Today's General Counsel, V10 N5, October/November 2013 by Today's General Counsel

OCT/ NOV 2013 VOLUME 1 0 / NUMBER 5 TODAYSGENER A LCOUNSEL.COM

OVERLOAD Multilingual Documents False Resumes Orphan Technologies Piles of Paper

Matter Management Cyber-Attacks Anti-Trust Challenges Member Liability in LLCs Reversing Bad Verdicts Ban-the-Box

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oct/ nov 2013 toDay’s gEnEr al counsEl

Editor’s Desk

In this issue of Today’s General Counsel Ron Epstein and Bryan Lord provide an interesting take on patent litigation. They say it is in effect part of a technology company’s R&D spend, and should be characterized as such in the budget. Luddites who are used to thinking of techies as omnipotent in their fields can take some comfort in Epstein and Lord’s observation that companies rarely understand where innovation really comes from, and resistance to taking a license stems in part from a vague feeling that some key technologies are floating around without owners. It takes a patent attorney to point out that these innovations can’t simply be adopted without some recognition of where they came from. Multilingual e-discovery is another thing a Luddite has a tough time comprehending. According to Mathieu van Ravenstein and Jon Shaman it’s even more complicated than you’d imagine. Their article points out that along with searching documents in different languages, e-discoverers have to deal with various countries’ data protection protocols. Swiss and French statutes, for example, may criminalize movement of data outside their borders. Knowledge of these laws has yet to be algorithmed, so the same experts who use unicode software to search documents in many languages have to be well-versed in legal matters. They may even have to be lawyers. An article about a recent survey concerning the use of matter management systems by corporate legal departments illustrates how this kind of software is changing the way departments manage their relationships with law firms. Cost cutting and finding the right firm for the job are two issues that users expect their systems to address. The constant innovation that characterizes high tech means that as these systems evolve law firms will be contending with increasingly sophisticated

and demanding corporate clients. The magazine you are reading contains our core content, but we continue to expand our content and the platforms where it can be viewed. This month we have expanded our Daily Email Alert to twice each day. If you have not done so recently check out our web site at http://www.todaysgeneralcounsel.com where, among other things, you can subscribe to the Daily Email Alert. We have been writing about business law for a long time and have been purposeful about providing the same quality content in the Daily Email Alert as you have come to expect in this magazine.

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oct/ nov 2013 today’s gener al counsel

Features

MATTER MANAGEMENT SOFTWARE SHOULD OFFER COST CONTROL PLUS

PAPER RECORDS STILL CRITICAL TO DISCOVERY

REVERSING A BAD VERDICT ON APPEAL

MONITORING REGULATORY AGREEMENTS

CRAFTING A SOCIAL MEDIA POLICY, WITH THE SEC IN MIND

THAT CYBER-ATTACK MAY BE AN INSIDE JOB

TIPS ON READING A RESUME FROM OUTSIDE LITIGATION COUNSEL

BELOW-COST PRICING LAW IN CALIFORNIA

Based on a GC Metrics Survey Benchmark metrics for legal department systems.

Barry Medintz It’s the age of e-discovery, but managing paper remains crucial.

Dawn Solowey and Rob Carty The rules change at the appellate level.

Ron Cote Challenging for the company and the monitor.

Reid J. Schar and Laura C. Bishop New SEC rule highlights the need.

Rose Romero and Craig Carpenter Employ “data loss prevention” technologies, but don’t entirely count on them.

Neil J. Dilloff Cite check, make verbal inquiries, watch out for vague generalities.

Howard M. Ullman No proof of harm required.

Page 62

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oct/ nov 2013 toDay’s gener al counsel

Departments Editor’s Desk Executive Summaries

Page 28

intEllEc tual ProPErt y

16 | Enhanced Duty of Candor Before the PTO Robert A. Kalinsky and Paige S. Stradley Related litigation may need to be disclosed.

18 | Antitrust Challenge Permitted By FTC v. Actavis May Be Limited 6

Jeffery M. Cross and Jill C. Anderson Application of “Rule of Reason” left to the lower courts.

22 | Understanding the Trademark Clearing House Jan Corstens Top level domain names bring IP risk.

E-DiscovEry

HuMan rEsourcEs

GovErnancE

28 | Multilingual Review in the E-Discovery Process

30 | The National Trend Toward “Ban The Box”

32 | Delaware Forum Decision Good for Companies and Shareholders Too

Mathieu van Ravenstein and Jon Shaman Technology, human translators and knowledge of the law are all in the mix.

Joseph G. Schmitt A close look at what in fact is banned.

24 | Thin Line Between Patent Litigation and R&D

Matthew J. Becker and Tara R. Rahemba Tell a cohesive, common sense tale.

34 | Member Immunity from LLC Liability Varies by State Roger C. Haerr and Adam Noakes Liability for torts is the key issue.

Ron Epstein and Bryan Lord Unacknowledged appropriation instead of licensing.

26 | Strategies in a Medical Device Patent Jury Trial

John S. Delikanakis Not necessarily a free ticket to Delaware.

Page 32

38 | Compensation Committee Mistakes when Hiring CEOs Frederick D. Lipman Set a compensation range, have a back-up candidate, beware false resumes.

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OCT/ NOV 2013 TODAY’S GENER AL COUNSEL

Executive Summaries INTELLEC TUAL PROPERT Y

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Enhanced Duty of Candor Before the PTO

Antitrust Challenge Permitted by FTC v. Actavis May Be Limited

Understanding the Trademark Clearinghouse

By Robert A. Kalinsky and Paige S. Stradley Merchant & Gould LLP

By Jeffery M. Cross and Jill C. Anderson Freeborn & Peters LLP

By Jan Corstens Deloitte

A provision in the Manual of Patent Examining Procedure arguably broadens the duty to provide information that is material to patentability in respect to patent applications covering technologies already involved in litigation. This provision , MPEP 2001.06(c), requires the disclosure of material information from “related” litigation. Case law interpreting the MPEP section suggests that it requires disclosure of information that goes beyond Rule 56. The provision appears to make related litigation, per se, material. Failure to disclose related litigation can result in severe consequences, including a finding of invalidity of the resulting patent and inequitable conduct. The Federal Circuit appears to have taken a step back from the per se material position in a 2012 decision. The current thinking, as suggested by the decision, is if related litigation does not involve citation of prior art, a challenge to validity, or a pleading of un-patentability, then such litigation may not be material to patentability and need not be disclosed. In other words, it is not per se material simply because it is related. The authors suggest that the general theme of jurisprudence on the topic is that the materiality of information depends on the circumstances. Applicants should always consider disclosure of related litigation documents. More specifically, an attorney should consider what litigation documents and information would materially affect the patentability of – or what litigation documents and information assert a position contrary to – that taken before the PTO examiner.

In June 2013, the U.S. Supreme Court released its decision on “reverse payment” settlements between brand-name and generic drug makers. Federal Trade Commission v. Actavis involved an antitrust challenge to the settlement of patent infringement litigation brought under the Hatch-Waxman Act. The generic drug manufacturers in the case agreed to drop their challenge to the validity of the brand-name manufacturer’s patent and to delay their entry into the market to a date later than they would have entered had they prevailed. In turn, the brand-name manufacturer paid the generic drug manufacturers millions of dollars. Such agreements are called “reverse-payment” settlements. The FTC alleged that their agreement violated antitrust laws, claiming reverse-payment settlements are presumptively anti-competitive because the parties are colluding to split the monopoly profits of the patent holder by delaying market entry of the generic drug, thus denying consumers the benefit of the lower cost generic. The Supreme Court held that reversepayment settlements of the type at issue had the potential to create an anti-competitive effect without justification, and therefore warranted antitrust scrutiny under the Rule of Reason. The Court rejected the FTC’s position that such agreements are presumptively illegal and therefore should be analyzed under the abbreviated “quick look” in lieu of the full Rule of Reason. The authors explain certain relevant aspects of the Hatch- Waxman Act, state the dissenters’ objections and conclude that the type of technical reverse payments their dissent is concerned with will be rare.

The Internet is undergoing a significant makeover with the rollout of hundreds of new generic Top Level Domains (gTLDs). They will create a vastly expanded universe of web addresses. While this presents many opportunities, some intellectual property owners are concerned about the risks. A recent survey, commissioned by Deloitte and conducted by Vanson Bourne, found that 83 percent of leading U.S. businesses believe that the current domain name system makes it difficult to protect trademarks. With a huge number of new names expected to appear within the next few months, protecting trademarks will prove to be an even more trying process. In this scenario, the new Trademark Clearinghouse has an important role to play. This article explains why registering with the Clearinghouse is crucial to protecting IP. For example, for a period of at least 90 days after each new web extension launches, trademark holders will receive a warning if someone else registers a domain name that matches their mark or marks, and as a result they will have an early opportunity to deal with trademark infringement. The Clearinghouse, which officially launched this past March, was developed by the Internet Corporation for Assigned Names and Numbers (ICANN), working with intellectual property experts, specifically to provide a way for trademark holders to protect their rights during the expansion of Internet domains. Using the Trademark Clearinghouse is a first and critical step towards securing and defending a company’s intellectual property.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2013

Executive Summaries

INTELLEC TUAL PROPERT Y

E-DISCOVERY

PAGE 24

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Thin Line Between Patent Litigation and R&D

Strategies in a Medical Device Patent Jury Trial

Multilingual Review in the E-Discovery Process

By Ron Epstein and Bryan Lord Epicenter IP Group

By Matthew J. Becker and Tara R. Rahemba Axinn, Veltrop & Harkrider LLP

By Mathieu van Ravenstein and Jon Shaman Consilio

Advanced technology companies today are essentially choosing to appropriate other companies’ technology rather than doing their own R&D, according to the author. They don’t acknowledge it or maybe even recognize it, but this fact - not patent trolls or others who invest in patent enforcement for profit - is the real reason there is so much patent litigation, he says. The ground-breaking innovations of last year are often viewed as no more than “plumbing” behind this years’ innovation, but the companies that spent billions of R&D dollars on ground-breaking innovations are rarely content to see new entrants simply adopt their technology. The long running battle over Kodak’s patent portfolio, which ultimately resulted in companies banding together to purchase the portfolio for the benefit of all, represents one example of the cost to access past innovations. Since free is better than not-free, and since companies rarely understand where innovation really comes from, there is a great resistance to voluntarily taking a license. Because patents represent the strongest form of intellectual property covering “borrowed” technology, litigation has become the de-facto sales process for IP licensing, and IP litigation costs are attributable to, and ought to be accounted for, as part of a company’s R&D spend. The author suggests developing an understanding of what level of dependence your products have on the sources of third party IP, budgeting realistically for litigation and considering ways to encourage an efficient IP marketplace that does not require litigation.

Developing a jury-friendly trial strategy in a patent case is critical to success. Reflecting on their medical device jury trial experience, the authors focus on three main components of trial strategy: using fact witnesses to build a compelling storyline; simplifying key infringement issues for the jury; and taking a common-sense approach to non-obviousness and damages issues by focusing on secondary considerations of non-obviousness, and making logical, intuitive damages arguments. Having the inventors explain that despite diligent work on the invention, the development process still required substantial time, effort and resources, conveys that the invention is not a trivial advance and tends to support patent validity. Don’t overreach. Inventors usually testify early in the case and can set the tone. A loss of inventor credibility can mean a loss at trial. Common examples of overreaching in the invention story include inflating the actual time spent on the invention, failing to account for fits and starts in the development process and exaggerating or double-counting development costs. Don’t oversell the importance of the invention. From the defendant’s perspective, it is important to present an independent design and development story, emphasizing key product differences. A defendant’s focus should be on attacking the existence of each secondary consideration, as well as the link between the secondary consideration and the claimed invention. Weaving a cohesive story throughout the case, one that is easy for the jury to grasp, can be the difference between a win and loss.

As a result of the increase in global commerce and international corporate disputes, discovery of large volumes of data in litigation is becoming common worldwide. Regulatory enforcement is also growing quickly, leading to a rise in the number of internal investigations and information requests that require large-scale multilingual review and production of documents. Law firms and their clients traditionally have used a combination of multilingual in-house lawyers and translation agencies to complete these projects, but challenges arise when there are not enough attorneys that speak certain languages available in a specific location. This can lead to delays and inflated reviewer costs. Legal technology tools such as concept clustering and predictive coding, sometimes referred to as Technology Assisted Review (TAR) or Computer Assisted Review (CAR), offer attractive options to help corporations and counsel reduce the amount of data that needs to be reviewed during discovery, thus reducing associated reviewer costs. These emerging technologies are becoming important components in dealing with legal matters that cross international borders and include data that is created, transmitted, and stored outside the United States. Besides the technical issues, there are legal strictures that must be understood and observed, including laws that in some cases criminalize movement of data outside of borders By being informed about advantages and risks, understanding international legal considerations, managing work flows and applying available tools appropriately, counsel will have the information necessary to make complex international review more efficient and less costly.

OCT/ NOV 2013 TODAY’S GENER AL COUNSEL

Executive Summaries HUMAN RESOURCES PAGE 30

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The National Trend Toward “Ban The Box”

Delaware Forum Decision Good for Companies and Shareholders Too

Member Immunity From LLC Liability Varies by State

By Joseph G. Schmitt Nilan Johnson Lewis PA

GOVERNANCE

Recent legislative and regulatory actions by states and municipalities, and new efforts by the EEOC, are restricting consideration of criminal records in the hiring process. Inside counsel and HR staff need to be aware of these changes and ensure that their hiring processes comply with federal, state and local statutes. These have been dubbed “ban the box” laws because they prohibit the employer from including a “box” on their application and requiring that the applicant check it if he or she has a criminal record. One type of restriction seeks to regulate the process by which an employer may obtain information regarding an applicant’s criminal record. For example, it may prohibit employers from asking an applicant about his or her criminal history, or performing a background check, until the applicant has either been selected for an interview or extended an offer of employment contingent on the background check. Other types of restrictions allow consideration of a conviction at any point in the process, but allow denial of employment only if its based on particular criminal convictions. EEOC guidance issued in April, 2012, states that consideration of an applicant’s arrests, pending charges and criminal convictions can be a violation of the rights of Hispanic and African American men under Title VII of the Civil Rights Act of 1964. The EEOC has taken the position that employers should consider an applicant’s criminal record when making a hiring decision only under certain limited circumstances.

By John S. Delikanakis Snell & Wilmer

In a recent Delaware Chancery Court decision (Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corporation and IClub Investment Partnership v. FedEx Corporation, et al) the validity of corporate bylaws making Delaware the sole and exclusive jurisdiction where stockholders can file a derivative lawsuit or sue corporate directors and officers for breach of fiduciary duty were upheld. The Chancellor held that such bylaws are valid under Delaware’s statute governing what may be included in a corporation’s bylaws, and that such bylaws are contractually enforceable against stockholders without shareholder approval. The concept that a corporation can specify the exclusive forum where certain types of lawsuits can be filed has been debated for some time. The decision carefully delineated what type of bylaw amendments would be statutorily valid under Delaware’s corporation statues. Lawsuits arising outside the corporate affairs doctrine, such as contract, tort or even federal securities claims – even when brought by a stockholder – cannot be subject to forum restriction bylaws under these laws. This decision is a victory for Delaware corporations, although its extent will be largely dependent on whether other jurisdictions will apply the ruling on a motion to dismiss or transfer. It is also a small victory for stockholders, because it is a reiteration by the Delaware Chancery Court that corporations must govern themselves carefully, thoughtfully and with an ear to shareholder wishes when enacting forum selection bylaws, or face challenges in courts or at their annual meeting.

By Roger C. Haerr and Adam Noakes McKenna Long & Aldridge LLP

LLCs and corporations limit the liability of their owners. LLC members and corporate shareholders risk only their capital contribution. Many people understand the concepts of “piercing the corporate veil” and “alter ego liability.” Do they apply to LLCs? Recent case law provides some answers. The LLC concept was introduced in Wyoming in 1977. The Uniform Law Commission promulgated the Uniform Limited Liability Company Act in 1996. Each state and the District of Columbia have now enacted statutes. In South Carolina, a member was judged liable for negligent supervision of an LLC project. On appeal, the member argued that the Uniform Limited Liability Company Act immunized him. The State Supreme Court upheld the judgement, relying on common law principles that hold a tortfeasor liable for his own wrongs, regardless of whether pursued on behalf of another. A Maryland court held an LLC manager liable for personal injuries resulting from lead paint exposure arising out of the negligent maintenance of real property owned by the LLC. In that case, the injured party never entered into a lease with the LLC and did not have a legal right to occupy the property. A Wisconsin court applied the language of the Wisconsin LLC statute and found that members cannot be personally liable for torts they commit when acting as an agent of the LLC. Wisconsin would appear to attach personal liability only when the member is acting outside his or her capacity.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2013

Executive Summaries

governance

features

Page 38

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Compensation Committee Mistakes when Hiring CEOs

Matter Management Software Should Offer Cost Control Plus

Paper Records Still Critical to Discovery

By Frederick D. Lipman Blank Rome LLP

Based on a survey by GC Metrics LLC.

