programs that often exist separately (e.g. lobbying, compliance, sustainability) can be developed in tandem in order to take advantage of synergies.

Plan for the worst. The most serious political risks tend to be low- likelihood but high-impact events. The most adventurous organizations are likely to experience some form of costly and very time-consuming political development somewhere in a ten-year time frame, as well as concurrent and ongoing “annoyances.” While the most serious political risk events do tend to be “existential” risks in a given market, this does not mean they have to equal a total loss (in insurance terms). If the organization understands the business environment,

MAKE RISK MANAGEMENT ENTERPRISE-WIDE

Iain Donald is Senior Vice President, Global Risk Analysis for Control Risks, a global risk consultancy that specializes in helping organizations manage political, integrity and security risks in complex and hostile environments. iain.donald@controlrisks.com

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Governance

Merger Enforcement continued from page 39

borne out by a recent study of FTC staff memos seeking approval for requests for additional information from the merging parties (so-called “Second Requests”). Initially, it is important to note that the 2010 horizontal merger guidelines specifically state that “[t]he unifying theme of [the] Guidelines is that mergers should not be permitted to create, enhance, or entrench market power or to facilitate its exercise.”

sloping demand curves. So if the acquiring company raises price, it can expect to see some of its customers seek substitutes. In the cereal example, let’s suppose Company A, which makes corn flakes, seeks to acquire Company B, which makes toasted wheat cereal. If Company A were to raise its price of corn flakes after the merger, some percentage of customers would substitute shredded wheat, others toasted oats and others a rice cereal. The question is whether a sufficient number of customers would substitute the toasted wheat cereal formerly owned by Company B so that the number of customers divest-

Market power is the ability to raise prices or reduce output without losing so much market share that the price increase is unprofitable. What is “market power?” To an economist, market power is the ability to raise prices or reduce output without losing so much market share that the price increase is unprofitable. This is a fundamental concept at the heart of the unilateral competitive effects theory for differentiated products. Most goods are “differentiated products.” This means that they vary in many ways, including color, shape and other features. Breakfast cereal is a classic example of differentiated products. Breakfast cereals vary in terms of texture, shape, basic ingredients, sugar coating and many other aspects. Consumer demand for breakfast cereals also varies, some preferring corn flakes, others shredded wheat or toasted oats, and others sugar coated cereals with or without colored marshmallows. The theory behind unilateral competitive effects is that a merger between two differentiated products will allow the merged party to exercise market power because consumers view the acquired product to be a close substitute for the acquiring product. Basic economics tells us that any increase in price will lead to a loss of customers. Most producers face downward

ing to the acquired product combined with its margin would make the corn flakes price-increase profitable. A price increase that is profitable in this way is by definition an exercise of market power. The 2010 horizontal merger guidelines expressly state that the agencies may apply such an analysis without actually determining a relevant market and calculating market shares. This is because the hypothetical monopolist test and its application of a hypothetical SSNIP are imprecise and subject to possible manipulation. VARIETY OF GOVERNMENT TOOLS

In many respects, the tests are interrelated. After all, the hypothetical monopolist test used to define a relevant market is essentially asking about the diversion of consumers from one product to another as a result of a price increase. How do the agencies determine the diversion and profit margins necessary to apply the theory of unilateral competitive effects for differentiated products? In some instances, there may be actual historical events where prices were increased and the substitution to other products can be observed. Such historical events are called “natural experiments.”

Another type of evidence the agencies will employ are so-called win/loss data where a company will record what its price was and whether it won sales or lost sales. Another type of evidence is internal company documents that reflect how the company makes pricing decisions. The agencies also employ a variety of econometric tools to determine if a merger of differentiated products will enable the merged entity to exercise market power. One such tool is known as the “gross upward pricing pressure index,” or GUPPI. This measures the diversion ratios and the margins for the diverted products. It also provides a credit for hypothetical efficiencies. It involves the use of first order differential calculus and generally requires the assistance of an economist. Another tool is merger simulation, which takes into account the elasticities of demand and applies principles of linear algebra to determine the profitability of a merger under certain scenarios. A company considering a merger is likely to want to employ all of these tools, including determining market definition and market shares to calculate HHIs. In addition, it behooves a company considering a merger to undertake a careful review of its internal documents to make sure they do not contradict otherwise pro-competitive evidence in support of the merger. The bottom line is that the governmental agencies have much flexibility in analyzing the potential future anticompetitive effects of a merger, and merging companies need to be prepared to respond to this flexibility. ■

Jeffery Cross is a partner at Freeborn & Peters LLP. A litigator and member of the antitrust and trade regulation group, he has extensive trial experience representing corporations and businesses in the areas of antitrust, securities fraud, contract, real estate, environmental regulations, libel and slander, false advertising, commercial code and trade regulation. jcross@freeborn.com

feb/ mar 2014 today’s gener al counsel

Cheap, Simple and USefUl metriCS from YoUr own finanCe department by rees morrison Colum n

rees Morrison is an attorney and the founder of General Counsel Metrics, LLC. Based in Princeton, NJ, he has for the past 25 years consulted solely to law departments on a wide range of management challenges. He coordinates the largest law-department benchmarking database and analysis ever conducted, with more than 1000 participants. rees@reesmorrison.com

or HR, the number of employees in the unit. For example, sometimes it is revealing to match how much you have paid in legal fees for every hundred employees of a client. This calculation gives you an indication of the legal “intensity” of your various clients. Client satisfaction ratings. If you have conducted a formal client satisfaction study, you have available another set of data. Add a column in your spreadsheet so that each client row has the overall rating your department received from that client. Then, compare that rating to what you spent outside. You might detect a pattern of spending more outside when your clients inside are less satisfied with your internal resources.