By Barry Medintz Recall Corporation

There are three major mistakes made by compensation committees in hiring a new CEO: failure to set a compensation range before commencing the search, failure to have the backup candidates needed to avoid having to give in to unreasonable demands, and failure to require a warranty and representation of the background information on which the committee relies in the employment agreement. By setting a compensation range before commencing the CEO search, the compensation committee provides a guidepost for what it considers reasonable. A compensation committee which fixes on a single candidate with no backups makes itself vulnerable to oversized compensation demands. The author lists several high-profile example of resume fraud at the CEO level, and underscores the problem this can create for the company. As a solution, he advocates requiring a specific warranty and representation to make it clear that the company is able to rely on resume information in entering into the contract. Requiring the warranty and representation forces the candidate to think again about whether he or she has exaggerated the resume. This can make for a more reliable vetting process and, equally important, a specific warranty and representation which turns out to be materially false may permit the company to disclaim its obligations under the employment contract, including severance, on the grounds that the company was fraudulently induced to enter into the agreement. It may even subject the CEO to a damage claim.

Fall 2012 marks the second issue of Matter Management Software Insights, a survey conducted by GC Metrics LLC. The survey combines staffing and spending data concerning the use of matter management software by U.S. and Canadian law departments. There are many systems available, all of them tailored exclusively for the use of in-house departments. It is estimated that more than 2,500 law departments have licensed a matter management package. Detecting billing violations is an important function of all systems, but not necessarily the most valuable. According to one system provider, sustainable value comes from using the information that systems yield to select the right firms for specific types of work, to look for trends in spending and to determine what work could be brought in-house. Another way to reduce spending is to use matter management systems in order to zero in on which departments within a company generate disproportional amounts of legal work so they can be educated on alternative ways of dealing with those issues. The systems referenced in the article provide functions that track where legal matters are generated and the costs that are associated with client groups. Generally speaking, systems had been in use by departments for five to seven years at the time of the survey. That is longer than the average tenure of a general counsel, and enough time for significant turnover of all personnel. Thus, training and consulting services become key for continued value.

Despite the explosion in digital records, businesses in every industry are still generating massive amounts of paper. The manner in which these records are stored, and the ability or inability to locate and retrieve them when the company is sued, can significantly impact litigation. Having a records management program in place to identify, protect and access critical paper documents is as important as the ability to identify, sequester and access electronic records stored in the corporate data center. When paper records are not stored (or destroyed) in a secure manner, organizations put themselves in harmâ&#x20AC;&#x2122;s way. The author provides some general guidelines for managing paper. Begin by reviewing your data inventory management program to ensure it adequately covers not just electronic data, but paper documents as well. The program should be able tell you what the company has in storage, where it is stored, who is in charge of it, how to access it and how long it will take to retrieve. Re-examine the companyâ&#x20AC;&#x2122;s records retention policy. Make sure itâ&#x20AC;&#x2122;s up to date from a compliance standpoint, and enforce the policy throughout the organization. According to the industry group ARMA, 93 percent of Fortune 1000 companies have a document retention policy in place, but only 38 percent enforce it. If enforcement has slipped, the legal department is ideally suited to initiate a company-wide upgrade. Consider establishing a team of key stakeholders to review and enhance the policy.

OCT/ NOV 2013 TODAY’S GENER AL COUNSEL

Executive Summaries FEATURES

PAGE 46

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Reversing a Bad Verdict on Appeal

Monitoring Regulatory Agreements

Crafting a Social Media Policy, with the SEC in Mind

By Dawn Solowey and Rob Carty Seyfarth Shaw LLP

By Ron Cote Grant Thornton LLP

By Reid J. Schar and Laura C. Bishop Jenner & Block

When a trial goes badly an appeal offers an opportunity for a reversal, but you cannot redo the testimony, arguments, or objections that led to an adverse verdict. The in-house legal team can help the appellate attorneys put together a strong appeal by providing them with all necessary information as early as possible, staying involved in the appellate strategy and maintaining a frank dialogue. Since there is a tight deadline for filing post-trial motions, and often a short track to the appeal, the appellate team will need to read the record immediately. If you were not in the courtroom yourself, it will be especially crucial to discuss early on the appellate counsel’s impressions about where the trial went off the rails, and where opportunities may exist for a turnaround on appeal. The starting point for a sound appellate strategy is the standard of review. The appeal must focus on arguments that offer the most favorable standard. Ask the appellate team to explain the various standards of review, and the resulting impact on your arguments, early in the process. Make sure you understand the practical consequences of each argument, so that you can help weigh its pros and cons and educate your internal clients. The appellate team will also want to discuss the possibility of settlement. If settlement is a viable option, consider developing an assertive appellate front that will allow you to negotiate from a position of strength.

Companies that operate in highly regulated industries sometimes need to enter into a settlement agreement that includes a remediation process and subjects them to examination by an independent monitor. The settlement typically requires restitution to consumers and operational reforms to ensure that the non-compliant behavior does not occur again. The independent monitor (typically a public accounting firm) assesses compliance with the agreement. While execution of these commitments is the responsibility of senior management, the oversight lies with the company’s in-house counsel. Organizations subject to monitoring usually have access to a wide variety of resources, such as personnel and technology. They may seem well equipped for a remediation effort, but sometimes it doesn’t work. Broadly speaking, difficulties can be attributed to functionality and culture. To build remediation teams, employees may need to be pulled from their normal activities. The nature of the monitor’s examination is often referred to as an “audit” in the settlement agreement, although this use of the term is a misnomer in the eyes of public accountants, whose professional standards define audit in a very precise way. Other professional accounting standards relating to attestation or consulting will be relevant here. An engagement performed under consulting standards allowing the monitor the greatest flexibility with respect to defining the scope and testing approaches must be used. A “standard” under which to perform the examination must be clearly defined in order to determine the effectiveness of the subject company’s remediation efforts.

Recently the SEC released guidance permitting companies to disclose important information to investors over social media, as long as the company identifies that platform in advance. The announcement followed a controversy in which the SEC notified Netflix and CEO Reed Hastings that it was recommending an enforcement action for disclosure of important information in a non-public manner. The action was based on a status update to Hastings’ Facebook page. In the Guidance the SEC announced it would not pursue the Netflix enforcement action, and it clarified portions of the agency’s position on social media. Companies may use social media in certain pre-approved situations to disclose information regulated by securities laws, but the limits of this approval highlight an ongoing enforcement risk for companies: unauthorized disclosure of regulated company information on unapproved social media platforms. The recent guidance authorizes an officially sanctioned personal account as an avenue for disclosure of regulated company information. The authors provide a list of elements a company should include in a model social media policy, based on precedent and guidance relating to the Foreign Corrupt Practices Act, some leading corporate social media policies already written, and common sense. A good social media policy should be dynamic, changing regularly as the nature of the risks change. The SEC’s significant shift in position between its 2012 notification of enforcement and 2013 April Guidance demonstrates that there is uncertainty, even among regulators, as to the proper use of social media.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2013

Executive Summaries

features Page 58

Page 60

Page 62

That Cyber-Attack May Be an Inside Job

Tips on Reading a Resume from Outside Litigation Counsel

Below-Cost Pricing Law in California

By Rose Romero and Craig Carpenter Thompson & Knight

By Neil J. Dilloff DLA Piper LLP

By Howard M. Ullman Orrick, Herrington & Sutcliffe LLP

While cyber-security threats posed by foreign governments and terrorist groups garner headlines, a large proportion of data breaches are carried out by current and former employees, vendors and business partners. As we learned from the recent NSA leaks, insider data breaches can happen to the most guarded organizations. Insider security breaches are often more consequential and costly than those by outside hackers. Insider data breaches are usually triggered by a single employment event that causes a once-trusted insider to take action. These triggering events include being passed over for a raise or denied vacation or a promotion. Similarly, a vendor may seek revenge for a contract not being renewed, or some other loss of business. Many insider employee threats can be mitigated by improving the recruiting process, conducting rigorous background checks and exit interviews, and simply being more aware of what’s happening with employees. Increasingly, companies are also relying on sophisticated “data loss prevention” and other technologies. They can be effective, but many of them, particularly DLP, are invasive and can affect an individual’s privacy at work. To address these concerns, and limit potential backlash from employees, it is important for companies to engage legal and human resource personnel in the process and to have written technology policies in place prior to rolling-out any DLP system. Finally, have a plan in place and be ready to act if preventive measures fail and an insider breach does occur.

Statistics about resumes in general indicate that roughly three-quarters of them are misleading and more than half contain outright falsehoods. No separate statistics have been broken out for lawyer resumes, but lawyers are people and job-seekers, so beware. For the careful reader, there are red flags. Use of the plural – “we,” “the firm has,” “the group has” – as opposed to ”I have” when describing experience or cases tried should raise questions. It is often intended to hide the fact that the person hasn’t done it individually. An interviewer should probe beyond the generality and get specifics about what the candidate has done. Failure to list results and dates also should raise a red flag. It may be appropriate if confidentiality is an issue. However, when the word “successful” is used to describe the result of the engagement, one needs to ask what “successful” means and to whom. If the case list omits dates, you may be shocked to find that glowing achievements are many years old, and the lawyer hasn’t tried a case for years. In-house counsel, risk managers and executives who hire outside litigation counsel, especially for major matters, should be meticulous in reviewing resumes. Especially in today’s era of the “vanishing trial,” those looking for trial lawyers (and not just “litigators”) should spend the time and energy to hire the right person for the job. Failure to do so can bring unfortunate results, unnecessary expense, and indigestion.

Most national and international companies do business in California. Like other states, California has laws prohibiting below cost pricing of goods and services, but California’s features unique plaintifffriendly provisions that can in theory expose your company to more liability than the laws of other states. For example, no proof of harm to competitors is required, only intent to harm. California law also prohibits the use of loss leaders – articles or products sold at less than cost to promote other merchandise, mislead prospective purchasers or injure competitors. This article looks at how California’s law differs from the federal RobinsonPatman Act, how it defines “below cost” for enforcement purposes, and some affirmative defenses that are available, including a showing that below cost pricing was for perishable goods, to close out stock or for goods that were damaged or deteriorated. For violations of the UPA’s pricing provisions, a plaintiff can recover treble damages, attorney’s fees, and costs, and injunctive relief against the pricing practices at issue. Violations can also amount to criminal misdemeanors and subject violators to fines and imprisonment, but this rarely occurs. Because California does not require proof of the possibility of recouping losses, because it provides plaintiffs with powerful (but rebuttable) presumptions, and because the defenses to a below-cost claim under California law are limited, companies that do business in California should make sure that aggressive promotions, discounts, or rebates do not violate California’s below-cost pricing law.

oct/ nov 2013 today’s gener al counsel

Intellectual Property

Enhanced Duty of Candor Before the PTO By Robert A. Kalinsky and Paige S. Stradley

atent applicants are familiar with the duty of candor that is required in practice before the U.S. Patent and Trademark Office (PTO). This duty requires applicants to provide information that is material to the patentability of applications for review during examination. Not so familiar is a lesser provision found in the Manual of Patent Examining Procedure (MPEP) that arguably broadens this duty in respect to patent applications covering technologies already involved in litigation. This provision, MPEP 2001.06(c), requires the disclosure of material information from

related litigation. It gives examples of what might constitute such material information, including evidence of possible prior public use or sales; questions of inventorship and prior art; and allegations of fraud, inequitable conduct, and violation of the duty of disclosure. The provision raises several issues that warrant the attention of patent prosecutors, in house counsel and litigators. First, it requires disclosure of “related” litigation only. Applicants must understand what this means, as laid out by the MPEP and interpreted by the courts, in order to avoid inundating the PTO with immaterial and unnecessary information.

Second, the provision appears to make related litigation per se material. Third, the examples provided in MPEP 2001.06(c) and case law interpreting the MPEP section, although limited, suggest that the provision requires disclosure of information that goes beyond what is typically disclosed. Failure to disclose related litigation can result in harsh consequences, including a finding of invalidity of the resulting patent, and inequitable conduct. In determining what documents are related and must be disclosed, the Federal Circuit analyzes: (1) the relationship between the litigation and the patent

today’s gener al counsel oct/ nov 2013

Intellectual Property being prosecuted and (2) the extent to which the litigation impacts the patentability of the invention. It is particularly useful to evaluate the claim terms at issue. In a 2005 Federal Circuit decision, the court noted that the patent involved in the litigation and the application being prosecuted shared the same inventor and specification. Furthermore, the limitations being disputed in the litigation were being disputed during prosecution. Finally, the litigation included examining the meaning of a certain limitation, and the applicant was pursuing an amendment to add that limitation to the patent being prosecuted. Given all of this information, the court found such litigation to be related litigation. While this might be an obvious example of “relatedness,” most instances are not as clear, and it is up to the applicant to make the determination. To complicate matters, there is little jurisprudence on the question. In a 2007 decision, the Court of Appeals for the Federal Circuit suggested that related litigation was per se material, meaning that the existence of related litigation was in and of itself material information to be reported to the PTO. The logic was that the existence of related litigation made the patent examiner aware that other material information relevant to patentability might be available from the litigation proceedings. Under this per se material categorization, information that would seemingly not meet the Rule 56 materiality standard might still be required to be disclosed to the PTO. Perhaps realizing that such a result could unfairly penalize the patent owner, the Federal Circuit appears to have taken a step back from the per se material position. In a 2012 decision, the Federal Circuit reviewed a lower court’s finding of inequitable conduct based upon a failure to disclose related litigation, citing lack of evidence of withholding of material information. The current thinking, as suggested by the decision, is if related litigation does not involve citation of prior art, a challenge to validity or a pleading of un-

patentability, then such litigation may not be material to patentability and need not be disclosed. In other words, it is not per se material simply because it is related litigation. Once a determination of related litigation is made, it is important for intellectual property attorneys and inhouse counsel to understand the types of material that must be disclosed. MPEP 2001.06(c) arguably encompasses material that expands the extent of information to be disclosed under Rule 56. One court determined that material information was withheld when pleadings from litigation, in which the judge had construed the meaning of terms in claims now before the examiner, were not disclosed. Another court found that a declaration from a professor stating that claims were not supported by an adequate written description was material, although not highly so. Therefore, depending on the circumstances, it may not be sufficient to simply disclose that related litigation exists, or to only disclose prior art from that related litigation. In Carnegie Mellon Univ. v. Hoffman-La Roche, Inc., the Federal Circuit noted that the PTO wants, “neither too little, nor too much, litigation material.” Thus, it is not only important to understand what must be disclosed, but also to understand what need not be disclosed. As noted above, the meaning of claim terms has been deemed material when those same terms are in front of the examiner. However, if the terms involved in the litigation and prosecution are not the same, then such information may not be material. The provision itself lists examples that would not immediately be identified as containing material information: “pleadings, admissions, discovery including interrogatories, depositions, and other documents and testimony.” Materiality of information depends on circumstances. An applicant should consider disclosure of related litigation documents in light of Rule 56. Specifically, an attorney should consider what litigation documents and information would materially affect patentability, or what litigation documents

and information assert a position contrary to that taken in front of the PTO examiner. Patent applications at risk of running afoul of MPEP 2001.06(c) usually protect the applicant’s most important technologies. In order to curtail allegations of invalidity and inequitable conduct for these assets, it is incumbent that material information from related litigation be disclosed. As noted, this is a two-step process in which the applicant must first decide if the litigation is “related” by thinking about the relationship between the litigation and the patent being prosecuted, and the extent to which the litigation impacts the patentability of the invention. Then, if such litigation is related, the applicant must ask if there is any information that is material. This step should consider the materiality of information in light of the guidance provided by Rule 56. Only after undergoing this two-step process can the applicant meet this arguably enhanced duty of candor. ■

Robert A. Kalinsky is a partner with Merchant & Gould LLP. His practice focuses on patent prosecution and litigation support, with a concentration on the electrical and mechanical arts, and on software and biomedical device patents. kalinsky@merchantgould.com

Paige S. Stradley is an associate with Merchant & Gould LLP. She practices intellectual property law litigation with a focus on patent, trade dress, and copyright infringement. She is a member of the Minnesota Chapter of the FBA Communication’s Committee. pstradley@merchantgould.com

oct/ nov 2013 today’s gener al counsel

Intellectual Property

Antitrust Challenge Permitted By FTC v. Actavis May Be Limited By Jeffery M. Cross and Jill C. Anderson

n June this year, the U.S. Supreme Court released its much-anticipated decision on so-called “reverse payment” settlements between brand-name and generic drug makers. Federal Trade Commission v. Actavis involved an antitrust challenge to the settlement of patent infringement litigation brought under the Hatch-Waxman Act. The generic drug manufacturers in the case agreed to drop their challenge to the

are presumptively anti-competitive because the parties are colluding to split the monopoly profits of the patent holder by delaying market entry of the generic drug, thus denying consumers the benefit of the lower cost generic. The lower courts, however, reasoned that the very purpose of a patent is to enable the patent owner to exclude competitors from the market during the term of the patent.

criticized the majority’s claim that its holding was limited to the unique context of patent settlements under the Hatch-Waxman Act. To the Chief Justice, a “reverse-payment” can occur in many settlements of patent litigation, not just those relating to Hatch-Waxman litigation. He found that the majority’s ruling was sufficiently broad to ensnare all patent settlements that involved some sort of

The majority was concerned with settlements in which a party with no claim for damages walks away with money so it will stay away from the patentee’s market.

validity of the brand-name manufacturer’s patent and also agreed to delay their entry into the market to a date later than they would have entered had they prevailed. In turn, the brand-name manufacturer paid the generic drug manufacturers millions of dollars. Such agreements are called “reversepayment” settlements, because typical patent settlements involve a payment by the alleged infringer (here the generic drug manufacturer) to the patent owner (here the brand-name drug manufacturer). In this type of case, the payment is the reverse. Because such settlements result in the generic drug manufacturer delaying entry into the market, they are sometimes called “pay-for-delay” settlements. FTC REVERSED

In Actavis, the FTC sued the settling parties, alleging that their agreement violated antitrust laws. According to the FTC, reverse-payment settlements

Accordingly, they concluded that the settlement was immune from antitrust attack because the agreed date for the generic to enter the market was prior to the expiration of the patent. The Supreme Court reversed. In a 5 to 3 decision written by Justice Stephen Breyer, the Court held that reversepayment settlements of the type at issue had the potential to create an anti-competitive effect without justification, and therefore warranted antitrust scrutiny under the Rule of Reason. The Court, however, also rejected the FTC’s position that such agreements are presumptively illegal, and therefore should be analyzed under the abbreviated “quick look,” rather than the full Rule of Reason. Chief Justice John Roberts, joined by Justices Antonin Scalia and Clarence Thomas, dissented. In addition to finding the majority’s decision a departure from settled patent and antitrust law, Chief Justice Roberts

benefit flowing from the patent holder to the alleged infringer. In this regard, Roberts cited various examples of reverse-payment patent settlements unrelated to the HatchWaxman Act. For example, when Company A sues Company B for patent infringement and demands $100 million in damages, but settles for $40 million, Company A has provided something of value to Company B that could be considered a form of “reverse-payment.” Further, if B has a counterclaim for damages against A, the original infringement plaintiff, A might end up paying B to settle B’s counterclaim. The majority responded by agreeing such commonplace forms of patent settlements should not be subject to antitrust liability. It emphasized that it was concerned with settlements in which a party with no claim for damages walks away with money simply so it will stay away from the patentee’s market.

todayâ&#x20AC;&#x2122;s gener al counsel oct/ nov 2013

Intellectual Property

oct/ nov 2013 today’s gener al counsel

Intellectual Property HATCH-WAXMAN INFRINGEMENT

To understand the majority’s distinction, it is necessary to understand the Hatch-Waxman Act and patent infringement litigation brought under it. A “pioneer” drug manufacturer can secure a patent on a drug, but cannot market the drug without obtaining FDA approval. To gain such approval, the pioneer must engage in expensive clinical trials to prove the safety and efficacy of the drug, and it must file a New Drug Application with the

When a generic company files an ANDA, it also certifies the relationship of the generic drug to any patent held by the brand-name manufacturer and listed in the Orange Book, under one of four different paragraphs of the Act. Certification under paragraphs 1 through 3 state that there is no patent information listed in the Orange book, or the original patent has expired, or that the generic will not manufacture the product until the patent expires.

The Supreme Court in FTC v. Actavis has largely left the application of the Rule of Reason in reverse-payment litigation to the lower courts.

FDA detailing these trials. Once FDA approval is granted for a branded drug, identification of the patents at issue are listed in an FDA publication known as the “Orange Book.” Prior to the Hatch-Waxman Act, a generic drug manufacturer would have to engage in similar clinical trials. However, such clinical trials themselves could be deemed acts of infringement of the patented drug, potentially exposing the generic company to substantial damages. For this reason, manufacturers of generics often waited until the brandname manufacturer’s patent expired before beginning such clinical trials. Congress found that hurt consumers by delaying the benefits of cheaper generic drugs. The Hatch-Waxman Act, enacted in part to solve this delay problem, permits a generic drug manufacturer to forego the clinical trials by riding-on-the-coattails so to speak of the branded manufacturer. Under the Act, a generic drug manufacturer files an Abbreviated New Drug Application (called an ANDA), stating essentially that the generic is the same as the patented drug.

Certification under paragraph 4 states that the original patent is either invalid or will not be infringed by the generic. Filing an ANDA with a paragraph 4 certification is deemed by the Hatch-Waxman Act as an act of infringement. However, the generic manufacturer does not face potential damages from such a “technical” infringement, nor does the generic typically have a counterclaim for damages against the branded manufacturer. It is a “reverse-payment” settlement in such a situation that the Supreme Court majority is concerned about. The question is, how frequently would there be patent litigation in which the alleged infringer is not facing any potential damage liability and has no counterclaim for damages against the patent holder? Although there might be an occasional case for a declaratory judgment concerning anticipatory infringement where there has been no actual infringement yet, these should be few. Settlements of such anticipatory patent infringement cases where there are reverse payments raise the concern at the heart of the majority’s decision. The pay-

ment in effect amounts to a purchase by the patentee of the exclusive right to sell its product, a right it already claims but would lose if the patent were held invalid or not infringed by the challenged product. Arguably, an antitrust analysis of such a settlement should be undertaken. The Supreme Court in FTC v. Actavis has largely left the application of the Rule of Reason in reverse-payment litigation to the lower courts. It remains to be seen whether these lower courts will limit antitrust challenges to reverse payments under the Hatch-Waxman Act or whether Chief Justice Roberts’ concern will be borne out. The majority has tried to limit the reach of its decision. The lower courts may accept such limitations. But if they do not, the situations in which antitrust challenges lie outside the majority’s framework may be so few that the adverse impact on businesses holding patents will be minimal. ■

Jeffery M. Cross is a partner at Freeborn & Peters LLP, and a member of the Litigation Practice Group and the Antitrust and Trade Regulation Group. He has taught antitrust law for the past 12 years as an adjunct professor at John Marshall Law School in Chicago. jcross@freeborn.com

Jill C. Anderson is a partner at Freeborn & Peters LLP she is a member of the Litigation Practice Group and leader of the Antitrust and Trade Regulation Group. Her experience includes successful trial and appellate work on behalf of corporate clients in a wide range of state and federal commercial matters. janderson@freeborn.com

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OCT/ NOV 2013 TODAYâ&#x20AC;&#x2122;S GENER AL COUNSEL

Intellectual Property

Understanding the Trademark Clearinghouse By Jan Corstens

he Internet is set to undergo its most significant makeover ever with the initial rollout of hundreds of new generic Top Level Domains (gTLDs). They will create a vastly expanded universe of original web addresses. Branded, general and geographic domains such as .google, .law and .africa will soon launch alongside traditional domains such as .com, .org and .info. While this presents many opportunities to enhance competition and innovation online, some intellectual property owners are concerned about the risks the new domains will present. A recent independent survey, commissioned by Deloitte and conducted by Vanson Bourne, found that 83 percent of leading U.S. businesses believe that the current domain name system already makes it difficult to protect trademarks. With a huge number of new domain names expected to appear within the next few months, protecting trademarks from fraudulent or other misuse will undoubtedly prove to be an even more trying process. Clearly there is a need to educate

and assist intellectual property owners in preparing for the new gTLD program. This is where the Trademark Clearinghouse has a role to play. The Trademark Clearinghouse was developed by the Internet Corporation for Assigned Names and Numbers (ICANN), working with intellectual property experts and other stakeholders in order to ensure a way for trademark holders to protect their rights during the expansion of Internet domains. Connecting with The Trademark Clearinghouse, which officially launched on March 26th, 2013, is the first and most critical step for a business that wants to secure and defend its intellectual property. ONE STOP

The Trademark Clearinghouse offers brand owners a one-stop opportunity to take advantage of unique mechanisms designed to safeguard their trademarks across the hundreds of new gTLDs that started going live this summer. Its launch marks the first time that there is a single, global repository of registered

trademarks. Previously, brands had to individually record their trademarks with each and every TLD in order to avail themselves of protection mechanisms. By registering trademarks with The Trademark Clearinghouse, brands will benefit from two unique services. The first is the opportunity to preferentially secure trademarked terms during the â&#x20AC;&#x153;sunrise period.â&#x20AC;? Before the open launch of any new gTLD to the general public, there is a sunrise period that enables intellectual property owners (businesses or private individuals) to secure domain names associated with their marks ahead of wider availability. Any intellectual property owner wishing to secure a domain name associated with its trademarks during this period must have submitted the relevant marks into the Trademark Clearinghouse. Since the Trademark Clearinghouse reviews marks from all jurisdictions according to the same requirements, use of the Clearinghouse provides a consistent basis for accepting sunrise registrations. It is important to note that new gTLD registries also have the ability to establish additional registration criteria, and may offer additional limited registration periods to establish further opportunities or protections. The second key benefit of a record in the Trademark Clearinghouse is notification alerts via the Trademark Claims System. For a period of at least 90 days after each new web extension launches, trademark holders will receive a warning if someone else registers a domain name that matches their mark or marks, thereby providing a very early opportunity to deal with trademark infringement. This comes with the certainty that any infringement occurred under notice of the existence of the record in the Clearinghouse. The impending arrival of new domains presents new threats to owners of existing trademarks, which is why 96 percent of

today’s gener al counsel oct/ nov 2013

Intellectual Property the leading brands surveyed by Deloitte view this as a risk to intellectual property. However, businesses that take advantage of the new protection mechanisms now available through the Trademark Clearinghouse will be in a strong position to defend their trademarks during the rollout of new domain extensions. While there is no existing deadline for submitting a trademark to the Trademark Clearinghouse, it is recommended that brand owners be prepared to submit their trademarks as early as possible to ensure enough time for dealing with administrative corrections. Brand owners that are particularly interested in taking advantage of registrations during sunrise periods should be focused on early submissions. Delays could lead to the inability to register a domain name. INTERNATIONAL PROTECTION

For businesses that have registered trademarks and benefit from associated legal protections, there has been some confusion as to why these need to be recorded in the Clearinghouse as well. One reason is that the Clearinghouse is

designed to enhance those protections within the international domain name system. Existing protection is limited to the category of goods and services and the jurisdiction(s) under which the trademark is registered. The sunrise process and the trademark claims process are essentially preventative measures. The new gTLD programme will also benefit from two curative measures: • Uniform Domain-Name DisputeResolution Policy (UDRP): This well established ICANN policy and associated processes allows trademark holders to deal with domain name disputes without resorting to litigation in order to cancel, suspend, or transfer a domain name. • Uniform Rapid Suspension (URS): This new policy will serve as a quicker and lower-cost alternative to UDRP for circumstances of explicit trademark abuse, where a temporary suspension of a domain name is allotted for the duration of the registration period.

These options are designed as added defense against abusive registrations by third party registrants who intentionally register similar domain names for illegitimate intentions. The purpose of the Trademark Clearinghouse is to offer the most reliable source of initial protection to intellectual property owners within the new gTLD program. Understanding the aforementioned reasons for registration will further aid the process of safeguarding trademarked terms within the new, larger universe of domain names. ■

Jan Corstens, a partner in the Deloitte Belgian office, leads a team of experts in contract risk and compliance services. He has performed and managed multiple royalty and IP audits in the software, hardware and technology space.

oct/ nov 2013 today’s gener al counsel

Intellectual Property

Thin Line Between Patent Litigation and R&D Hi-Tech Products Inevitably Use Other’s Technology By Ron Epstein and Bryan Lord

atent litigation is on the rise because corporate R&D has changed. Litigation is now an integral part of corporate R&D. A decade ago patent litigation was much less common and typically involved fierce competitors battling over accusations of copying. Today, it is typically one of the top three legal-related issues on CEO agendas, and barely a week goes by without stories of patent litigation appearing in the national business press.

The blame has been placed on patent trolls and others who invest in patent enforcement for profit. However, the real culprit is the fact that companies are increasingly reliant on IP developed by third parties. The days of mega-companies like IBM and HP developing their own products from components to software are over. Companies are increasingly adapting new ideas from outside sources. There are at least three ways this happens:

• “Building on the Shoulders of Giants” The ground-breaking innovations of last year are often viewed as no more than the “plumbing” behind this year’s innovation by other companies. But the companies that spent billions of dollars on R&D on those ground-breaking innovations are not always content to see new entrants simply adopt that technology without some recognition. The long running battle over Kodak’s patent portfolio, which ultimately

today’s gener al counsel oct/ nov 2013

Intellectual Property resulted in nearly a dozen companies banding together to purchase the portfolio for the benefit of all, represents one example of the cost to access the innovations of the past. • Convergence One leading trend is to integrate what were previously many different products into a single product. For example, a few years ago, a typical consumer

customer attention. Engineering talent is widely available, so it is simple and cheap to copy a new feature or product idea once it is on the market. The most famous example of innovation by observation is seen in the ongoing case between Apple and Samsung. Apple won a $1billion verdict by demonstrating that certain aspects of Samsung’s phone designs looked very similar to Apple’s product designs.

Companies rarely understand where all of their innovation really comes from. owned a cell phone for voice calls, a PDA for scheduling, a laptop computer for productivity software and games, a Blackberry for mobile email, a pager, an mp3 player/IPOD for music, a camera, and perhaps a mobile gaming device and a GPS unit. Today, all those products are incorporated in a single smart phone. Convergence isn’t limited to consumer electronics. Automobile makers are now adding phones, computers, even media centers to their cars. Medical device manufacturers are adding communications and advanced monitoring capabilities to life improving products. The makers of these new integrated products did not re-invent or separately invent all of these new technologies. They imported them, often whole and without having to incur significant R&D cost. The companies that spent years and invested hundreds of millions of dollars into bringing these technologies to market often own controlling intellectual property. The newcomers will need to pay to access the related technologies. • Innovation by Observation Have you noticed that the products from each manufacturer of smart phones have nearly identical lists of features? Sure, there are a few features on each phone that differ, but even those features usually show up in competitor products in a few months. The fact is, competitors pay very close attention to new features that gain

This problem is particularly acute for smaller companies that can spend years developing a new product only to find that large companies use their advantage in size, resources and reach to copy and exploit it. Recently, a research report cited in The Economist found that “innovators captured only seven percent of the market for their product over time.” LITIGATION AS A SALES TOOL

Few companies outside of biotech/pharma account for access to third party IP on their balance sheets. (How does your company account for the cost of access to these IP sources?) Much of this borrowed technology is free. The developer chooses not to charge for use of its IP. However, now developers are getting more insistent about ensuring that borrowers pay for access. But, since free is better than not-free, and frankly since companies rarely understand where all of this innovation really comes from, there is a great resistance to voluntarily taking a license. Because patents represent the strongest form of intellectual property covering “borrowed” technology, this insistence takes the form of patent litigation. Litigation has become the de-facto sales process for IP licensing, and IP litigation costs are attributable to, and ought to be accounted for, as part of a company’s R&D spend. Given the increasing pace of innovation, and an increasing dependence on third party sources for IP, litigation will continue

to be part of a corporation’s R&D spend. But GCs and business executives in techoriented companies who recognize, understand, and embrace this new paradigm should consider the following strategies: • Be aware so you can properly manage licensing. Not all third party requests to take a license are illegitimate. Try to develop an understanding of what level of dependence your products have on the sources of third party IP. • Account for the expense of access to third party IP in the cost-structure of the product, and budget for paying for these rights. If patent litigation costs are counted as a legal expense, as opposed to the cost of third party IP, no one at the company can look for ways to manage and reduce that expense internally. • Mitigate expense. Once you have a handle on the cost to access third party IP rights, build expertise on how to reduce it. Look for ways to decrease these costs by cross licensing, patent acquisitions and encouraging engineering teams to investigate design-arounds. • Think strategically. Consider ways to encourage an efficient IP marketplace that does not require litigation. ■

Ron Epstein is CEO of Epicenter IP Group, an intellectual property services company headquartered in Silicon Valley. He provides patent licensing, patent brokerage and strategic IP consulting services to corporations and IP investors. ron@epicenterip.com

Bryan Lord manages corporate development and IP transactions for Epicenter IP Group. He has more than 15 years of experience managing the finance and commercial IP strategies of high technology companies and their investors. bryan@epicenterip.com

OCT/ NOV 2013 TODAY’S GENER AL COUNSEL

Intellectual Property

Strategies in a Medical Device Patent Jury Trial By Matthew J. Becker and Tara R. Rahemba

eveloping a jury-friendly trial strategy in a patent case is critical to success. Weaving a cohesive story throughout the case, one that is easy for the jury to grasp, can be the difference between a win and loss. Based on our medical device jury trial experience, we focus on three main components of trial strategy:

• Using fact witnesses to build a compelling storyline. • Simplifying key infringement issues for the jury. • Taking a real-world, common-sense approach to non-obviousness and damages issues by focusing on secondary considerations of nonobviousness, and making logical and intuitive damages arguments. Several different aspects of a compelling storyline are often available when representing a patent plaintiff. First, emphasize the efforts and investments that went into creating the invention and bringing it to fruition. Juries tend to like inventors. A compelling explanation of the inventors’ efforts can align the jury with the plaintiff/inventor, and set the stage for the infringement and invalidity cases. For example, having the inventors explain that despite diligent work on the invention, the development process still required substantial time, effort and resources, conveys that the invention is not a trivial advance and tends to support patent validity. Don’t overreach. Inventors usually testify early in the case and can set the tone. A loss of inventor credibility can mean a loss at trial. Common examples of overreaching in the invention story include inflating the actual time spent on the invention, failing to account for fits and starts in the development

process and exaggerating or doublecounting development costs. Acknowledge these facts, preferably through the inventors’ direct examinations. This tends to build inventor credibility. Emphasize the importance and value of the invention. This is often best done through end users, and with marketing or sales executives. And of course the fact that the defendant and perhaps others have decided to make and sell a similar product usually helps. But again, it is important not to oversell the importance of the invention. Most inventions do not completely revolutionize a given industry and do bear at least some similarities to the prior art. Too often patent plaintiffs will attempt to oversell the novelty and importance of the invention. This too can create credibility issues for the inventors and the other plaintiff witnesses. Conversely, from the defendant’s perspective, it is important to present an independent design and development story, emphasizing key product differences. Testimony of the product developers as to the time, effort and other investment required to develop

the accused product tends to show independent development and helps to refute allegations of copying. Perhaps more important, an independent development storyline sets the stage for a defendant’s non-infringement positions. If a defendant’s fact witnesses can subtly distinguish the features of the accused product from those claimed in the patent, this will often provide defendant’s expert witnesses with good footing for their non-infringement opinions. EXPLAINING INFRINGEMENT EVIDENCE

Because the issue of infringement is usually at the core of any medical device patent case, it is important for both the plaintiff and defendant to present their cases simply and logically. Many medical device claims are lengthy and have the potential to overwhelm the jury if not presented in a clear, organized way. The plaintiff’s challenge is to meet its burden as to every claim limitation, at the same time focusing the jury on the (usually) small number of claim limitations that are actually in dispute.