Experience of lawyers. Almost always, one or two lawyers in the department account for the bulk of the invoices handled. What is important about that typical situation is that training and tools should be directed at those key lawyers. Also, you may detect a pattern that suggests that more junior lawyers turn to outside counsel more often than experienced lawyers. Or the opposite. The graph shows a hypothetical law department where five lawyers handled from one to 15 invoices; the next five moving up the curve from the lower left handled 15 to 30 invoices! At the other extreme, one lawyer had to review 275 invoices, only a few more than the next busiest with about 252 invoices. ■

nuMber of invoices subMit ted to each of 19 in-house l aw yers

reorder ( var 1) freq

ost law departments rely on reports from their accounts payable group to know what they have spent on outside counsel. The A/P reports tell them amounts spent by invoice paid, and therefore when aggregated by law firm, client and date, as well. That is the minimum information available from A/P, and it might well be what the law department keeps on its own spreadsheet. The quality of the A/P data, the speed with which it is available, the flexibility of presentation, all fall far short of what a licensed matter management system can provide, but then again, it’s free. The finance group can export its data in spreadsheet format. With that in hand, it is possible for the law department to add a range of additional information. Let’s consider four pieces of incremental information and some insights they can provide. Size of law firm. You can readily find out the number of lawyers in each firm that you pay. If you add that data to your spreadsheet, you can calculate how the size of a firm corresponds to its overall billing rate or how much you use it. Number of client employees. You can also add for each client, be it a business unit or a staff unit such as Finance, IT,

100

125

150

175

200

2 25

250

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The 2014 Spring Meeting is a “Must-Attend” meeting for lawyers with a practice or interest in international legal issues WHAT WILL ATTENDANCE AT THE SPRING MEETING OFFER YOU? • Over 70 substantive concurrent continuing legal education sessions with world-class speakers • Cutting edge programming on the latest international legal and ethics issues • Networking opportunities with counterparts, decision makers and potential clients from around the world who are active in international practice areas • An entire year’s worth of CLE credits • Special programming for young lawyers, law students, and legal educators

OUTSTANDING NETWORKING OPPORTUNITIES! • Tuesday, Welcome Reception at the Waldorf Astoria • Wednesday, Special Reception at the New York Stock Exchange and Opening Reception at Cipriani Wall Street • Thursday, Reception at the USS Intrepid • Friday, Chair’s Closing Reception at the Waldorf Astoria

LEARN, NETWORK, PARTICIPATE • Learn the latest from top experts and receive information that is relevant to you in your international law practice area • Network with the best and brightest international lawyers throughout the meeting particularly at our twice daily networking breaks, evening events and ticketed luncheons • Participate in specialized meetings with colleagues who share your areas of interest by attending committee working business meetings, division breakfasts and committee dinners • Visit exhibitors of dynamic products and services for the legal profession

Join us at the crossroads of the world for a spectacular SPRING Meeting!

For more information and to register, please visit ambar.org/ilSpring2014

E motions Run HigH WHEn in-HousE CounsEl is DEposED By Bradley J. Betlach his article examines the psychological effect on in-house counsel who are placed in the witness chair, as well as the interpersonal dynamics that develop between in-house lawyers and their outside counsel in that situation. By better understanding the power shift and emotions at play, in-house counsel can successfully navigate the deposition with reputation, relationships and sanity intact.

feb/ mar 2014 today’s gener al counsel

The psychological dynamic that occurs when a person is thrust into a lawsuit is known as litigation stress syndrome. It is characterized by self-doubt, fear, anger, helplessness, and unrealistic expectations. These feelings are exacerbated and acute when the lawsuit’s allegations focus negatively on in-house counsel’s advice and/or work product. They take a toll on personal and professional life. Relationships with family, friends, colleagues and staff may fray. Job performance and quality of life may suffer. In-house counsel may feel a loss of control over all aspects of life, not just work. Self-doubt manifests itself when inside counsel begin to question their own legal advice, or how their work product has resulted in the litigation, even if the allegations are without merit. Fear and anxiety surface when in-house counsel senses that their personal and professional reputation, and maybe even their job, is at stake, particularly where the real or imagined threat of institutional harm is great. Anger can be directed at a variety of sources, including opposing counsel, outside counsel who “failed” to protect against the deposition,

Feelings oF anxiety and anger are exacerbated when the lawsuit’s allegations Focus negatively on in-house counsel’s advice and/or work product.

the judge that allowed it or others within the corporation or legal department whom in-house counsel believes are responsible for the predicament. These emotions are heightened when inhouse counsel feels helpless or takes on unrealistic expectations, such as a belief that they can win or lose the case through their deposition. It is important that inside counsel understand factors that increase the deposition’s emotional impact, starting with role reversal and ambiguity. In-house counsel is accustomed to calling the shots. Outside counsel typically accepts this power dynamic and responds accordingly. But when in-house counsel’s deposition is noticed, these traditional roles become ambiguous. In some circumstances, they are reversed. What had been a team with defined roles and expectations breaks down and transforms, diminishing its clarity and function. Outside counsel, in preparing for the deposition, must ask tough questions, point out weaknesses, and perhaps criticize in-house counsel’s style, position, thought processes or actions. This transformation of duties and responsibilities is obviously fraught, particularly where the stakes are high for all involved. During the deposition itself, in-house counsel will likely experience “spectating,” a tendency to watch and analyze the deposition as it transpires. Spectating occurs when inhouse counsel refuses, or is simply unable, to take off the lawyer’s hat and focus exclusively on providing responsive and succinct answers. It is detrimental to a successful deposition, whether it manifests as stifling the desire to object, becoming overly concerned with trickery, analyzing how answers might affect the company’s theories or outcome of the case, or becoming preoccupied by and attempting to correct outside counsel’s perceived mistakes. How does in-house counsel successfully manage litigation stress syndrome and spectating? First, accept the inevitability of being a target of the litigation. Prepare for a prolonged and tiring ordeal by engaging in the process while maintaining a work-life balance. Focus on building resilience through self-care and self-awareness to counter stress. Second, build a seamless team early in the process and redefine the team as necessary, setting clear roles and responsibilities. This starts with appropriately pairing counsel. Outside counsel must have the respect of in-house counsel to be effective, and outside counsel must have both the experience and confidence to appropriately manage the relationship. This is particularly true during the