TODAY’S GENER AL COUNSEL OCT/ NOV 2013

Intellectual Property A plaintiff should of course set the stage during opening statements (and, if permitted, during witness transition statements) by explaining that it will prove that all elements are present, but at the same time highlight the focal points of the dispute. An organized, logically flowing infringement presentation augmented with effective demonstrative exhibits will hold the jury’s attention and help frame the hotly disputed issues. A defendant contesting infringement should be mindful of hypertechnical infringement challenges. All too often, litigants place a premium on the quantity of defenses. In our experience, a few strong non-infringement positions make for a better trial presentation than a high volume of suspect positions. Weak defenses usually affect a party’s credibility with the jury, and tend to weaken the stronger positions. Visual demonstratives are often very effective tools for both parties to simplify the technical issues in medical device cases. Mechanical technologies by their nature are often easier to explain to lay juries than chemical or software technologies. The use of good graphic demonstratives to supplement physical samples and technical documents is an effective tool to assist the jury in grasping the technical issues. Adhering to the court’s claim construction analysis during the infringement presentation is also critical. In the medical device field, jurors may be familiar with the lay meaning of mechanical terms used in the patent claims, but lay meaning often does not control for claim terms that have been construed. Accordingly, an effective trial presentation must reinforce that the jurors must apply the court’s constructions, rather than their own interpretation of the claim terms, in determining infringement. APPEAL TO COMMON SENSE

A successful party will frame its trial presentation to appeal to the juror’s common sense and logic. Two examples of areas in which to capitalize on this strategy are secondary considerations of non-obviousness and damages.

Because most medical device fields tend to be relatively crowded with prior art, obviousness is usually an issue. The plaintiff patentee should devote a significant amount of the rebuttal case to secondary considerations of nonobviousness, including commercial success of the patented products, copying, initial skepticism of the invention and a long-felt but unmet need for the invention. These real-world factors are usually easier for jurors to grasp and value than the technical issues involved in comparing the prior art to the claimed inventions. Focusing on secondary considerations can also be an effective way for a plaintiff to counter apparent similarities between the prior art and the invention. A defendant’s focus should be on attacking the existence of each secondary consideration, as well as the link between the secondary consideration and the claimed invention. For example, with respect to commercial success, the patented product may generate revenue, but that does not necessarily mean that it is commercially successful for the patentee. In addition, in most cases any commercial success that does exist can be attributed to a host of factors. A strong analysis of the causes of the commercial success can effectively negate this factor. Jurors can easily relate to damages issues - they deal with monetary issues on a daily basis - so again, appealing to the jury’s common sense, logic and even personal experience is important. Damages may be available in the form of lost profits for the sales of the patented products, or they may be in the form of a reasonable royalty. In either situation, the role of the damages expert and supporting fact witnesses is to walk the jury through their analyses in a logical and well-reasoned manner, where possible using analogies to realworld financial scenarios (such as lease negotiations) that all of the jurors likely have experienced. If lost profits are at issue, constructing what the market for the patented products would have looked like absent the defendant’s infringe-

ment can be done in a step-by-step manner, in common-sense terms. If the damages sought are in the form of a reasonable royalty, it’s critical to break down the Georgia-Pacific factors into layman’s terms that the jury can relate to. The subset of factors that tend to be easiest to understand should be the focus - e.g., the relationship between the parties as competitors in the same field, royalty rates paid by alleged infringers in similar circumstances, and the value (in terms of utility or money) of the invention as compared to previous devices that had been used. Emphasizing the factors that are most easily understood by the jury (and presumably that are most helpful to your party’s position) ensures that the jury will appreciate the considerations that go into the analysis and that it will reach the same logical result as your expert. ■

Matthew J. Becker is a partner and co-chair of Axinn, Veltrop & Harkrider LLP’s Intellectual Property Group. His practice focuses on patent litigation in various healthcare fields. He has also handled many patent cases involving other technologies, including electronics, nuclear detection equipment, food products, fiber optics and consumer products. mjb@avhlaw.com

Tara R. Rahemba is an associate at Axinn, Veltrop & Harkrider LLP, in the firm’s Intellectual Property Group. Her practice focuses on patent litigation and counseling in the pharmaceutical, biomedical, medical device and consumer products fields. trr@avhlaw.com

oct/ nov 20 13 toDayâ&#x20AC;&#x2122;s gEnEr al counsEl

E-Discovery

Multilingual Review In The E-Discovery Process By Mathieu van Ravenstein and Jon Shaman

egal technology tools such as concept clustering and predictive coding can help reduce the amount of data that needs to be reviewed during discovery, thus reducing reviewer costs. These emerging technologies are becoming important components in dealing with legal matters that cross international borders and include data that is created, transmitted, and stored in non-U.S. locations. In the past, European and Asian countries experienced lower volumes of discovery during litigation, due mainly to differences in civil and common law systems. As a result of the increase in global commerce and international corporate disputes, discovery of large volumes of data is becoming more common worldwide. Regulatory enforcement is also intensifying, leading to a rise in the number of internal investigations and information requests that require large-scale review and production of documents. Law firms and their clients traditionally have used a combination of multilingual in-house lawyers and translation agencies to complete these projects. This is hardly a smooth process, as the law firm rarely knows at the beginning of a matter if the data set contains foreign language documents or how many different languages are involved. Additional challenges arise when there are not enough attorneys available that speak languages in a specific location. This can lead to delays and inflated reviewer costs. The use of external translation services can help. However, since the translation process is so context-specific, and the translators are often too far removed from the case team to gain a full understanding of the facts of the case, inconsistencies in reviewer accuracy frequently occur, resulting in a slower and significantly more expensive process.

It is important to develop protocols that capture as much information as possible at the earliest stages of the discovery process. Find out from custodians and employees familiar with the matter about the geography, culture, work habits and other relevant facts about participants who contributed to the data being collected. Determine the languages used both in writing documents and collaborative interactions among team members. These kinds of conversations and questions regarding discovery allow the legal team not only to explain the legal discovery process and obtain relevant permissions to access and review data, but can also help identify relevant languages that may be involved in

each custodianâ&#x20AC;&#x2122;s data. In cases where custodians are either unavailable or unsure of information that may exist in multiple languages, it is possible at the processing stage, using e-discovery software, to identify the languages in which a document has been written. TRADITIONAL LINEAR REVIEW

If you have enough reviewers competent in each language being reviewed, then the process is relatively straightforward. Using electronic discovery review platforms, documents in each language can be identified, segregated and routed to reviewers proficient in that language. If human translations for production are required, this can be built into the work flow.

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E-Discovery

If there aren’t enough reviewers capable of understanding a language, then consider options such as machine translation and outsourced review. Machine translation is typically literal and word-for-word, but it does provide a broad understanding in a relatively accurate, quick and economical format. Relevant documents can then be translated or further reviewed by a lawyer proficient in the original language. When documents are located in foreign countries or involve multilingual document review, parties should allow extra time in their case plan. Start the discovery process with custodian interviews to identify which languages may be included in the collected data. Using technical processing tools early on can provide critical information, including the numbers of documents in each language. The combination of machine translation and multilingual reviewers generally provides an adequate resource pool. NEW TECHNOLOGIES

The best approach for a multilingual case will likely include a number of techniques and technologies. Tools such as concept searching, concept clustering and possibly even predictive coding can make review more efficient and less expensive. One benefit of these technologies is that they can leverage decisions made in prior reviews. However, there currently are no agreed upon standards specific to these technologies. Corporations should understand the risks of adopting unproven technologies that most U.S. courts have not yet endorsed and international courts have yet to consider. As more cases come through courts and regulatory agencies, it will be easier to determine which work flow combinations are appropriate and which will not succeed. Additional challenges arise when data is located in numerous countries. The need to move data between jurisdictions as part of discovery frequently conflicts with regional, national and supra-national restrictions, such as the European Data Privacy Directive. This often means it’s necessary to obtain and maintain consent from individuals, with regard to how their data will be collected, where it will be sent and who will have access. There may also be a requirement to confirm that personal information and data has been excluded or filtered out.

Laws protecting corporate data, such as the French or Swiss blocking statutes, may actually criminalize movement of data outside of borders. There may be internal corporate data restrictions, whereby the companies responding to information requests have contractual obligations to protect their client data. And there may be state data restrictions, such as the Law of the People’s Republic of China on Guarding State Secrets, where review of certain classes of documents may be required before they can be moved outside the country. In Germany, the Federal Data Protection Act strictly regulates the collection, processing, and use of personal or corporate data, significantly impacting the manner in which investigations are conducted. Planning becomes critical as failure to gain consent of key custodians can limit data collection and result in failure to meet litigation and regulatory request deadlines. Significant financial penalties may result. MULTILINGUAL REVIEW: CASE IN POINT

Even before technologies such as predictive coding had a name, technologyassisted review techniques were being used to help corporations manage their data. A notable example was when Siemens faced investigation by the U.S. Department of Justice and the Securities and Exchange Commission for potential violations of the Foreign Corrupt Practices Act. This case offers an example of how the right combination of technology, process and people can effectively collect and reduce the data set, making review more efficient and less costly. Hundreds of millions of documents were collected from nine countries, and the investigation involved translation of more than 24 languages, including non-Latin alphabet languages. The data included multiple types of computer text encoding, including old versions that pre-dated international standards. Common Unicode software could not have accurately captured all available data for indexing and searching. The experts working on this case had particular expertise in handling Chinese, Japanese and Korean data.

They employed specialized technology for determining encoding, resulting in accurate data identification, processing, indexing and multilingual searching. In addition, while gathering and managing data from Germany, China, Belgium, Russia, Greece, Italy, Singapore, the United States and the United Kingdom, the expert understanding of each country’s data protection laws was essential in facilitating the overall investigation and complying with local customs, sensitivities and laws. Companies that operate across borders have multiple technologies and techniques available – including machine translation, multilingual search and conceptual tools – to reduce the amount of irrelevant data that must be reviewed. To save time and reduce costs, they may also incorporate integrated services and managed workflows at all stages of the process. By understanding the nature of the data going into an investigation or legal matter, applying the right combination of machine and human translation, introducing proven technologies, and employing experts who understand data privacy laws in each country of operation, corporations can become well-positioned to manage their multilingual document reviews. ■

Mathieu van Ravenstein is a director at Consilio, where he manages large-scale review projects across multiple countries. mathieu.vRavenstein@consilio.com

Jon Shaman is a vice president at Consilio. Prior to joining the company, he was a practicing litigator for more than 13 years. jon.shaman@consilio.com

oct/ nov 2013 today’s geneR al counsel

Human Resources

The National Trend Toward “Ban the Box” By Joseph G. Schmitt

n May, Minnesota adopted legislation restricting employers’ consideration of criminal background checks in the hiring process. The new Minnesota statute follows legislative and regulatory actions by other states and municipalities, as well as new efforts by the Equal Employment Opportunity Commission (EEOC), to restrict employers’ consideration of criminal records in the hiring process. Inside counsel and HR staff need to be aware of these changes and ensure that their hiring processes comply with federal, state and local statutes, regulations and ordinances. These take several forms, but have been universally dubbed “ban the box” laws because they

typically prohibit the employer from including a “box” on its application and requiring that the applicant check the box if he or she has a criminal record. The new Minnesota law illustrates one set of restrictions, those that seek to regulate the process by which an employer may obtain information regarding an applicant’s criminal record. For example, it prohibits employers from asking an applicant about his or her criminal history, or performing a background check, until the applicant has either been selected for an interview or extended an offer of employment contingent on the background check. The Minnesota statute does not, however, place a substantive restriction

on the employer’s ability to consider the applicant’s criminal record in making its hiring decision. These process-based statutes are fundamentally different from statutes that place substantive restrictions on an employer’s ability to consider an applicant’s criminal history. For example, the Wisconsin Fair Employment law precludes an employer from refusing to hire an applicant based upon an arrest, a pending criminal charge, or a criminal conviction – unless it is for an offense that is substantially related to the circumstances of the particular job. An employer in Wisconsin may consider an applicant’s conviction

today’s geneR al counsel oct/ nov 2013

Human Resources

at any point in the process, but the employer may deny an applicant employment based only upon particular criminal convictions.

The EEOC’s guidance states that an employer should not deny a position based upon a criminal conviction unless the employer has determined

State and local restrictions supplement EEOC guidance issued in April of 2012.

State and local restrictions supplement EEOC guidance issued in April, 2012, outlining the Commission’s position regarding consideration of an applicant’s arrests, pending charges and criminal convictions under Title VII of the Civil Rights Act of 1964. The EEOC contends that consideration of criminal records has a disparate impact upon several classes protected under Title VII. According to the EEOC, “African Americans and Hispanics are arrested at a rate that is two to three times their proportion of the general population. Assuming that current incarceration rates remain unchanged, about one in 17 white men are expected to serve time in prison during their lifetime; by contrast, this rate climbs to 1 in 6 for Hispanic men; and to 1 in 3 for African American men.” As a result, the EEOC has taken the position that employers should consider an applicant’s criminal record only when making a hiring decision under certain limited circumstances. Initially, the EEOC’s Guidance states that employers should not deny positions based upon an arrest that has not yet resulted in a conviction. The EEOC contends that because African-Americans and Hispanics are arrested at rates higher than Caucasians, and because an arrest does not always result in a conviction, consideration of arrests would discriminate against those groups. However, the EEOC was careful to note that an employer may make a decision to deny a position based upon facts underlying an arrest, even if the individual has yet to be convicted.

that denial of the position is consistent with business necessity. In particular, it advises employers to avoid blanket policies, and directs consideration of all relevant information regarding the applicant, including the nature of the crime and the length of time since the applicant was convicted, the nature of the position sought by the applicant, and all other relevant information, before making a decision on whether to deny the applicant employment. The EEOC’s Guidance suggests that a “best practice” for an employer would be to conduct an individualized inquiry, evaluating not only the position and the conviction, but also considering whether the applicant has been rehabilitated. This would presumably necessitate obtaining additional information from each applicant regarding activities since conviction, and a determination of whether the applicant is likely to commit a crime in the future. Finally, the EEOC specifically notes that Title VII preempts any state or local requirements regarding background checks. Thus, an employer may not avoid or defend against a Title VII lawsuit on the grounds that it was complying with a state or local requirement that an employer conduct a background check and denied an applicant employment based upon that check. Of course, many, if not most, employer decisions to deny employment based upon a state or local requirement will also satisfy the EEOC’s “business necessity” requirement. However, at least one federal court has

already held that an employer who denied an applicant employment based upon a state requirement nevertheless could violate Title VII. Employers confronting this changed statutory and regulatory landscape will want to carefully consider their hiring practices. In particular, they should:

1 2

Avoid denying applicants employment based solely upon arrests.

Review applications for employment, disclosure forms and other hiring documents to ensure that any requests for criminal records are made in compliance with all applicable state and local statutes and ordinances.

Avoid blanket policies prohibiting hiring of applicants with criminal convictions.

Ensure that they consider the nature of the conviction, the amount of time since the conviction, and all other relevant information in making a decision on whether to deny an applicant employment based upon a criminal conviction.

Continue to review and update hiring documents and practices to account for future changes in this fastmoving area. Every employer must formulate background check policies and procedures to account for its special circumstances and specific business challenges. But by following best practices, an employer can minimize the risks under Title VII, and state and local statutes and regulations. ■

Joseph Schmitt is a shareholder and chair of the labor and employment group at Nilan Johnson Lewis PA. His practice is focused on management-side labor and employment law. jschmitt@nilanjohnson.com

oct/ nov 2013 today’s Gener al counsel

Governance

Delaware Forum Decision Good for Companies and Shareholders Too By John S. Delikanakis

y now, most in-house attorneys have read about, or at least heard about, the Delaware Chancery Court’s June 25 decision in Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corporation and IClub Investment Partnership v. FedEx Corporation, et al. In this case, Chancellor Leo E. Strine Jr. upheld the validity of corporate bylaws making Delaware the sole and exclusive jurisdiction where stockholders can file a derivative lawsuit or sue corporate directors and officers for breach of fiduciary duty. Specifically, Chancellor Stine held that such bylaws are valid under Delaware’s statute governing what may be included in a corporation’s bylaws, and that such bylaws are contractually enforceable against

stockholders, even when adopted by a board unilaterally, without shareholder approval. The concept that a corporation can validly adopt bylaws to specify the exclusive forum where certain types of lawsuits can be filed is not new. It has been debated for some time, as corporations are regularly confronted with having to defend the same claims, regarding the same documents, in several different courts around the country. Recognizing these inefficiencies, in 2010 shareholder litigation involving Revlon, Delaware Vice-Chancellor Laster noted that where a particular forum provides an efficient location for shareholder lawsuits, corporations “are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes.”

A year later, Delaware Chancellor Chandler wrote in a case involving Allion Healthcare: “Worse still, if a case does not settle or consolidate in one forum, there is the possibility that two judges would apply the law differently or otherwise reach different outcomes, which would leave the law in a confused state and pose full faith and credit problems for all involved.” Historically, many plaintiffs have sought to litigate “anywhere but Delaware,” often seeking state court forums that have limited experience in adjudicating shareholder claims and that allow such claims to be tried to a jury. In contrast and unsurprisingly, defendant corporations are drawn to Delaware’s juryless Chancery Court, with its deep experience trying such matters.

today’s Gener al counsel oct/ nov 2013

Governance

The fact that Delaware’s Chancery upheld bylaws for Delaware corporations that require shareholder lawsuits to be filed in Delaware is certainly welcome news. However, in-house counsel should keep in mind that the scope of Chancellor Strine’s decision is narrow, that it preserves a number of shareholder methods to challenge such bylaws, and that it is not binding on other jurisdictions. Finally, practical considerations regarding good shareholder relations and careful corporate governance will come into play when a board contemplates enacting a forum selection bylaw.

subject to forum restriction bylaws under Delaware’s corporate statute. The decision also recognizes and preserves “as-applied” challenges to otherwise valid forum restriction bylaws. Usually an as-applied challenge is brought in a forum outside of Delaware and argues that the forum selection clause at issue is fundamentally unreasonable under the specific facts of the case. Questions regarding fair and correct governance procedures, the location of executives or whether key executives are subject to Delaware’s jurisdiction may all come into play in such an “as-applied” challenge.

restriction. Since Delaware’s corporation statute and case law grants and supports a board’s wide discretion on procedural matters, a forum selection clause that allows for waivers by a board after consideration of a specific case will likely be less vulnerable to an “unfairness” legal challenge than one that does not. The Boilermaker Local decision is indeed a victory for Delaware corporations, although the decisiveness of that victory is largely dependent on whether other jurisdictions will apply the decision when ruling on a motion to dismiss or transfer.

In-house counsel should keep in mind that the scope of Chancellor Strine’s decision is narrow, that it preserves a number of shareholder methods to challenge such bylaws, and that it is not binding on other jurisdictions. 33 Chancellor Strine’s decision carefully delineated what type of bylaw amendments would be statutorily valid under Delaware’s corporation statues and what type would not. Delaware corporations, he wrote, had long been allowed to enact “self-imposed rules and regulations that are deemed expedient for its convenient functioning. The forum selection bylaws here fit this description. They are process oriented, because they regulate where stockholders may file suit, not whether the stockholder may file suit . . .” However, even procedural rules have their limits. The bylaws at issue in the Boilermaker Local case were narrow in scope and did not attempt to restrict the forum for a broad range of lawsuits. Rather, these bylaws provided that Delaware was the sole and exclusive forum for derivative, breach of fiduciary and internal affairs lawsuits. Even after Boilermaker Local, lawsuits arising outside the corporate affairs doctrine, such as contract, tort or even federal securities claims – even when brought by a stockholder – cannot be

Also an open question is how, or if, courts in other jurisdictions will follow Delaware’s lead when faced with a challenge to a forum restriction bylaw. There have been a few high profile examples over the last few years where judges in California and New York have held on to cases against corporations in the face of Delaware forum restriction bylaws. Chancellor Strine also outlined how stockholders continue to have more traditional ways to challenge questionable forum restriction bylaws. Under Delaware’s corporation statute, stockholders retain the right to amend or repeal bylaws and to request that a board waive the restriction on a case-by-case basis. Delaware’s corporation statute also gives stockholders an annual “potent tool to discipline boards who refuse to accede to a stockholder vote repealing a forum selection clause.” For practical as well as legal reasons, in-house counsel advising their Delaware corporation board on a forum restriction bylaw should give maximum discretion to the board to allow for exceptions to the forum

The Boilermaker Local decision is also a small victory for stockholders. It is a reiteration by the Delaware Chancery Court that corporations must govern themselves carefully, thoughtfully and with an ear to shareholder wishes when enacting forum selection bylaws, or face very real challenges in courts or at their annual meeting. ■

John Delikanakis is a partner in Snell & Wilmer’s commercial litigation group in Las Vegas, Nevada. A former associate general counsel for a Fortune 500 company, his experience ranges from counseling senior management on day-to-day operational issues to litigating at district court and appellate levels. He presently sits on Snell & Wilmer’s E-Discovery Committee. jdelikanakis@swlaw.com

OCT/ NOV 2013 TODAYâ&#x20AC;&#x2122;S GENER AL COUNSEL

Governance

TODAY’S GENER AL COUNSEL OCT/ NOV 2013

Governance

Member Immunity from LLC Liability Varies By State By Roger C. Haerr and Adam Noakes

imited liability companies have become popular in recent years because they are easy to establish, pass profits directly through to members and, as their name implies, they limit liability. Corporations are taxed on profits before distributions, and also offer shareholders protection from liability. Therefore, as compared to a partnership or sole proprietor business, LLCs and corporations share an advantage in limiting the liability of their owners. In practical terms, this means that LLC members and corporate shareholders only risk their capital contribution. If you were to peruse the internet sites that offer to form LLCs, you might be led to believe that an LLC can immunize its members from all liability. Is that true? Using corporations law as an analog, most people understand the concept of “piercing the corporate veil” or “alter ego liability.” Does this concept also apply to LLCs? Recent case law provides some answers. In a South Carolina case, Jade Street, LLC v. R. Design Construction Co., LLC, a condominium project owner sued the LLC that acted as the general contractor, and sued the individual members of the LLC, alleging claims of negligence and construction defects. The LLC was in the business of constructing spec homes and was owned by its two members, a husband and wife. The husband held a residential builder’s license and supervised construction of the project; the wife was not involved in construction. After a bench trial, the trial court entered judgment against the LLC and the husband member individually, finding he was negligent in supervising the

construction. On appeal, the member argued that the Uniform Limited Liability Company Act immunized him from the liabilities of the LLC. Acknowledging the issue was one of first impression, the South Carolina Supreme Court reviewed the language of the Act, analogous corporate principles, and a split of authority in different jurisdictions. In upholding the judgment, the court relied primarily on established common law principles that hold a tortfeasor liable for his or her own wrongs, regardless of whether they are pursued on behalf of or in the name of another. The court quoted Judge Posner who once observed, “You don’t buy immunity from suits for your torts by being a member of a business corporation.” SPLIT OF AUTHORITY

It might be too early to determine the full extent of liability protection because LLCs have not been around long enough to test their protection in the courts. By way of background, the LLC concept was first introduced in legislation in Wyoming in 1977. A number of states followed with their own legislation until the Uniform Law Commission promulgated the Uniform Limited Liability Company Act in 1996, revised in 2006. Each state and the District of Columbia have now enacted its own statute. Section 304(a) of the Act states: The debts, obligations, or other liabilities of a limited liability company, whether arising in contract, tort, or otherwise: (1) are solely the debts, obligations, or other liabilities of the company; and (2) do not become the debts, obligations, or other liabilities of a member or manager solely by reason of the member acting as a member or manager acting as a manager.

oct/ nov 2013 today’s Gener al counsel

Governance

Similar language in the various statutes has been interpreted in at least two ways: As only shielding a member from vicarious tort liability, or as shielding a member from essentially all personal tort liability against third parties.

precluded personal liability for torts committed by members or managers when acting as agents of the LLC. The court came to this conclusion because the Illinois statute previously made members and managers personally li-

A handful of states have decided their statutes shield LLC members from personal liability for at least some of their own conduct.

The drafters of the Act favor the first interpretation. The comment to Section 304 states, “This paragraph shields members and managers only against the debts, obligations and liabilities of the limited liability company and is irrelevant to claims seeking to hold a member or manager directly liable on account of the member’s or manager’s own conduct.” Thus, the majority of courts interpreting the statute impose personal liability for the torts committed by the member, even when performed on behalf of the LLC. To illustrate an extreme, a Maryland court determined that an LLC manager could be held liable for personal injuries resulting from lead paint exposure arising out of the negligent maintenance of real property owned by the LLC. In that case, the injured party never entered into a lease with the LLC, never paid rent to the LLC, and did not have a legal right to occupy the property. Moreover, the manager never acted in his individual capacity when dealing with the property. Nevertheless, the court determined that he could be personally liable for his negligence because he was responsible for the day-to-day affairs of the LLC. Because the LLC can only act through its agents, some individual will always be personally liable for the torts of an LLC. By contrast, a handful of states have decided their statutes shield LLC members from personal liability for at least some of their own conduct. Those states are Illinois, Kentucky, Louisiana, and Wisconsin. For example, an Illinois court determined that the legislature specifically

able, similar to officers and shareholders in a corporation, but then the legislature removed the section that did so from the statute. Interestingly, the Illinois statute does include a similar provision to the Act, providing that members do not become liable “solely by reason of being or acting as a member or manager.”This same language was relied on by the majority of courts to suggest that the liability shield only protects against vicarious liability, not direct liability. Likewise, a Wisconsin court applied the language of the Wisconsin LLC statute and found that members cannot be personally liable for torts they commit on behalf of, and when acting as an agent of, the LLC. Wisconsin Statute section 183.0304 states, “The debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company. … [A] member or manager of a limited liability company is not personally liable for any debt, obligation or liability of the limited liability company, except that a member or manager may become personally liable by his or her acts or conduct other than as a member or manager.” Thus, unlike the uniform Act, the Wisconsin statute does not have the “solely by reason” language. Hence, Wisconsin would appear to attach personal liability only when the member is acting outside his or her capacity. ALTER EGO LIABILITY

Piercing the corporate veil or alter ego liability refers to an equitable remedy

in the law of corporations that imposes liability on corporate shareholders, who otherwise might be immune from the debts of the corporation. Courts look to a wide range of factors to evaluate in determining whether to apply the doctrine and impose liability. Creditors should look to corporate law in their own jurisdiction before attempting to argue application to an LLC. In one respect, it appears that LLCs are different from corporations. Most LLC statutes and the Uniform Act are intended to relax the formalities otherwise required of a corporation. For example, section 304(b) of the Act states, “The failure of a limited liability company to observe any particular formalities relating to the exercise of its powers or management of its activities is not a ground for imposing liability on the members or managers for the debts, obligations, or other liabilities of the company.” Compared to a partnership or sole proprietorship, an LLC offers significant protection, akin to a corporation. In a few states, the liability shield is near absolute. In most states, however, while the LLC offers significant liability protection, it does not extend to a member’s tortious acts. ■

Roger C. Haerr is a partner at McKenna Long & Aldridge LLP and the division leader of Real Estate Litigation. He has 25 years’ experience resolving real estate and commercial disputes by mediation, arbitration, trial or appeal. rhaerr@mckennalong.com

Adam Noakes is an associate at McKenna Long & Aldridge LLP. anoakes@ mckennalong. com

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oct/ nov 2013 today’s Gener al counsel

Governance

Compensation Committee Mistakes When Hiring CEOs By Frederick D. Lipman

here are three major mistakes made by compensation committees in hiring a new CEO. The first is the failure to set a compensation range before commencing the search. The second is the failure to have backup candidates to avoid having to give in to unreasonable demands by the proposed CEO. The third is the failure to provide in any employment agreement a warranty and representation by the CEO candidate of the background information on which the compensation committee relies, including but not limited to the accuracy of the candidate’s resume.

By setting a compensation range before commencing the CEO search, the compensation committee provides a guidepost for what it considers to be reasonable. Failing to set such a range at the beginning of the search leaves the compensation committee vulnerable to unreasonable demands. An independent compensation consultant can assist the committee in determining what is a reasonable range of compensation for the CEO position. One method to avoid having to cave-in to unreasonable compensation demands from a proposed CEO is to

have back-up candidates who may be less desirable, but are nevertheless reasonable choices. A compensation committee which fixes solely on a single candidate, with no back-ups, limits its bargaining power. There may be situations in which quick action is required to hire a new CEO and to pay whatever the candidate requires. This should be a very rare situation, and many time results from inadequate CEO succession plans. Resume fraud is not uncommon. Some people perceive their misrepresentations to be “mostly true” and see

today’s Gener al counsel oct/ nov 2013

Governance

no problem in fudging. There is no shortage of examples. • Yahoo! CEO Scott Thompson incorrectly claimed that he had a degree in computer science in addition to his bachelor’s degree in accounting, although he never submitted a formal resume to Yahoo! After being exposed by a shareholder, he resigned in May 2012. • In April 2007, it was reported that the Dean of Admissions at MIT had quit because she misrepresented her academic credentials when she first came to work at MIT 28 years previously. She claimed on her resume to have degrees from Union College, Rensselaer Polytechnic Institute, and the Albany Medical College, but in fact had no degrees from any of those institutions. The Wall Street Journal stated that the dean had “embellished her own credentials.” Remarkably, the dean was a

the day of his resignation, Veritas Software’s stock price fell approximately 16 percent. • In November 2002, the eye care company Bausch & Lomb announced that Chairman and Chief Executive Ronald Zarrella would forfeit $1.1 million because his resume falsely noted an MBA from New York University. • In November 2002, MSG Capital Chairman and CEO, Brian Mitchell, admitted falsifying a degree from Syracuse University and, although he was continued as CEO, after the announcement the stock price fell 37 percent, hitting a 52-week low. Nothing is more embarrassing than hiring a CEO only to find the person’s background has been misrepresented. But no matter how careful the CEO vetting process is, it is extremely difficult for the compensation committee to avoid hiring

Most compensation committees and their counsel don’t require a warranty and representation that resume background information is correct and complete. This is a major mistake. prominent crusader at MIT against pressure on students to build their resumes for elite colleges. • In February 2006, RadioShack Corp. CEO David J. Edmondson resigned following the revelation that he had lied on his resume. He claimed he had received degrees in theology and psychology from Pacific Coast Baptist College in California (subsequently renamed Heartland Baptist Bible College). But the school had no record of the degrees, and the registrar of the school stated that the CEO had completed only two semesters – and the school never offered degrees in psychology. The CEO had served in various positions with RadioShack starting in 1994 and became CEO in May 2005. • In October 2002, Kenneth Lonchar, the CFO of Veritas Software, was forced to resign after making false claims that he was a Stanford MBA graduate. On

someone who has lied on his or her resume about prior managerial experience and educational background, for whatever reason. CEO candidates might be aware of certain acts or omissions in the past which could result in future claims against them after they are hired. One example would be a potential CEO who has been accused of sexual harassment in his or her prior position. This could result in an embarrassing public law suit against the CEO after the CEO is hired. Even though the compensation committee relies on the information contained in the proposed CEO’s resume, as well as other information supplied by the candidate, most compensation committees and their counsel don’t require a warranty and representation that the background information is correct and complete. This is a major mistake. If the compensation committee’s decision was based on the resume, that candidate should

be willing to provide one. Requiring that warranty and representation forces the candidate to think again about whether he or she has exaggerated the resume. This can make for a more reliable vetting process, but equally important, a specific warranty and representation which turns out to be materially false may permit the company to disclaim its obligations under the employment contract, including severance, on the grounds that the company was fraudulently induced to enter into the agreement. It may even subject the CEO to a damage claim from the company. The warranty and representation should address, in addition to the resume, all other information known to the candidate that might be harmful or embarrassing to the company if revealed in the future – the kind of information exemplified in some of the examples noted above. If the employment contract does not have a warranty and representation, the company may still be protected by other provisions permitting the termination of the CEO’s employment without cause or for cause. However, the term “cause” is typically defined very narrowly as the result of negotiations with the CEO candidate’s attorney and may not include resume fraud or embarrassing claims. The company is therefore likely to have to use the provision that permits the company to terminate the CEO without cause, which typically results in a very substantial severance payment to the CEO. ■

Frederick D. Lipman is a partner at Blank Rome LLP. This article contains excerpts from the book entitled “Executive Compensation Best Practices” (John Wiley & Sons, Inc., 2008) of which he was the lead author. He has held faculty positions in the MBA program at the Wharton School of Business and at the University of Pennsylvania Law School for a combined total of 13 years. Lipman@BlankRome.com

Matter Management Software Should Offer Cost Control Plus Fall 2012 marked the second issue of Matter Management Software Insights, a survey conducted by Rees W. Morrison, founder and president of GC Metrics LLC. The survey combines staffing and spending data to analyze the use of matter management software by 189 U.S. and Canadian law departments.