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO feb/ mar 2014

deposition itself, when inside counsel must focus solely on the role of witness. An inexperienced attorney is likely to be unprepared to handle this power dynamic, which will only increase in-house counselâ&#x20AC;&#x2122;s anxieties and challenges. Third, promote open and transparent communications. Discuss the emotional toll of the deposition, and the fact that these emotions are common and to be expected. Talk about the need for in-house counsel to relinquish the lead role to outside counsel for all deposition purposes, and the need for outside counsel to accept the lead. Define clear roles, expectations, duties and responsibilities for team members. Explore the problem of spectating and the best ways to prevent or alleviate it. Fourth, in-house counsel should allow outside counsel to determine how much and what kind of preparation is required. Do not let pride or other commitments prevent the acquisition of key deposition skills. Be willing to block out significant portions of time, to leave your office and its distractions behind, and to turn off the

phone once the session begins. Be willing to meet well in advance of the deposition so that there is sufficient time for any required followup. And then be willing to meet again on the eve of the deposition, and to listen and take to heart the repetitive advice of your outside counsel. Be candid about any personal, professional or emotional issues that could negatively impact your ability to adequately testify. Finally, in-house counsel must welcome constructive feedback during the deposition and gracefully accept a â&#x20AC;&#x153;woodsheddingâ&#x20AC;? if necessary. Outside counsel is in the best position to determine whether the deponent has become defensive, argumentative, non-responsive, grandiose, or withdrawn. In-house counsel must empower outside counsel to call out these behaviors with blunt honesty and assure that they will not be penalized for doing so. Although in-house counsel will rarely relish being deposed, understanding and acceptance of the emotional and psychological dynamics at play are critical to successfully weathering the experience. n

Bradley J. Betlach is a shareholder at the Minneapolis law firm, Nilan Johnson Lewis PA. He primarily defends insurance companies in litigation involving life, health and disability claims, including those alleging ERISA violations and bad faith. bbetlach@ nilanjohnson.com

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

A Program 50

For Building The Legal Operations Function By Jeffrey D. Paquin

eneral counsel and their law departments require a variety of operational services, legal services, and operational-legal hybrid services in areas such as outside counsel management, intellectual property operations and electronic discovery. These come under the banner of “law department operations.” Leading law departments are now focusing on building a centralized operation to manage those services in order to achieve goals such as departmental efficiency, cost reduction and risk mitigation. One simple way to think about law department operations is “everything a law department manages except the legal work itself.” While in-house counsel are experts at legal work, a law department is responsible for activities that are not optimally managed by counsel with day-to-day legal responsibilities. Some law

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO feb/ mar 2014

department operational activities are separate from pure legal work and some support that work. But what all of these operational activities have in common is that to be effective they rely on a process-oriented approach with welldefined objectives and typically require significant technology. The key to successful law department operations is to develop the right strategy and apply the right people, process and technology. This applies to the law department as a whole, and to each of the specific areas within the law department operations function, which may include the following: Overall Operations. Management and support of all legal department operational areas, including development and execution of the legal department mission statement and short and long-term strategic plans. This may involve liaising with other corporate functions. Legal department “value justification” analytics are useful for periodic reporting and other corporate-wide purposes. Legal Information Technology. Management and support for overall legal department technology strategy, processes and systems, and liaising with the corporate IT function. Managing Outside Counsel and Legal Service Providers. Includes initiatives such as convergence of firms and vendors (or other “preferred” programs), development of guidelines, administration of standardized rate request processes, management of matter budgets and other aspects of spend management, resource allocation planning and management, development of alternative fee arrangements, management of conflict-waiver request processes, the development and administration of counsel and vendor performance scorecards, RFP/ RFI program management, the development and management of e-auction processes, and similar programs. Often requires liaising with the corporate procurement function. Electronic Discovery and Data Management. Management and support for overall e-discovery and data management strategy, processes

and systems, including those related to litigation holds, collection, document review and production, and often working closely with the litigation group and liaising with the corporate IT and corporate records function. Intellectual Property Management Operations. Includes strategy, processes, and systems related to IP portfolio management, docketing, annuities, foreign filing, monitoring, searches, research and analytics, portfolio integration for acquisitions and segregation for divestitures. Litigation Portfolio Management. Strategy, processes, and systems related to litigation and dispute portfolio management, including management and support related to early warning systems, early case assessment, early case resolution and similar initiatives, often working closely with both the litigation group and corporate risk management.

Interplay Between Arbitration And The Courts By Bruce G. Paulsen and Jeffrey M. Dine

hen parties choose arbitration to resolve their dispute, they are not necessarily choosing

to keep it out of court. On the contrary, arbitration and litigation are intricately bound throughout the life of a dispute. Arbitration and the courts can interact by compelling parties and non-signatories to arbitrate; in the selection of arbitrators; in handling attachment, by way of interim measures, injunctions and in discovery; in confirmation or vacatur of the award; and

feb/ mar 2014 today’s gener al counsel

in judgment enforcement. The parties may find themselves in the courts of several states and in multiple federal districts, not to mention federal or state appeals. Arbitration and litigation create a complex topography, and navigating it requires understanding and strategy. Decisions made in one forum may have significant implications later in others. In-house counsel and outside arbitration or litigation counsel therefore need to consider tactical steps in light of their strategic goals. The conduct of the arbitration needs to take into account the requirements of the places where interim relief or recognition of the award may be sought, and the resulting judgment executed.