‘‘

I started GC Metrics back in 2009 because law departments deserve quicker data,” says Morrison. “Graphs are a great way to convey data, along with tables and text explanations. Recently I have moved more toward statistical analyses and have included compensation data by working with Major, Lindsey & Africa.” Morrison notes that unlike word processing programs, email or spreadsheets, matter management software is licensed only by law departments. There are many systems available, and they are all tailored exclusively for in-house departments. “I estimate that upwards of 2,500 law departments have licensed a package,” he says. The survey defines and calculates three benchmark law department metrics: external spend per lawyer (external spend divided by number of lawyers); external spend as percent of company revenue (external spend divided by revenue); and

13,000 employees globally, and 2011revenue of $2.4B. It has a four-attorney legal department whose main task is safeguarding the company’s IP worldwide. Given its lean staffing, Kennametal’s department places great reliance on outside counsel. As its international footprint grew, so did its legal costs. Its investment in LexisNexis Counsel Link was made with those costs in mind, and according to Larry Meenan, Chief Counsel for Intellectual Property, savings have been achieved. Most have come through the system’s automated invoice review, which spots billing guide violations. According to a case study, the matter management system has generated annual savings of $70,000 for Kennametal’s department. “CounselLink instilled discipline in our internal review process and required our outside vendors to carefully Long term value comes from using the information that sys- review their invoices before they submit them,” Meenan tems yield to make sure the right firms are being used for explains. “This has specific types of work, to look for trends in spending and to resulted in finding and rejecting billing violadetermine which work could be brought in-house. tions that previously would have been virtuexternal spend as percent of total spend (external ally impossible to find. For example, hourly rates spend divided by total legal spend). on a matter are set and applied based upon the “Cost control is the main benefit these sysapproved rate. Counsel can no longer bill at an tems offer, but not the only one,” says Morrison. increased rate on a matter before it is approved.” “Among other things, they can tell their users The analysis also provides a legal spend report who among their outside counsel has worked based on matter type and number of matters, on various types of matters, what the outcomes which in turn allows Kennametal to determine were, and which of their client groups are genhow much each outside counsel is charging on erating legal work for the department and for average, per type of matter. “I can use that figoutside counsel.” ure to determine which counsel in a particular country is the most efficient on a given matter,” DISCIPLINING INTERNAL REVIEW says Meenan. Kennametal Inc. is a Latrobe, Pa.-based indusAs more data is collected, Meenan hopes to trial technology and products company with see which counsel are providing the most value

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2013

per matter, which will lessen the importance of simply looking at the hourly rate.

“Our clients have validated numerous ways that our matter management and e-billing platform (TeamConnect), can reduce external legal OTHER WAYS TO CONTROL SPENDING spend,” says Katie Bullard, VP of Product Management and Marketing, Mitratech. Her com“Detecting billing violations is certainly an important way to reduce spending, but I wouldn’t pany has used direct input from clients to build call it the single most important,” says Bill Young, a proprietary return-on-investment model that details, down to each piece of functionality, the Product Line and Legal Department Operations expected and actual amount of external spend Executive, Bridgeway Software. “The sustainable reduced through using value comes from using e-billing in concert with TeamConnect. Cost control is the main matter management to “Our clients, Chevmanage law firms.” benefit these systems offer, ron and Aon Corp. for example, have reduced Young believes that but not the only one. external spend by opusing the information timizing the analytical yielded by any system capabilities of TeamConnect.” says Bullard. to select the right firms for specific types of work, to look for trends in spending and to asAnother way to reduce spending is to zero in on which divisions and departments within a sess what work could be brought in-house, are company generate disproportional amounts of features that provide long-term value. legal work, and to educate them on alternative Bridgeway’s systems are designed so that matways of dealing with those issues. ters and information can be categorized in a va“That is certainly a priority for many of the riety of ways. “One of the most useful is by client group,” says Young. “Our clients want to know clients we work with,” says Bullard. “They generally have complex legal needs, and we are able to where their workload is originating. The system provide several avenues for the legal department to equips them to educate clients and work on stratetrack where legal matters are generated and how gies that address the sources of legal work, rather much cost is associated with each division or unit.” than just responding to requests for assistance.”

nuMber oF DepartMentS uSing MMS paCkageS *Data from 189 law departments. Total number of department users is unknown. The estimated installed base of MMS among U.S. and Canadian law departments is 1,600 to 2,000.

From the Survey Introduction by Rich Selenov, Managing Director, Huron Legal

#1. Does it provide immediate feedback on your performance metrics? 41

#2. Does it help manage the total spend, both internal and external?

TR Serengeti

Mitratech

Bridgeway

CT TyMetrix

Datacert

#3. Does it help you continuously improve performance?

LT Online

9 9 9

TR Elite LexisNexis EAG

CSC

Legal Files Legal-Suite

Legal Edge

3 3

Amicus Attorney

Four Criteria For evaluating a Matter ManageMent SySteM

Source: 2012 General Counsel Metrics, LLC

#4. Does it help articulate the value of the law department?

oct/ nov 2013 today’s gener al counsel

Revenue of DepaRtments using solution* *Solutions with more than two users according to six revenue ranges. Each range has approximately the same number of departments. Solution and Revenue Range

$50-255M

$255-791M

$791M-1.6B

$1.6-3.1B

$3.1-8.5B

>$8.5B

Totals

0 1 1 1 4 0 0 1 0 1 1 0 0 2 2 75 3 2 94

0 0 0 1 0 0 1 0 0 0 0 1 1 4 0 79 1 3 91

1 1 2 3 2 1 0 0 2 1 1 1 5 2 1 61 1 9 94

1 2 0 3 3 3 2 1 1 0 1 3 2 5 0 55 2 6 90

1 6 1 4 4 2 3 0 0 1 3 3 6 1 5 37 1 13 91

0 14 2 7 4 10 3 1 0 0 2 3 20 1 1 18 1 4 91

3 24 6 19 17 16 9 3 3 3 8 11 34 15 9 325 9 37 551

Amicus Attorney Bridgeway CSC CT TyMetrix Custom Datacert EAG Legal Edge Legal Files Legal-Suite LexisNexis LT Online Mitratech MS Office, Access MS SharePoin N/A or None TR Elite TR Serengeti

aveRage numbeR of lawyeRs in DepaRtments *The median for the entire group is five lawyers. MMS Environment

Avg. Lawyers

Datacert Mitratech CT TyMetrix Bridgeway CSC LexisNexis EAG Legal Edge LT Online custom MS SharePoint TR Serengeti TR Elite Legal-Suite N/A or None MS Office or Access Legal Files Amicus Attorney

136.2 72.8 48.3 45.9 40.2 36.3 33.6 25.3 23.9 17.7 15.8 15.7 11.6 10.3 9.7 5.5 5.0 4.3

Source (both charts above): 2012 General Counsel Metrics, LLC

According to Bullard, Mitratech’s system can be used to track non-compliant incidents, to quantify risks and to implement compliance efforts, thus providing a risk profile for different departments or groups. The reporting tool is used to understand costs, matter volume and exposure by division, department and geography. Associated spend is summarized and filtered by criteria the client devises. “They end up with a clear picture of where legal issues are being generated,” Bullard says.

TRAINING

Generally speaking, systems had been in use by departments for five to seven years at the time of the survey, longer than the average tenure of a general counsel and time for significant turnover of all personnel. Thus, training and consulting services become key for continued value. “Turnover of trained personnel in a legal department can certainly be an issue,” says Young, of Bridgeway, “especially for smaller departments that rely on only one or a few administrators to maintain the system.”

Bridgeway conducts an annual user conference for clients, at which it provides continuing education, and best practice tutorials. “We also provide training support, including hands-on user training, train-the-trainer type sessions, and detailed instructions and documentation,” says Young. The company’s support staff is available for trouble-shooting, and they advise clients regularly on upgrades. “We provide multiple training options for our customers,” says Jonah Paransky, Vice President, Managing Director, LexisNexis CounselLink. That includes consulting services during implementation and throughout the use of CounselLink. Consultants assist in optimally configuring functionality and data entry, and they provide coaching about how to automate processes, build analytics and partner effectively with in-house clients and other business stakeholders. “We also offer instructor-led, on site and webbased training courses,” says Paransky. Mitratech offers a 3-tier training program, ranging from basic functionality to complex technical support. The company’s most popular support is its solution administration course for key personnel and their backups, which specifically addresses the issue of turnover. “We also offer free monthly training to our clients through our regional solution consultants program,” says Mitratech’s Bullard. “It is designed to maximize utilization of TeamConnect as long as the system is in use.” ■

Helping The Legal Aid Society in New York City Serve Humanity... 1,080 attorneys 300,000 matters/yr 1 matter management system

bridge-way.com

s d r o ec al R r Papel Critic y Stil iscovertz To Darry Medin By B

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2013

or most corporate law departments, electronic discovery continues to be a major concern, and it’s easy to see why. The e-discovery costs associated with a major class action lawsuit or a lengthy government investigation can run into the millions of dollars. What’s not so easy to understand is why so many legal departments seem less concerned about traditional paper discovery, where the risks and costs can be just as high, if not higher. Consider the current multi- billion dollar mortgage fraud litigation brought by the U.S. government against some of the world’s largest banking institutions. The government’s discovery requests for original customer loan applications have left many banks scrambling to locate not only the actual paper applications, but missing attachments and other loan documentation. Or consider the hospital in a major metropolitan area facing regulatory fines after reporting in 2012 that more than 300,000 records containing protected health information went missing from a document management area. In fact, the records, which included patient identities and credit information, had been missing for at least two months. Despite the explosion in digital records, businesses in virtually every industry continue to generate massive amounts of paper. The manner in which these records are stored and the ability, or in many instances the inability, to locate and quickly retrieve them when the company is sued can significantly impact its ability to defend itself. Though we’ve heard the business world is going “paperless” for decades now, paper remains and will continue to remain an integral part of a corporation’s day-to-day operations. Even measures like the 2009 Health Information Technology for Economic and Clinical Health Act (HITECH Act), which was designed to stimulate the adoption of electronic health records and supporting technology in the United States, have done little to stem the tide. Corporate law departments and compliance officers still print out and retain key records as a backup should something happen to their digital files. Having a records management program in place to identify, protect and access critical paper documents and records is as important as the ability to identify, sequester and access electronic records stored in the corporate data center. When paper records are not stored (or destroyed) in a secure manner, organizations put themselves in harm’s way. Every company and industry has unique document retention and storage requirements, but here are some general guidelines on how to proceed: continued on page 53

OCT/ NOV 2013 TODAYâ&#x20AC;&#x2122;S GENER AL COUNSEL

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2013

Reversing a Bad Verdict on Appeal By Dawn Solowey and Rob Carty

hen a trial goes badly, an appeal offers the hope of redemption. As appellate specialists, we are often called into a case after an adverse verdict and tasked with overturning the judgment on appeal. Entering a case that was handled by a different firm at trial and delivering an appellate reversal is no simple task. To maximize the chances for success, here are five key principles for inhouse counsel to follow when hiring a new firm to handle the appeal.

Dawn Solowey is a partner at Seyfarth Shaw LLP. She is Senior Counsel in the Labor & Employment Department and a member of Seyfarthâ&#x20AC;&#x2122;s Appellate Team, with significant experience representing employers in high-stakes appeals and post-trial motions around the country dsolowey@ seyfarth.com

oct/ nov 2013 todayâ&#x20AC;&#x2122;s gener al counsel

1. Conduct a Deep Read of the Trial Record. For example, appellate courts will use Only by reading the trial record can an apa de novo standard when reviewing pure pellate team get a feel for what the judge or legal arguments, errors in jury instructions, jury heard and saw, where errors occurred, and whether punitive awards are unconstiand whether objections were properly preserved. Since there Your best bets will be arguments that are is a tight deadline for filing post-trial well-grounded in legal authority, were clearly motions, and often a short track to the appeal, the appellate preserved, and enjoy a favorable standard of review. team will need to read the record right away. As in-house counsel, you should facilitate getting the record tutionally excessive. The de novo standard to appellate counsel as quickly as possible, makes such issues a better bet on appeal. By whether from your own files or those of trial contrast, evidentiary rulings are generally counsel. You will save time and money if reviewed under a very discretionary stanyou can deliver the material in an organized, dard of review, and they are far less likely sequential manner. Tell appellate counsel what to be overturned. you think the significant errors were at trial. In addition, experienced appellate counsel Since timing is tight after judgment enters, will be able to look behind the standard of remake sure that you and your appellate counview. Some standards may seem favorable on sel have established internal deadlines for the surface, but are rarely applied as written all steps of the post-trial motion and appeal (such as the standard for a juror-misconduct process. If you were not in the courtroom argument). Conversely, sometimes a seemingly yourself, it will be especially crucial to discuss unfavorable standard can be turned into a early on the appellate counselâ&#x20AC;&#x2122;s impressions favorable one. about where the trial went off the rails, and For example, instead of attacking an where opportunities may exist for a turnevidentiary ruling under the typical abusearound on appeal. of-discretion standard, your appellate team may be able to invoke a de novo review by 2. Get Familiar With The Standards of Review. attacking the legal standard the judge used The starting point for a sound appellate in ruling on an objection. Appellate counsel strategy is the standard of review. Given the will also have to consider whether any error was prejudicial. A clear legal error is of no consequence if it did not have an impact on the outcome. Finally, your appellate team will want to As in-house counsel, insist on candor from think carefully about the practical result of a given argument. Will it result in appellate counsel as to which issues were and were winning a favorable judgment for you, or merely a new trial? What is the dollar value of the not preserved. While it can be awkward for argument? Answering these questions helps you and your appellate team focus resources appellate counsel to deliver the news that an issue on the arguments that offer the most promising rewards. was waived, it is essential for you to know. As in-house counsel, ask your appellate team to explain the various standards of review, and the resulting impact on your arguments, early in the process. Make sure limited space available in appellate briefs, and you understand the practical consequences the limited time at oral argument, your appeal of each argument, so that you can help must focus on arguments that offer the most weigh its pros and cons and educate your favorable standard of review. internal clients.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2013

3. Get a Firm Handle On What Was Preserved. To have a strong argument on appeal, it’s not enough to find a prejudicial error. You must also ensure that trial counsel preserved your appellate rights with respect to that error. As your appellate team reads the record, they will keep track of every adverse ruling and error. They will look for errors in evidentiary rulings, jury instructions, the verdict form, and any rulings on motions. They will track trial counsel’s objections to determine whether they adequately preserved error. This process will help you and your appellate team form a global picture of possible appellate arguments. From there, you can choose which arguments to focus on during the appeal. Your best bets will be arguments that are well-grounded in legal authority, were clearly preserved, and enjoy a favorable standard of review. As in-house counsel, insist on candor from appellate counsel as to which issues were and were not preserved. While it can be awkward for appellate counsel to deliver the news that an issue was waived, it is essential for you to know. If there is a concern that a key issue was waived, ask whether appellate counsel is being aggressive enough in considering any possible argument that the issue actually was preserved, and even if it was, whether you can still press the argument under a “plain error” or similar standard. 4. Know When And When Not To Include Trial Counsel. If you have hired a new team to handle the appeal, there should be no question that they are the architects of the appellate strategy. You have hired them to take a fresh look at the case. Inevitably, the appellate team will view parts of the case very differently than trial counsel did. This often results in new strategic directions and decisions to abandon arguments or themes that were unpersuasive. Although trial counsel must take a back seat during the appeal, they need not be excluded. Keeping trial counsel on the appellate pleadings sends a signal of unity to the appellate court, rather than telegraphing that mistakes were made. Moreover, trial counsel will have valuable information that does not appear in the record, which may help when preparing post-trial motions and navigating any postverdict settlement discussions. As in-house counsel, maintain your relationship with trial counsel and facilitate the introduc-

tion to appellate counsel. You can help set a tone of teamwork and cooperation. At the same time, make clear that appellate counsel is driving the appellate strategy, and feel free to set appropriate limits on trial counsel’s time billed on the matter. 5. Work As A Team in Developing Appellate Strategy. Experienced appellate counsel will want to involve you directly in the appellate strategy. It is important that you have an honest discussion about the realistic strength of arguments on appeal. This can get touchy if appellate counsel recommends abandoning an argument you really like. Understand that appellate counsel must be selective in choosing appellate issues. A kitchensink approach rarely persuades appellate judges.

Perhaps the hardest part about taking a case on appeal is this: the record is the record. 49 Your appellate team will also want to discuss the possibility of settlement. If settlement is a viable option, you should consider developing an assertive appellate front that will allow you to negotiate from a position of strength. As in-house counsel, begin your relationship with appellate counsel by having a candid conversation about your expectations for the appeal. Ask what information you can provide to help appellate counsel get up to speed. Explain the internal pressures you face and how you prefer to be updated on strategy. Come to an agreement on a budget for the appeal, and discuss how to keep the appellate process cost-effective. Have a frank discussion about what settlement amount and terms would be desirable to the company. Agree on a timeline for all aspects of the appellate process. Clear and transparent communication is essential to developing a strong appellate strategy in a fast-paced time frame. Perhaps the hardest part about taking a case on appeal is this: the record is the record. While you want to change the outcome, you cannot go back and redo the testimony, arguments, or objections. But you can help the appellate team put together a strong appeal by providing them with all necessary information as early as possible, staying involved in the appellate strategy and maintaining a frank dialogue. n

Rob Carty is a partner in Seyfarth Shaw LLP’s Labor and Employment Department and a member of the firm’s Appellate Team. He has represented clients in a variety of disciplines ranging from employment cases to product-liability suits and trademarkenforcement actions. He concentrates his practice on appellate and other complex briefing. rcarty@seyfarth.com

M 50

onitoring Regulatory Agreements By Ron Cote

ompanies that operate in highly regulated industries – health care, financial services, insurance, energy and food production, to name a few – are now commonly entering into settlement agreements to carry out a remediation process, and with that they become the subject of examination by an independent monitor. Companies come under scrutiny in a variety of ways. Offending actions are often discovered by regulators through consumer complaints or compliance examinations. The nature of the alleged non-compliant behavior also varies but includes issues such as: charging fees to consumers without disclosure, selling products or services in a deceptive manner, engaging in behavior to drive up the cost of goods or services, and failing to follow appropriate health and safety protocols. In any case, a joint consent decree or settlement agreement between an organization and its regulator requires three broad commitments. First is the enactment of business reforms to ensure that the noncompliant behavior does not occur again. Second is restitution to consumers, and/or payment of fines to regulators. Third, that the company engage an independent monitor (typically a public accounting firm) to assess compliance with the agreement. While execution of these commitments is the responsibility of senior management, oversight lies with the company’s in-house counsel. A monitor’s responsibilities are defined within the settlement agreement. The monitor may be required to test the effectiveness of business reforms and/or the restitution process based on precise requirements. Problems that commonly arise concern personnel and systems deployment by the subject company, expectations of the examination process and development of an appropriate reporting form.

Remediation teams are built by pulling employees away from their traditional duties and dedicating them to this one-time function.

COMPANY RESOURCES

Organizations subject to monitoring usually have access to a wide variety of resources, including personnel and technology. They may seem well equipped to undertake a remediation effort, but sometimes it doesn’t work. Broadly speaking, difficulties can be attributed to functionality and culture. Restitution is a process outside of normal operating activities. Often a dedicated database is created without undertaking standard system verification or beta testing that would otherwise be employed as part of the refine-

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2013

ment of ongoing business functions. The restitution database is populated with data points that originated in other systems and are used in ways that were not originally contemplated. Complexity is added to the restitution process, as information from various operating systems are compiled into one database, potentially resulting in redundant or overlapping data points. For example, restitution may be calculated based on time elapsed. In this instance, a “start date” and “end date” would be crucial. Data points to support these dates might be pulled from a system housing consumer applications, a monthly billing system, account activity records or accounting system. Data fields within each of those systems could be similarly named (e.g. “start date”), but have different meanings. A programmer building the restitution database must understand which of those fields is appropriate to calculate restitution. Adding to the complications is the fact that the calculation of restitution may not be uniformly reproducible across the entire population. The more expansive the eligibility period, the greater likelihood subsets exist within the data set due to system conversions, refinement of data fields or myriad other causes which would require modifications to the standard formula for the affected records. In addition to the need for re-purposing the functionality of the subject company’s operating systems, there is a need to deal with disruption to the culture. Remediation teams are built by pulling

employees away from their traditional duties and dedicating them to this one-time function. Often these employees are working for someone other than their day-to-day supervisor and are unprepared for the degree of scrutiny that may come from the monitor or the regulator. Further, the remediation team’s work becomes a topic within various corporate political considerations.

EXPECTATIONS

Settlement agreements call for a monitor to be “independent” from the subject company, although that standard is not defined as it would be for a financial statement audit. The monitor tests the remediation process but does not participate in its design or execution. If

oct/ nov 2013 today’s gener al counsel

examination procedures are performed during ongoing restitution, then observations made during this period could have an impact on amounts disbursed. The monitor is not part of the remediation team, but neither the subject company nor the regulator want errors in restitution calculations detected by the monitor to remain unidentified and/or unaddressed until after disbursements are made to consumers. Therefore, monitors must have a framework to report deficiencies in the restitution calculation formula without becoming part of the remediation team. That framework should be in place through coordination with the

If the basis for evaluating the remediation process is unknown, then ambiguity will exist with respect to success or failure. 52

Ron Cote is a managing director with Grant Thornton LLP. He has more than 20 years’ experience in forensics and litigation dispute, including broad experience with monitor examinations. Ronald.Cote@ us.gt.com The author wishes to acknowledge the assistance of Scott Graham, a manager with Grant Thornton.

regulator and/or the subject company’s counsel, and it should address identification of a condition without offering to define its scope or a solution. The subject company will always retain responsibility for determining the impact of a given condition to the restitution population, and for implementing a solution. The monitor then remains free to test the effectiveness of the subject company’s solution. Monitors and subject companies must navigate the challenges that arise when the results of testing are indicative of problems in the restitution approach while the remediation process is ongoing. This is accomplished in the context of two common conditions in remediation: (1) a standardsmaking body does not specifically exist to set rules for a monitoring examination, and (2) a monitor may carry out an examination with minimal direct access to the report’s audience – that is, the regulator. As noted, settlement agreements often require that the monitor role be filled by a public accounting firm. The examination is often referred to as an audit in the settlement agreement, although this use of the term is a misnomer for public accountants, whose professional standards define audit

in a very precise way. But other professional accounting standards relating to attestation or consulting are relevant. Although the form the examination will take would seem to be an academic problem for the monitor, it’s highly relevant to the company. A standard under which to perform the examination must be understood to determine the effectiveness of the subject company’s remediation efforts. In simple terms, did the subject company “pass” the examination? If the basis for evaluating the remediation process is unknown, then ambiguity will exist with respect to success or failure. A settlement agreement may define the tasks that must be executed by the subject company, but perfect execution of those tasks is doubtful and a settlement agreement almost never defines successful compliance in a set of clear metrics. As noted earlier, the subject company typically is required to engage the monitor. The regulator may interact with the monitor, but often prefers to communicate through the subject company. The risk with this approach is that the scope of the examination will not meet the expectations of the regulator. If the regulator becomes aware of exceptions for the first time in a reporting document, it may insist that additional testing procedures be conducted, adding to the time needed for the examination.

DEVELOPING A REPORT

The monitor is responsible for rendering the examination results in a written report, and the subject company has little say over its content. The monitor is commonly instructed to provide a narrative of the subject company’s efforts. Of course, the subject company will benefit from a narrative that provides transparency. However, subject companies often worry that the description of each modification or correction during the remediation process will instill a lack of confidence in the regulator and invite further investigations. Finally, the monitor’s test results must be reported in a way that is meaningful. The monitor’s examination is typically a mix of qualitative and quantitative procedures. Without specific guidance from the regulator on metrics language, the subject company must rely on the monitor to aggregate judgmental evaluations and statistical testing results into a conclusion that communicates whether the remediation efforts were effective. ■

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO OCT/ NOV 2013

Paper Records continued from page 45

• Begin by reviewing your data inventory management program to ensure it adequately covers not just electronic data, but paper documents as well. Whether it is electronic data or paper, the program should be able tell you what the company has in storage, where the data is stored, who is in charge of it, how to access it if and when it’s needed, and how long it will take to retrieve. • Next, re-examine the company’s records retention policy. If you don’t have one in place you’re asking for trouble. When one is in place, make sure it’s up to date from a compliance standpoint. HIPPA regulations, for example, specify exactly the type of healthcare documents/records that must be protected from disclosure and the standards for protecting and discarding them. The retention requirements for each industry are different, so it’s important to have a policy in place that not only ensures you keep what you need, but also lets you discard documents you are not required to keep. If certain documents in a discovery request have been destroyed in compliance with the company’s retention policy, you’re in a much better position than you would be if they had been destroyed without a policy. • Finally, the most difficult issue: Enforce the document retention policy throughout the organization. According to the industry group ARMA International (the Association of Records Managers and Administrators), some 93 percent of Fortune 1000

companies have a document retention policy in place, yet only 38 percent enforce it. You may have the world’s best retention policy, but if it’s not being enforced daily, it’s useless. If enforcement has slipped over the years, the legal department is ideally suited to initiate a company-wide upgrade. Consider establishing a team of key stakeholders to

Having a records management program in place to access critical paper documents is as important as the ability to access electronic records. review and enhance the policy. Again, determine the types of records you have, where they’re located, who’s in charge of them and whether the policy continues to comply with the latest retention requirements for your industry. Then develop the necessary enforcement guidelines. While on-site storage is a viable solution for smaller enterprises, larger companies often partner with document management industry vendors for a variety of reasons. Storing paper documents and records off-site can be more affordable than storing them in rented office space, and in many cases, safer and more secure. Also, today’s in-house archivist may not be with the company in five years, and the offsite facility that provides indexing and records archiving services may then make it easier to meet discovery requirements. Meanwhile documents in highly active files – like customer contracts, personnel information, medical files, legal documentation, patent documents, architectural or engineering drawings – can be picked up, stored, or quickly retrieved and delivered. In 1975, Businessweek published an article anticipating the “paperless office” by 1995. We’re not there yet, and in fact we are not even close. Society will someday become paperless, but probably not in our lifetimes nor our children’s. Though the use of paper isn’t exploding, like the use of digital, but it’s still growing, and it still plays a crucial role in discovery. ■

Barry Medintz is global vice president and general counsel of Recall Corporation. He oversees all legal matters affecting company operations, including corporate compliance, commercial transactions, data privacy and protection, intellectual property, litigation/ dispute resolution, mergers and acquisitions, product safety and labor/employment issues. barry.medintz@ recall.com

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2013

Crafting a SoCial Media PoliCy, With the SeC in Mind By Reid J. Schar and Laura C. Bishop

his April, the Securities and Exchange Commission released guidance permitting companies to disclose important information to investors over social media, as long as the company identifies that platform in advance of the disclosure. The announcement followed a 2012 controversy in which the SEC notified Netflix and CEO Reed Hastings that it was recommending an enforcement action for disclosure of important information in a non-public manner. The action was based on a status update to Hastings’ Facebook page that congratulated Netflix for achieving one billion hours of streaming video. In the April guidance, the SEC announced it would not pursue the Netflix enforcement action, and it clarified portions of the agency’s position on social media. The SEC makes clear that companies in certain pre-approved situations may use social media to disclose information regulated by securities laws. But the limits of this approval highlight an ongoing enforcement risk for companies, the risk of unauthorized disclosure of regulated company information on unapproved social media platforms. This article addresses the necessary elements of a social media policy that will enable companies to best protect themselves in a dynamic regulatory landscape, while continuing to reap social media benefits. The first thing to consider is that companies face potential regulatory actions for postings employees make through their personal social media accounts. The April 2013 Guidance offers a remedy: officially sanction a personal account as an avenue for disclosure of regulated company information. While that remedy may work for a CEO’s Facebook account, no com-

pany would claim that all personal employee accounts serve as the company’s mouthpiece. As an alternative, some companies have tried to minimize exposure by limiting employee use of social media, but such restrictions can risk violating First Amendment rights. Given the rapidly changing regulatory landscape, a model policy must adapt to shifting enforcement threats, but even the best social media policy cannot eliminate all risk of a regulatory violation. The goal of a policy must first be to minimize the number of prohibited postings employees make, and second to limit consequences for the company when such posts occur. Social media is a relative new phenomenon, and there is little enforcement precedent from which to discern which policy components will result in leniency in the event of a regulatory violation. However, enforcement precedent and guidance developed under the Foreign Corrupt Practices Act provides a useful comparison. The FCPA criminalizes the payment of items of value to a foreign official to obtain or retain business. Like securities violations over social media, FCPA violations are difficult for large companies to totally prevent. But the DOJ and the SEC recently released guidance that sets forth the critical components of an FCPA compliance program, and they made clear that leniency is most likely where a company has adopted a thoughtful, risk-specific compliance program. What follows are some specifics companies should keep in mind when formulating a social media policy, based on FCPA precedent and guidance, as well as current social media policies of leading corporations, and common sense. Companies should address social media both as its own subject-matter policy and as a component of other policies affected by

oct/ nov 2013 today’s gener al counsel

Reid J. Schar, a partner in the Chicago office of Jenner & Block, co-chairs the firm’s White Collar Defense and Investigations Practice. He is a former Assistant U.S. Attorney who has tried more than 20 criminal cases, many involving complex fraud and financing issues. rschar@jenner.com

Laura C. Bishop is an associate in the Litigation Department at Jenner & Block. Her pro bono work includes cases in the fields of environmental law and domestic violence. lbishop@jenner.com

social media use. It’s instructive that the SEC accused Netflix of violating “Reg FD,” which requires public disclosure of information that could change a stock price if the information is disclosed to anyone outside the company. Many public companies already have written policies on Reg FD compliance. A model social media program should address social media use in the company’s policy on Reg FD and create a separate company policy on social media use that includes a section on Reg FD compliance. While many companies have added language to Reg FD policies that extends the scope to social media activities, relatively few have created a dedicated social media policy that directly references Reg FD. Including Reg FD requirements in a social media policy ensures that all employees who use social media, regardless of experience with Reg FD, are informed of an important federal regulation they might otherwise overlook. The policy should be clear and specific. A model FCPA policy uses specific language and examples so employees fully understand the scope of prohibited activities. Currently, many social media policies fail to provide that kind of specificity. For example, Reg FD bans disclosure of “material non-public information.” Many social media policies simply parrot this phrase. Such statements are vague and provide little guidance to employees. A better way to promote employee understanding and compliance is to include specific examples of information that cannot be disclosed. Include seemingly obvious but highly sensitive information, such as “unannounced mergers,” as well as examples based on topics of employee interest that are likely to lead to social media posts if employees are unaware of the regulatory repercussions, such as “leadership changes” and “new product launches.” Any good social media policy should also highlight the need for employees to use common sense. For many employees, updating daily thoughts and actions on Twitter and Facebook has become reflexive. Employees who fail to use common sense in this activity create situations that are likely to disclose prohibited information. For example, a social networking service called “Foursquare” allows users to “check in” to geographic locations, making their location visible to other users, including on Facebook or Twitter if desired. If an employee known to be involved in corporate takeovers makes a business trip to meet with a target, a Foursquare “check in,” along with a tweet that the employee is traveling for business, could alert savvy followers to takeover possibilities in the relevant city.