Arbitration and litigation create a complex topography. Decisions made in one forum may have significant implications later in others.

Bruce G. Paulsen is a partner at Seward & Kissel LLP. He handles complex commercial, maritime and international disputes, including public securities cases, bankruptcy, insurance, maritime finance and international sanctions compliance. paulsen@sewkis.com

This article will look at two moments in the dispute: at interim measures/injunctions, and judgment enforcement, and in particular at the relief available in federal court. It is not uncommon for parties to seek injunctive relief to protect themselves from injurious acts of the other party, or to prevent the dissipation of assets that would render an award uncollectible. And of course the losing party to an arbitration may not willingly satisfy the award even when it’s confirmed as a judgment, necessitating execution on bank accounts, personal and real property, and alter-ego or fraudulent transfer litigation. INJUNCTIVE RELIEF Prior to the initiation of arbitration, or during its course, parties may need to seek interim relief from actions of the other party. Circumstances such as an employee’s misappropriation of proprietary information, a party’s threatened transfer of property subject to dispute, or dissipation of assets all may warrant preliminary, and potentially ex parte, relief.

The availability of judicial remedies to parties who are bound to arbitration, even before arbitration begins, varies among federal circuits as well as under state law. Maritime businesspeople and lawyers are familiar with federal “Rule B” attachment procedures, where a federal district court can order seizure of a vessel or other assets as security for claims when certain threshold requirements are met. In other cases, the availability and standard for pre-judgment judicial relief may be determined by each state’s arbitration statute. Whether a federal court will hear a claim for relief will vary depending on circuit and the procedural posture of the case. Relief may also be found within the arbitration itself. Traditionally, emergency measures (at the outset of a dispute) and interim measures in the course of the arbitration have been available in international arbitration. The federal courts are split on their ability to provide such relief. But U.S. domestic arbitration forums vary in permitting the arbitrators to grant such relief. FINRA Rule 13804, for example, permits parties to seek a temporary restraining order from a court, while reserving permanent injunctive relief for the arbitrators. JAMS’ Comprehensive Rules provide for interim relief, but not for emergency relief. The American Arbitration Association, which administered some 4,000 arbitrations under its Commercial Rules in 2012, has long authorized arbitration panels to issue interim relief under those rules in the course of an existing arbitration. The AAA has also long had optional rules for emergency measures of protection. Those rules, however, had to be specifically integrated within the parties’ contract or by specific agreement. Notably, the Southern District of New York in October 2013 denied a motion to vacate, and confirmed an award issued by an emergency arbitrator against Yahoo! Inc. in favor of Microsoft Corp. under the AAA’s optional rules. In a very recent and significant change, those formerly optional rules have now been incorporated into the AAA’s Commercial Rules as Rule 38. The rule change applies to all arbitration clauses or agreements to arbitrate under the Commercial Rules entered on or after October 1, 2013, unless the parties exclude them. Under the new rule, a party seeking emergency relief must notify the AAA and all other parties in writing. Notification may be given by email. Within one business day, the AAA will appoint a “single emergency arbitrator designated to rule on emergency applications.” Within two business days, the emergency arbitrator

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO feb/ mar 2014

must establish a schedule for hearing the application. The arbitrator may grant relief if the party seeking it “has shown that immediate and irreparable loss or damage shall result in the absence of emergency relief, and that such party is entitled to such relief.” Although the rules provide that seeking emergency relief from a court “shall not be deemed incompatible with this rule, the agreement to arbitrate or a waiver of the right to arbitrate,” that language has not been widely tested. In addition, parties negotiating contracts with arbitration clauses, or who are considering or have gotten relief from the emergency arbitrator, and want to enforce that relief in court, will need to be mindful of the law governing confirmation of awards rendered in the course of arbitration (and whether such enforcement is available) in their jurisdiction. If an arbitrator renders an enforceable “partial final award,” parties also need to be aware of the short statute of limitations for seeking to vacate or modify awards (three months), as well as the time limit for confirmation (one year for domestic awards). The new rule is an important change to the AAA’s Commercial Rules. Companies whose contracts provide for arbitration under the rules are well advised to consider the relative advantages and disadvantages of the availability of emergency measures in their transactions. JUDGMENT ENFORCEMENT Proceedings to confirm arbitration awards under the Federal Arbitration Act in federal court are subject to the Federal Rules of Civil Procedure. That includes injunctive relief, as well as the rules governing execution of judgments and attachments (which refer to the law of the state where the court sits). Thus, for example, a party holding an award and seeking confirmation may, if justified and subject to the applicable standard, seek a temporary restraining order or preliminary injunction to prevent the loser from dissipating assets or taking other injurious actions pending confirmation. Similarly, prejudgment attachment, arrest and other remedies may also be available.

Once judgment is entered, the award holder, now a judgment creditor, has the same rights as any other federal judgment creditor to enforce the judgment within the federal court. That includes, for example, restraints and executions as permitted by state law. Moreover, Federal Rule of Civil Procedure 70 provides a means of enforcing an arbitrator’s award (confirmed as a judgment) for non-monetary relief. Under the federal court’s ancillary (supplemental) jurisdiction, the federal court may be able to exercise pre or post-judgment jurisdiction over other supplementary proceedings, including attachment and garnishment. There are outer limits to the federal court’s ancillary jurisdiction, which rests on the court’s power to address claims that are factually interdependent with the subject of the judgment, and to “vindicate its authority and enforce its decrees.” The outer limits of that power, particularly in respect to third parties, will be determined by the facts and circumstances of the case. As a judgment creditor, the holder of a confirmed award may also have to pursue the judgment debtors assets across state lines and into other courts – federal or state – subject to jurisdictional, statutory and strategic considerations, and requiring coordination between law firms across multiple jurisdictions. Choosing arbitration in a contract does not remove the possibility of court proceedings at many points throughout the dispute. Counsel choosing between arbitration and litigation when negotiating contracts should consider the litigation implications of that decision. The importance of that decision is amplified by the AAA’s incorporation of rules for emergency measures of protection into its Commercial Rules. Standard company form contracts with arbitration provisions will be affected, so that counsel may want to consider whether to opt-out of or keep the rule. As disputes progress through arbitration and confirmation, counsel need to keep an eye on issues of asset dissipation and other efforts to thwart the award, and possibly complex, multi-jurisdictional efforts at judgment enforcement. n

Choosing arbitration in a contract does not remove the possibility of court proceedings at many points throughout the dispute.

Jeffrey M. Dine is a senior associate at Seward & Kissel LLP. His practice includes commercial, intellectual property, bankruptcy and maritime litigation, arbitration and arbitration enforcement, in the United States and abroad. dine@sewkis.com

Natasha Norman, a law clerk in the litigation group at Seward & Kissel LLP, assisted in the preparation of this article.

New Commercial Arbitration Rules PRovide PRediCtAbility By Angela Zambrano and Casey Burton

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO feb/ mar 2014

e regularly advise clients about the pros and cons of arbitration. One of the first things we advise is that if the client chooses to insert an arbitration clause into a commercial agreement, the drafter should be familiar with the rules of the arbitral organization selected. In October and November 2013, the American Arbitration Association (AAA), one of the most commonly utilized arbitral institutions, introduced two new sets of rules that apply to commercial arbitration disputes. Both are worth noting. First, the AAA revised its general Commercial Arbitration Rules, adding specific rules related to discovery, emergency procedures, and dispositive motions. Second, it added a set of Optional Appellate Arbitration Rules, by which parties can agree to established procedures under which an appellate panel of arbitrators can review the decision of the initial panel. These changes resulted in the incorporation of many procedures commonly found in U.S. courts, but the AAA has also attempted to maintain the focus of arbitration on efficiency and minimizing costs. Whether these changes succeed in allowing parties to minimize costs and maintain efficiency while adding certain procedural safeguards remains to be seen, but they appear to be a step in the right direction. THE COMMERCIAL ARBITRATION RULES The updated AAA Commercial Rules, which became effective October 1, 2013, included revisions in four key areas. The first involves taking testimony from witnesses not located in the jurisdiction that is the site of the arbitration. There is currently a split in authority regarding whether Section 7 of the Federal Arbitration Act, which gives arbitrators the power to “summon in writing any person to attend before them as a witness,” permits an arbitrator to issue a subpoena requiring a third-party to appear for a deposition prior to the final arbitration hearing. Some circuits have held that third parties are not required to attend depositions before the final arbitration hearing, while other courts have held that they are. However, new Commercial Arbitration Rule R-35(b) partially solves the problem by allowing an arbitrator to “order the witness to appear in person for examination before the arbitrator at a time and location where the witness is willing and able to appear or can be legally compelled to do so.”

This provision, in essence, incorporates a concurring opinion by the Third Circuit, holding that the arbitrator could move the location of the hearing to take pre-hearing testimony of a third party who is located outside the arbitrator’s subpoena power and who is unwilling to voluntarily attend. This provision is important leverage for a party seeking a deposition. While depositions are not specifically contemplated by the Commercial Arbitration Rules, the parties can agree to depositions, and the ability to conduct a hearing to take the testimony of a necessary witness may be sufficient pressure to convince the recalcitrant witness (and/or the opposing party) that a deposition is preferable to a live hearing in front of the arbitrator. The second major revision is the incorporation of the emergency measures of protection, which were formerly optional, into the main body as Rule R-38. While the substance of the emergency measures did not change, having them be mandatory is a critical difference from the prior version. Thus, for any agreement entered into after October 1, 2013, a party can seek emergency relief from the AAA. Those procedures, which are likely unfamiliar to practitioners due to their previously optional status, allow parties to seek relief that preserves the status quo and/or prevents immediate and irreparable loss. This provision, in combination with the Interim Measures provisions in Rule R-37, may provide additional comfort for parties who agree to arbitration because there will now be a way for an arbitrator to issue the equivalent of a temporary restraining order or preliminary injunction. A third key revision is the addition of a rule related to dispositive motions. Before the addition of Rule R-33, there was no specific rule permitting a party to bring a dispositive motion, and no framework in which to analyze whether dispositive motions should be permitted. With the revised Commercial Arbitration Rules, it may be harder to convince an arbitrator to allow dispositive motions, as they are now only permitted if the “arbitrator determines that the moving party has shown that the motion is likely to succeed and dispose of or narrow the issues in the case.” And even then, it is within the arbitrator’s discretion to allow the filing of such a dispositive motion. The fourth, and in practice the most important change, was the revision to various provisions involving discovery. There is still no blanket entitlement to document production, but new Rule R-22 makes clear that the arbitrator

feb/ mar 2014 today’s gener al counsel

Angela Zambrano is

a partner in the Complex Commercial Litigation department at Sidley Austin LLP. She regularly represents clients in arbitrations involving post-acquisition disputes, purchase price adjustments and other commercial contract disputes. She regularly speaks and writes on arbitration issues. angela.zambrano@ sidley.com