Periodic reminders, perhaps through e-mail, are a good way to reinforce the concept that even seemingly trivial social media use could put both the employee and the company in danger of serious consequences. These reminders, like those that many companies post in the FCPA context, demonstrate a commitment to keep regulatory compliance at the forefront of employees’ minds. It should be made clear that there are repercussions for violations. Companies seeking leniency when an FCPA violation occurs have learned they must take steps to remediate, a concept that includes employee discipline that can range from warnings to termination. Likewise, a good social media policy should make clear that policy violations will result in discipline. Thereafter, the company must abide by the policy and impose discipline in accord with the severity of the violation, thus demonstrating the seriousness of the policy to employees and regulators alike. As FCPA enforcement has intensified, many companies have hired a full-time FCPA compliance officer. For most companies, the threat of regulatory response to social media use does not justify a similar post. A model policy should, however, identify a responsible person whom employees can contact if they have questions. This individual would also be a contact should an employee see a problematic post from another employee, allowing the company to stay abreast of potential problems and take corrective action to the extent possible. A company committed to minimizing social media risks should offer training sessions for all employees, and consider mandating such sessions for senior executives. This helps employees avoid problematic behavior, at the same time it demonstrates a commitment to minimizing violations. Several Fortune 100 companies currently make such training widely available to employees. A good social media policy should be dynamic, changing regularly as the nature of the risks change. The SEC’s significant shift in position between its 2012 notification of enforcement and 2013 April Guidance demonstrates that there is uncertainty, even among regulators, as to the proper use of social media. Companies should closely follow enforcement actions, as these will provide guidance regarding emerging risks. Social media can bring great benefits to companies, but it comes with risks. Companies must thoughtfully consider the necessary components of a written policy, and the ongoing steps needed to implement that policy, in order to minimize the risk of enforcement actions, as well as to demonstrate a commitment to compliance that will help limit the consequences of any violations that occur. n

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ThaT Cyber-aTTaCk May be an InsIde Job By Rose RomeRo and CRaig CaRpenteR

hile cyber-security threats posed by foreign governments and terrorist groups against U.S. networks garner headlines and are on the rise, itâ&#x20AC;&#x2122;s a fact that a large proportion of data breaches are carried out by current and former employees, vendors and business partners. As we learned from the recent NSA leaks, insider data breaches can happen to even the most guarded organizations. Surveys of U. S. corporations have found that security breaches caused by once-trusted employees and contractors account for one in five attacks across all industry sectors. Insider security breaches are often more costly and significant than those by outside hackers. The resulting leaks of confidential or embarrassing information, theft of proprietary intellectual property, or misappropriation of trade secrets, can cost companies millions of dollars and possibly permanent loss of a competitive advantage.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2013

A 2012 study conducted by Cyber-Ark Software of more than 800 enterprise-class companies found that the vast majority of global IT managers and executives consider insider threats to be the greatest security risk to their companies. To address these threats, companies must understand what prompts them, properly screen and monitor employees, potential hires and vendors, get serious about employee data and device-use policies, bolster technical defenses, and be prepared to respond. Insider data breaches are usually triggered by a single employment event that causes the oncetrusted insider to take action. These triggering events include being passed over for a raise, or being denied a vacation or a promotion. Similarly, a vendor may seek revenge for a contract not being renewed or some other loss of business. Regardless of the rationale for retaliation, the payback typically occurs within 30 days of the triggering event. Many of these kinds of threats can be mitigated by improving the recruiting processes, conducting rigorous background checks and psychological screenings, as well as exit interviews, and simply being more aware of what’s happening with employees. Cyber-security and data protection should be priorities for the C-suite and human resources personnel, not just the IT team. When an employee is subject to a possible triggering event, it is important that the IT team, managers and human resource team coordinate to minimize the opportunity for a breach. From a corporate policy perspective, steps should be taken to assure that employees have access only to the specific data systems and documents they need for their jobs, that no software can be installed without permission, and that employees use mobile devices responsibly. For optimal protection, sensitive data systems should be partitioned, monitored and made available to employees only on a “needto-know” basis. Under appropriate circumstances, both employees and employers benefit from the convenience of free access and sharing of information, but this can leave the company vulnerable. Since companies may never be completely safe from insider threats, they need to balance a reliance on the integrity and good judgment of employees against strict preventive security measures. Companies should consider layered and mutually supportive technical defense systems to limit network access and protect individual files. A layered defense system would include programs to limit network intrusions, such as

regularly updated firewalls, antivirus programs and intrusion detection and protection systems, as well as policies to restrict access to sensitive files, such as requiring multi-factor authentication, administrative controls on sensitive files and giving administrative privileges only to trusted key personnel. In addition, vendors and contractors that handle sensitive data should be evaluated, to make sure their defense mechanisms are adequate. Increasingly, companies are also relying on some relatively new “data loss prevention” technologies. Also known as data leak prevention, or DLP, systems, they can help managers spot suspicious activity, such as someone saving classified documents to a local hard drive and then downloading them to a thumb drive, or attaching them to an outbound e-mail message. In contrast to a firewall, which helps prevent intruders and malicious information from entering an environment, DLP systems help prevent sensitive data from leaving an environment. They allow businesses to classify and restrict data according to sensitivity, and then monitor and track the movement of the sensitive data, basically alerting the company when someone tries to copy or distribute a large amount of sensitive information. Effective as they may be, many of these technologies, particularly DLP, are invasive and can affect an individual’s privacy at work. To address these concerns and limit potential employee backlash, it is important for companies to engage legal and human resource personnel and have written policies in place prior to rolling out a DLP system. These policies should be clearly and frequently explained to employees, so that employees understand that cybersecurity and data protection are priorities and not to be taken lightly. Finally, be ready to act if preventive measures fail and an insider breach does occur. Have a plan in place, follow that plan and know whom to contact, so you can respond quickly. Often it’s beneficial to engage legal counsel early in this process to preserve privilege, initiate investigations, coordinate with law enforcement, comply with notification requirements, mitigate litigation risks and protect the company’s interests. Unfortunately, the insider data breach threat appears to be getting more serious. Increased access and reliance on technology, combined with the increased importance of intellectual property, has made it even more appealing for a disgruntled employee with special access privileges to betray the employer. It’s now essential that businesses understand their vulnerabilities and make cyber-security a priority. n

Rose Romero, a partner in the Dallas office of Thompson & Knight, leads the firm’s cross-practice Data Privacy and CyberSecurity team. She is a former Executive Assistant United States Attorney and a former Regional Director in the SEC. rose.romero@ tklaw.com

Craig Carpenter is an attorney in the Dallas office of Thompson & Knight. His practice is focused on intellectual property transactions, internet policies and terms of use, intellectual property assignments and licenses, and technology agreements. craig.carpenter@ tklaw.com

Tips On Reading a Resume FROm

Outside LitigatiOn COunseL By neil J. dillOFF

I 60

have served as outside litigation counsel for Fortune 500 companies, and in the last few years have hired outside counsel in my capacity as counsel to our law firm. You might say I’ve been both a contestant and a judge in beauty contests, and those experiences inform this article. The starting point for most hiring decisions is the resume. It’s been my experience that many in-house counsel who hire outside litigation counsel are unsophisticated in their ability to parse the generalities routinely contained in resumes, and lawyers who want to be hired are often less than candid in the information they provide. As a result, potential employers make incorrect assumptions about the experience and capabilities of outside counsel. In some cases, these failures result in unpleasant surprises, usually right before or during a trial or arbitration. Everyone wants to put their best foot forward in a resume. That’s understandable, but statistics about resumes in general indicate that roughly three-quarters of all resumes are misleading and more than half contain outright falsehoods. No separate statistics have been broken out for lawyers’ resumes, but lawyers are people and job-seekers. For the careful reader, there are some red flags.

• Vague descriptions used to conceal lack of personal experience: Use of the plural “we,” “the firm has,” or “the group has” – as opposed to “I have”– when describing experience or cases tried should raise questions. It is often intended to hide the fact that the person hasn’t done it individually. An interviewer should probe beyond the generality and get specifics about what the candidate has done.

• Lack of specifics to conceal extent of experience: Recent resumes that I reviewed proclaimed that the litigator had tried “numerous cases.” When questioned, “numerous” turned out to be four for one lawyer, five for another, and seven for the third. Upon further questioning, it turned out that one of the lawyers had been lead counsel in only two of the cases. In another circumstance, a lawyer listed a series of cases tried, but it turned out that although present at the trials, she didn’t examine witnesses on direct or cross examination, didn’t open or close, and didn’t argue any motions. She was there in a support role. • Failure to list results and dates: Instead of providing either case citations or specific results of a trial, the resume describes the outcome of cases in generalities. For example, “representation of XYZ corporation in a class action securities litigation.” This may be appropriate if confidentiality is an issue. However, when the word “successful” is used to describe the result of the engagement, one needs to ask what “successful” means and to whom – the lawyer who lost but made a lot of money, or the client? If no result is described, you can likely assume the case was lost or there was an unfavorable settlement. In one case I participated in we lost $31 million for a large client, but the exposure was over $300 million. The client threw a big party for my cocounsel and me. I was never able to reconcile that losing $31 million was “successful,” and didn’t list it as such on my resume, but my co-counsel did.

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2013

Additionally, if the case list omits dates, find out when the lawyer handled the various matters. You may be shocked to find that glowing achievements are many years old and the lawyer hasn’t tried a case for years. • Failure to identify losses as well as wins: Remember, “a lawyer who has never lost a case has never tried a hard one.” Lawyers who lose challenging cases inevitably learn a lot, something that doesn’t necessarily happen with an easy win. Be skeptical about accolades, honors and awards. Any resume contains a laundry list of academic achievements, membership in prestigious societies, and honors. Based upon these, someone tasked with hiring outside counsel might assume expertise and experience. But with respect to hiring lead trial counsel, an interviewer should get details of a candidate’s actual trial experience. Check LEXIS or Westlaw to see reported cases. Many lawyers received honors during their heyday, but have turned into administrators and delegators. Honors don’t tell the number of actual trials handled to verdict, their degree of difficulty, whether or not the lawyer served as lead counsel, how long the trial lasted, what the problematic legal or factual issues were, or whether the case was a “winner” or a “loser.” They don’t indicate whether the lawyer is responsive, communicative, easy to work with, calm or easily panicked, or about other personal traits. Most importantly, keep in mind the key question: Is this trial lawyer going to get his or her hands dirty or merely swoop in a few weeks or days before the trial to get up to speed after subordinates do all of the pretrial work? Don’t fail to review the resumes of others who will be doing the work: In today’s big ticket litigation, it has become popular for junior lawyers to do most of the work, and for the “lead” counsel to swoop in and try the case. Putting aside

whether or not this is suitable for a particular case, you should review the resumes of those junior lawyers who are going to be taking the depositions, handling hearings and writing motions. Their resumes should receive the same scrutiny as the lead partner’s resume. In-house counsel, risk managers and executives who hire outside litigation counsel, especially for major matters, should be meticulous in reviewing resumes. They should review accuracy by cite-checking cases and by making verbal inquiries. Especially in today’s era of the “vanishing trial,” those looking for trial lawyers (and not just “litigators”) should spend the time and energy to hire the right person for the job. Failure to do so can lead to unfortunate results, unnecessary expense and indigestion. ■

Neil Dilloff is a litigation partner at DLA Piper LLP. He has been lead counsel in over 100 trials in various complex matters, including legal malpractice, accounting malpractice, construction and other types of commercial disputes. In addition to his litigation practice, he serves as firm counsel. neil.dilloff@ dlapiper.com

BELOW-COST PRICING LAW IN

CALIFORNIA BY HOWARD M. ULLMAN

THE MAGA ZINE FOR THE GENER AL COUNSEL, CEO & CFO oct/ nov 2013

s of 2012 California was the 12th largest economy in the world (at least according to Wikipedia). Most national and international firms do some business in the Golden State. Like other states, California has laws prohibiting the below-cost pricing of goods and services. Although belowcost pricing claims are not filed with great frequency, they are filed, and they can become a trap for those unfamiliar with the law. California’s below-cost pricing law features some unique plaintiff-friendly provisions that can in theory expose your company to more liability than the laws of other states. You might unwittingly find yourself on the wrong side of California law, especially if your company uses discounts, promotions, or rebates. This article briefly reviews California’s belowcost pricing law and some things you need to know to minimize exposure. What statute is at issue? California Business & Professions Code section 17043 prohibits “sell[ing] any article or product at less than the cost thereof to [a] vendor, or . . . giv[ing] away any article or product, for the purpose of injuring competitors or destroying competition.” Section 17043 is part of California’s Unfair Practices Act, or “UPA.” California law also expressly prohibits the use of loss leaders. Section 17030 defines loss leader as “any article or product sold at less than cost: (a) Where the purpose is to induce, promote or encourage the purchase of other merchandise; or (b) Where the effect is a tendency or capacity to mislead or deceive purchasers or prospective purchasers; or (c) Where the effect is to divert trade from or otherwise injure competitors.” Although the loss leader provision was probably designed to protect small retailers, it is not expressly limited to retailers and could apply to other links in the distribution chain. For most purposes, you can safely think of a loss leader claim as a specific type of belowcost pricing claim. Why Would a statute address beloWcost pricing? California developed the below-cost sections of the UPA during the Great Depression to, among other things, protect existing firms against market price erosion as a result of distress sales, bankruptcy liquidations, and unscrupulous practices. The UPA is in some ways similar to the federal

Robinson-Patman Act, which also addresses below-cost pricing, but in some ways it’s significantly different. Some of the notable differences between California and federal law are discussed below. What products are covered? The definition is broad. It includes “any article, product, commodity, thing of value, service or output of a service trade.” One court has written that this definition is “remarkably open-ended.” The UPA may, for example, apply to technology or software licensing, which usually does not fall under the Robinson-Patman, because such licensing involves neither commodities nor sales. do sales beloW cost themselves violate the statute? isn’t harm to competition also required? Proof of harm to competition is one of the major differences between federal law and California law. Under federal law, below-cost sales are only actionable when the seller is likely to recoup the losses at a later time period (e.g., after the seller has driven its competitors out of the market and jacks up the prices). Because this likelihood is so difficult to prove, below-cost pricing claims under federal law have become relatively rare. California law, however, imposes no such requirement. That said, to violate the statute, the seller must act with the purpose of injuring competitors or destroying competition. Such intent could be shown through the seller’s internal documents, which might be obtained in discovery. But often no such documents exist, and some courts have also indicated, citing Section 17071 of the UPA, that proof of one or more acts of selling or giving away any article or product below cost or at discriminatory prices, together with proof of the injurious effect of such acts, is presumptive evidence of the purpose or intent to injure competitors or destroy competition. Although such evidence can be rebutted, the presumption may make it more difficult for a seller to dismiss a below-cost pricing claim at an early stage. What does it mean to sell “beloW cost?” Unlike federal law, California law expressly defines the concept of below-cost sales (although there remain many questions about how California law applies in practice). Under California law, the cost referred to in the UPA is a fully allocated cost or fully distributed cost. For distribution, cost means the invoice or replacement cost, whichever is lower, of the article

Howard Ullman is of counsel in the antitrust and competition practice of Orrick, Herrington & Sutcliffe LLP. His practice is focused on antitrust, trade regulation and unfair competition issues. He has extensive experience advising on distribution law and distribution system issues, including pricing, non-price restraints and dealer terminations. hullman@orrick.com

oct/ nov 2013 today’s gener al counsel

or product to the distributor and vendor, plus their cost. If you are a distributor and you are selling product X, the cost will be the invoice/ replacement cost of X, plus an appropriate allocation to product X of a portion of your overhead costs. Developing proof of the appropriate cost allocation can be time-consuming and complex, since it includes depreciation, maintenance costs, insurance and a variety of other things. In the absence of proof of cost of doing business, a markup of six percent on such invoice or replacement cost is prima facie proof of such cost of doing business. Thus, absent actual evidence, a plaintiff can still make out a case by establishing that your pricing is below invoice cost plus six percent. This is another feature of California law that makes it difficult to secure early dismissals of below-cost claims.

If I lower my prIces temporarIly, can I average them over tIme? Although there are good arguments that you should be able to average out temporary price reductions, the case law in this area is unclear. You should not assume that you can lower prices for a few days or weeks and enjoy immunity because over a period of months or years your prices are above cost. Before deciding on such a pricing strategy, you should consider its legal implications carefully. Does calIfornIa law average costs over tIme? Here, the answer is a bit better for sellers. At least one California appellate court has held that the costs of selling items should be measured as the average costs over a reasonable time, rather than the cost of the item on a particular occasion. Thus, if your costs temporarily increase, you may be able to argue that they should be measured over a longer period of time. This is important, because you want your pricing to be above your cost.

are there Defenses to below-cost prIcIng claIms? Yes. Both Sections of the UPA that address below cost pricing are subject to an affirmative defense for sales made in good faith in an endeavor to meet the legal prices of a competitor selling the same article or product, in the same locality or trade area and in the ordinary channels of trade. This is the so-called “meeting competition” defense. Note that the defense allows you to meet (not beat) competitive pricing, and it only applies when you meet the legal prices of a competitor. Thus, if two sellers know they are each selling below cost and nevertheless pursue a price war, the defense will probably not apply. There are other less important defenses as well. For example, you can engage in below cost sales of perishable goods to close out your stock, or price below cost when goods are damaged or deteriorated in quality. what are the remeDIes for a vIolatIon? For violations of the UPA’s pricing provisions, a plaintiff can recover treble damages, attorney fees, and costs. A plaintiff can also secure injunctive relief against the pricing practices at issue. Violations can also amount to criminal misdemeanors and subject violators to fines and imprisonment, but the UPA is almost never enforced in this manner. It may be surprising that companies cannot price as they wish, but that is the case. In California, below-cost pricing remains actionable, and below-cost pricing suits are filed almost every year. Because California does not require proof of the possibility of recouping losses, because it provides plaintiffs with powerful (but rebuttable) presumptions, and because the defenses to a below-cost claim under California law are limited, companies that do business in California should make sure that aggressive promotions, discounts or rebates do not violate California’s below-cost pricing law. n

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