Casey Burton is an associate in the Complex Commercial Litigation Department at Sidley Austin LLP. He requently represents clients in commercial arbitrations. casey.burton@sidley. com

can require the parties to exchange documents that they intend to rely on, and can also require the parties to produce documents, including electronically stored information. Rule R-22 also gives the arbitrator the power to determine the reasonable search parameters for parties producing ESI. Rule R-23 gives the arbitrator the specific power and authority to enforce any order related to the document production rules. Importantly, under Rule R-23, the arbitrator now has the specific authority to allocate costs of document production, draw adverse inferences, and exclude evidence. The Commercial Arbitration Rules were also amended to include one other minor change of note. The AAA now requires that the parties engage in mediation in any case where a claim exceeds $75,000. However, Rule R-9 allows either party to unilaterally opt out of the mediation process, so this rule should be read as creating a presumption in favor of mediation rather than a true requirement. OPTIONAL APPELLATE RULES In a change that received more attention than the discovery rule changes, but one that will likely have less impact on the day-to-day operations of those involved in arbitration, the AAA created a brandnew set of Optional Appellate Arbitration Rules. The key takeaway is that these rules, as the title suggests, are optional. The Appellate Arbitration Rules only apply when the parties stipulate to those rules or if they agree to those rules by contract. Moreover, the Appellate Arbitration Rules do not apply to a dispute between a business and an individual consumer where the arbitration clause is contained in an agreement that is non-negotiable in most or all of its terms, and where the transaction is related to a standardized consumable good. The other key change is the subject of a possible appeal. Unlike appeals of arbitration awards to a court of law, which are limited to appeals to vacate the award for certain very specific and narrow reasons, the new Appellate Arbitration Rules allow a party to appeal a broader range of issues based on “(1) an error of law that is material and prejudicial or (2) determinations of fact that are clearly erroneous.” Incorporating the rules into an arbitration provision would, therefore, permit a review much more similar to an appeal to a typical state or federal court. While the standard of review is not entirely clear at this point, the text of the rule appears to envision a de novo standard for

issues of law, and a “clearly erroneous” standard for determinations of fact, which would be in line with the typical standard of review in most state and federal appellate courts. Procedurally, the notice of appeal must be filed within thirty days of the arbitration award. Within twentyone days of the filing of the notice of appeal, the appellant must submit its initial brief. Following this, a responsive brief is due within another twenty-one days, followed by a reply brief served within ten days. The appellate panel, which by rule defaults to a panel of three members, must then issue a decision within thirty days of the last brief, and that decision is generally made without oral argument. Thus, a typical appeal should be completed within 120 days, but could stretch out to 180 days if there is oral argument or the panel needs additional time to consider the appeal. Overall, the Optional Appellate Arbitration Rules create the possibility for parties to ensure review of an arbitrator’s decision. The new rules create a relatively streamlined appellate process that allows the parties to seek review of any erroneous legal or factual finding by the initial panel. However, the ability to appeal an arbitration award is, at least in part, antithetical to the notion of a quick and efficient adjudication of a dispute. While the appellate procedure under the AAA rules is likely quicker than an appeal in federal court, part of the perceived benefit to arbitration is the speedy and certain resolution of a dispute. The Optional Appellate Arbitration Rules clearly are not appropriate for every dispute. The rules themselves recognize that they are not to be used for consumer disputes in form contracts. But the Optional Appellate Arbitration Rules may provide some benefit in agreements between highly sophisticated parties. For example, if a merger agreement contained an arbitration clause, the buyer and seller may agree to utilize the Optional Appellate Arbitration Rules, which would provide the predictability associated with the availability of appellate review combined with the cost savings and confidentiality of arbitration. In conclusion, the revised Commercial Arbitration Rules and the new Optional Appellate Arbitration Rules reflect the new reality that arbitration is increasingly used to resolve disputes between a broad range of parties, and that arbitration is frequently the dispute resolution mechanism of choice for contractual disputes between sophisticated business parties. On the other hand, some practitioners may not like the new rules for a variety of reasons. However, parties may always choose to carve out certain rules by contract. n

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO feb/ mar 2014

Building Legal Operations continued from page 51

Contract and Transaction Management. Management and support for overall strategy, processes, and systems related to contract and transaction management. These include creation, review, revision, negotiation, contract execution, storage and retrieval, post-contract administration and monitoring and deal due diligence support. Legal Finance Management. Support for legal invoice processing and reporting, and developing and managing the law department budget, including financial planning and forecasting, accrual and reserve management, and cost control initiatives. Often liaising with the corporate finance function. Legal Human Resources Management. Includes developing hiring and staffing activities, education and training programs, employee culture surveys, diversity initiatives, succession planning efforts, mentoring programs, onboarding initiatives, team building efforts, recognition and reward initiatives, employee policies, and performance review initiatives. Often liaising with the corporate HR function. Legal Department Administration. Management and support for additional legal department administrative activities, including developing, managing, and supporting legal intern programs, pro bono and community service programs, law department client satisfaction surveys, workload allocation management, restructuring initiatives, corporate policies owned by the legal department, law department retreats and meetings, legal department facilities and asset management. Additional Operational Areas. Areas such as managing and supporting compliance operations, and records and information management. Legal department operations areas of focus may vary considerably depending upon industry, company culture and other factors. The “Law Department Operations Executive” or “Legal Department COO” position has become more significant over the past decade. It serves an important role in bridging the gap between business and law. The title may vary, and the professional may be an attorney, or a non-attorney typically with an advanced degree such as an MBA.

Some law departments have a large legal operations team led by an operations executive, with dozens of team members. Others have only a single “LDO” professional, and some outsource the legal operations function to a managed services firm or other service provider. Regardless of how services are delivered, the operations function allows the department to reduce costs and addresses unnecessary expense by freeing attorneys and paralegals to practice law instead of engaging in operational activities. There are a series of standard but crucial steps in building an excellent legal operations function. They include:

Developing three to five-year strategic objectives with stakeholder buy-in, with respect to both overall legal operations and specific operational areas, capitalizing on cross-operational synergies and aligning the legal department strategy with overall corporate strategy.

Conducting needs assessments and developing executable recommendations, including “current state-future state” gap analyses, funding and staffing requirements, and technological requirements. Developing recommendations using tools such as data analytics, general and industry benchmarking and “best practices,” stakeholder interviews, and focus groups and surveys.

3 4

Timely and cost effective implementation by multi-disciplinary program or project teams.

Developing defensible, stakeholder-accepted legal department and specific operational area key performance indicators, including relevant metrics, data analytics and similar tools.

Actively leading, managing, and administering legal operations function and each operational area, with continuing performance reassessment. We are in a transformative period in the legal industry, and legal departments are part of it. They should be setting clear objectives and developing detailed strategies to achieve thoise objectives. Rigorous use of data analytics and metrics to measure progress serve a dual purpose: Tracking and reporting guarantee that key objectives are being met, and they are a way to demonstrate the value of the legal department to senior management, board members and investors. n

Jeffrey D. Paquin is CEO of the Global Center for Corporate Counsel Excellence, an advisory board member of the Institute for Law Department Excellence and former Divisional Vice President, Legal Operations and Chief Operations Counsel at Abbott Laboratories. jeff.paquin@ paquinllc.com

If Your Law fIrm SufferS a Data-Breach, maYBe You Do too By richard J. Bortnick

ike other professionals, lawyers often have access to clients’ sensitive commercial, operational and other information. But law firm lawyers also can possess similar information about their clients’ clients and customers (such as when a lawyer represents a healthcare company). As a result, lawyers, like employees, face the risk of a lost, stolen or breached mobile device, laptop or, most problematic, data retention mechanisms that can affect their clients’ profits and perhaps their continuing economic viability. The most prudent way for lawyers (and other professionals) to manage the new risks attendant on the electronic storage of data and the ability of users to remotely access a business or law firm server is for them to create and implement cyber, privacy and technology (“CPT”) best practices before something goes wrong.

This might include best practices training and education, as well as the purchase of dedicated CPT-specific insurance. Whether or not the lawyers voluntarily employ CPT best practices, a growing number of people agree that their clients should require them to do so. That is what we tell clients. This article discusses the vicarious risks affecting businesses as a result of affording their outside counsel access to their sensitive commercial information. We also address the fallacy of the widely-held view that counsel’s errors and omissions and/or general liability coverage will respond to a cyber-related incident that impacts a client’s operations, reputation and/or bottom line. To the contrary, among the recommended best practices is for counsel to purchase dedicated CPT insurance to mitigate the costs of an adverse CPT incident.

feb/ mar 2014 today’s gener al counsel

RISKS OF A CPT INCIDENT

Business entities, regardless of whether they employ outside legal counsel, must be sensitive to the widespread impact of an adverse CPT incident, starting with loss of customer goodwill and reputational damage. Both client companies and their outside counsel holding sensitive information are at risk of losing such data as the result of an adverse cyber incident, such as a hacker intrusion or the unintentional loss of tangible property (such as lost laptops and hard drives). It doesn’t matter whether the harm is attributable to malicious activity or simple employee or third-party negligence. It’s the effect that counts, and in many cases the effect of a cyber incident can be devastating, if not fatal, to the economic viability and vitality of the business. As lawyers, we regularly advise our clients to implement and employ best practices when consulting on commercial, risk management and loss avoidance strategies. Of course, many of us practice what we preach and employ and regularly update a state-of-the-art cyber best practices regime. Regrettably, however, this is not uniformly the case across the profession, as many outside (and sometimes in-house) counsel are not regularly trained and updated on CPT best practices. In the case of CPT, as in other contexts, both companies and their outside attorneys should look to specialized legal counsel to create, implement and regularly update a best practices regime. The advantage of the attorney-client privilege is manifest. As in many other situations, when employees, outside counsel and others are being educated on CPT best practices, the privilege can be a critical asset. Hence, while vendors and IT specialists (both internal and external) may promote themselves as having the appropriate knowledge and training to teach and implement CPT best practices, they do not possess the protections afforded by the attorney-client relationship. In a relatively new area like CPT, where the law is developing rapidly, the privilege becomes even more important, as many companies’ management, employees and outside advisers who face CPT risks on a daily basis are just at the start of the learning curve.

WHY COMPANIES SHOULD BE CONCERNED Many companies fail to consider the fact that outside counsel likely hold both their own sensitive data and that of third parties – that is, the company’s clients or customers. For example, outside counsel might control and or have access to personally identifiable information (PII) and personal health infor-

mation (PHI) of both their clients and the customers or clients of those clients. Outside lawyers, to put it another way, could hold the keys to the kingdom, and that means they could lose them. In the case of employee and third party consumer PII and PHI, most states’ privacy laws mandate breach notification to affected persons if two pieces of personally identifiable information are compromised. The list of what can constitute such information is long. It consists of name, address, telephone number, electronic mail address, fingerprints, photographs or computerized images, a password, an official state or government-issued driver’s license or identification card number, a government passport number, biometric data, an employer or student identification number, a military identification number, date of birth, medical information, financial information, tax information, disability information and zip codes. Virtually every business holds at least two of these categories of information about their customers/clients. By extension, oftentimes, so too do their outside counsel. It is common knowledge that personal health information is governed by The Health Insurance Portability and Accountability Act of 1996 (HIPAA) and The Health Information Technology for Economic and Clinical Health (HITECH) Act. Both laws apply to “covered entities”, i.e., healthcare clearinghouses, health plans, and healthcare providers that conduct certain functions in electronic form. What is less well known is that under newly enacted legislation, HIPAA and HITECH also apply to “business associates” that provide services involving the use or disclosure of personal health information held on behalf of a covered entity. Such entities typically create, receive, maintain or transmit personal health information on behalf of a business associate. Examples include companies that provide data transmission services or store documents and data, as well as personal health record vendors and financial institutions lending to the health care industry. It also includes the company’s attorneys. The risks for professionals under these statutes are significant. In January of 2012, Minnesota’s attorney general filed a federal court lawsuit against a consulting firm that had been retained by two hospitals to evaluate the relationship between a patient’s physical condition and the likelihood that the person would be hospitalized. An employee of the consulting firm left an unencrypted laptop containing personal health information in a rental car, and the laptop was stolen along with patient data records on 23,500 patients.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO feb/ mar 2014

Seven months after the suit was filed the parties settled, with the consulting firm agreeing to pay $2.5 million to compensate patients affected by the breach. The firm also agreed to being barred from operating in Minnesota for at least two years, with the ability to resume operations dependent on the attorney general’s consent. The firm also was required to return to the client hospitals all data about their Minnesota patients. In many instances, in addition to an attorney general investigation or proceeding, plaintiffs and plaintiffs’ counsel will file the obligatory privacy putative class action against the entity to whom they provided their PII and PHI. Of course, the law firm likely will be sued (if, for no other reason than to access the firm’s E&O and/or CPT insurance), but so too will your company. In short, a company can be sued in a class action based on a CPT event suffered by a third-party advisor and or consultant rather than with respect to its own operations and systems. It is essentially a foregone conclusion that attorneys fall within HITECH’s definition of business associate to the extent they provide “other than in the capacity of a member of the workforce of such covered entity, legal ... services to or for such covered entity, or to or for an organized health care arrangement in which the covered entity participates, where the provision of the service involves the disclosure of protected individually identifiable health information from such covered entity or arrangement, or from another business associate of such covered entity or arrangement, to the person.” It follows that if an attorney obtains personal health information in order to provide professional services, business associate status attaches regardless of whether the law firm has signed a business associate agreement. Commentary to the HITECH final rule adds a fine point, stating that “a person becomes a business associate by definition, not by the act of contracting with a covered entity or otherwise. Therefore, liability for impermissible uses and disclosures attaches immediately when a person creates, receives, maintains, or transmits protected health information on behalf of a covered entity or business associate and otherwise meets the definition of a business associate.” These are real risks. In its Fortune 500 Cyber Disclosure Report, 2013, Willis, the financial consulting and insurance broker, identified the professional services sector as having the second highest risk exposure per classification, surpassed only by financial institutions/banks. Thus, if an attorney has entered into a business associate agreement with a client, the attorney is or should be well aware of the limitations placed on business associates relative to the use or disclo-

sure of PHI. And, under HITECH, lawyers (and other professionals) will need to have in place appropriate security policies and procedures. In other words, best practices. And along with best practices should come risk-specific liability insurance.

CPT INSURANCE As independent counsel, we are required by state law to purchase errors and omissions insurance. Regrettably, and often as not, law firms (and their clients) assume that the law firm’s E&O and commercial general liability policies will cover CPT risks. This is a critical mistake. Indeed, more than a few insurance brokers and policyholders misunderstand the extent and limitations of professional and general liability insurance. In particular, many mistakenly believe that advertising and personal injury coverage (typically Part B or Part II of a CGL policy) covers a cyber breach. Others are of the view that an E&O policy will respond. In most situations, these views are wrong. Although limited CPT-related insurance may be provided by a CGL or E&O insurance policy, the lion’s share of fees, expenses, and other loss incurred following a CPT incident would not be covered. CGL policies cover damage to a third party’s tangible property (or person) as well as, in certain situations, advertising and personal injury (if purchased). In turn, E&O forms apply to professional negligence. Hence, if information from a closed matter still rests on a law firm’s server, it would be difficult for the firm to credibly argue that the mere storage of such information constitutes a professional service. In any event, neither policy applies to either first-party loss or crisis management expenses. In stark contrast, CPT insurance can cover a law firm’s (and, by extension, perhaps your company’s) crisis management-related costs and expenses. Because of this, we have advised clients to require their vendors (including outside counsel) to purchase dedicated CPT insurance. At a minimum, this would be an incentive for counsel’s adoption of best practices which, if handled correctly, will reduce the risk of a CPT incident. Of equal value, outside counsel’s deployment of a best practices regime can help reduce the premium your company pays for its own CPT insurance. Insurers will review your vendors’ systems as well as yours, and the more robust your company’s and your vendors’ protections are, the lower your CPT premium. It’s a significant and critical risk/benefit analysis. In considering its risks and exposures, your company should evaluate and account for those presented by outside entities and persons holding your company’s sensitive information. n

Richard J. Bortnick is a shareholder at Christie, Pabarue and Young, He litigates and counsels U.S. and international clients on cyber and technology risks, exposures and best practices, director and officer liability, professional liability, insurance coverage and commercial matters. He also drafts professional liability policies, including cyber, privacy and technology forms. He is publisher of the cyber industry blog, Cyberinquirer.com. rbortnick@cpmy.com