Today's General Counsel, V11 N5, October/November 2014

oct/ nov 2014 voLUME 1 1 / nUMBER 5 todaysgener a lcounsel.com

Flat budget, better results Cleaning out the ESI Cybersecurity: The vanishing perimeter How to talk about risk A TGC Survey: Arbitration

cutting e-discovery down to size $199 Subscription rate per year ISSN: 2326-5000 View our digital edition: digital.todaysgeneralcounsel.com

BEGINNING AT SQUARE ONE IS FINE UNLESS YOU NEED A PRELIMINARY INJUNCTION NOW.

Start with Practical Law. Save time with straightforward, up-to-date resources such as: • Preliminary Injunctive Relief: Initial Considerations Practice Note • Preliminary Injunctive Relief: Procedure for Obtaining Practice Note • Preliminary Injunctive Relief: Drafting Required Documents Practice Note • Order to Show Cause for Preliminary Injunction and TRO Standard Document Our attorney-editors create and maintain thousands of practical resources so you don’t have to. And now that we’re part of Thomson Reuters, you have everything you need from one trusted partner.

Begin your FREE TRIAL now at startwithpracticallaw.com

©2013 Thomson Reuters L-388222/10-13 Thomson Reuters and the Kinesis logo are trademarks of Thomson Reuters.

daegis www.daegis.com/capture

info@daegis.com 800.828.7660

Capture the heart of your organization.

Information is the very heart of your organization.

Storing, securing and easily locating organizational data is critical to business continuity, risk mitigation and legal discovery. Daegis AXS-One Central Archive provides you with a world-class archive that stores all business-critical email, documents and social media — in a single, easy-to-access central repository.

oct/ nov 2014 toDay’s gEnEr al counsEl

Editor’s Desk

For nearly two decades the courts have been wrestling over whether business methods, often algorithms programmed into a computer, can be patented. In this issue of Today’s General Counsel, Gregory A. Stobbs writes that it’s part of a longer story, going back to Samuel Morse more than 150 year ago, and now the Supreme Court may have sounded the death knell for those patents. In June the Court ruled, in Alice Corp. V. CLS Bank, that an abstract idea cannot be patented, and the mere fact that the patent claims to administer or execute the idea using a computer made no difference. This will come as a great relief to the financial and IT industries, Stobbs points out, but not to the pharmaceutical industry. It will also please the Patent Office, which has been heavily lobbied by those industries for years over what was seen as an open question. In another IP article, Daniel McDonald discusses two decisions that will make it easier for defendants accused of infringing patents to collect attorneys’ fees, a blow to so-called trolls.

Companies contemplating a merger or acquisition need to convince the government that the transaction will not have an anti-competitive effect, but as TGC Editorial Advisory Board member Jeffery Cross cautions in his column, those companies are sometimes in possession of memos and other documents that contradict that notion, and may even advocate the deal precisely for its potential to reduce competition. He recommends a thorough anti-trust audit before any submissions are made to the FTC or DOJ. Canadian practitioner Jamie Koumanakos, a frequent contributor, and his colleague Chris Salamon summarize trends in cross-border M&A. Michael Hupp and Anshu Pasricha analyze strategic considerations involved in a cross-border joint

2

venture, and ways of structuring it that will not run afoul of regulators.

The TGC survey in this issue captures trends and attitudes among our in-house readers on the topic of arbitration. Next issue, look for a survey on what general counsel are thinking about an increasingly pressing topic – information governance.

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

GET YOUR ROADMAP TO EXCELLENCE!

Access the Law Department Maturity Model® to transform your department from “order takers” to business aligned. www2.bridge-way.com/roadmap

oct/ nov 2014 today’s gener al counsel

Features

40

BURYING BRIBES IN THE BOOKS AND RECORDS

42

YOUR VENDOR CAN BE AN ATTACK VECTOR

46

SEEING AND BELIEVING KEY FOR COMPLIANCE REGULATORS

50

LEGAL DEPARTMENT DELIVERED BIG RESULTS ON A FLAT BUDGET

52

MEGA-DEALS UP IN CANADA

Howard Scheck When the bribe is paid the books need to be cooked.

Mark E. Harrington and Anthony Di Bello The threat from “the vanishing perimeter.”

Laura Martino Check-the-box compliance won’t cut it.

Ed Chang Fewer law firms, more efficient billing.

Jamie Koumanakos and Chris Salamon Less M&A, but bigger bucks.

4

COLUMNS

34

DEVELOPMENTS IN MOBILE DEVICE ELECTRONIC DISCOVERY

35

CHARTING WHERE EXPERIENCE COUNTS

36

TWO RECENT COURT DECISIONS MAY BREATHE LIFE INTO COUNTERATTACKS AGAINST TROLLS

Michael Weil and Mark Michels The e-discovery challenge in smartphones and tablets.

Rees Morrison Size matters, but less than you might think.

Daniel McDonald Anti-trust laws invoked in IP disputes.

38

GET CONTROL OF INTERNAL DOCUMENTS BEFORE MERGERS OR ACQUISITIONS Jeffery Cross Regulators will look closely at how the company itself has viewed the deal.

Page 38

Prior results do not guarantee a similar outcome. © 2014 Phillips Lytle LLP One Canalside, 125 Main Street, Buffalo, NY 14203 (716) 847 8400

2014 Client Service A-Team

Phillips Lytle has been recognized by FORTUNE 1000 in-house counsel for delivering superior client service.

WHEN IT COMES TO DEFENDING YOUR PRODUCTS, WE BRING MORE TO THE TABLE.

When you partner with Phillips Lytle, you get more experience, more passion and a more pragmatic approach. And that gets winning results.

Talk to us about Products Liability or any one of our 36 practice areas.

PHILLIPSLYTLE.COM | EST. 1834 NEW YORK: ALBANY, BUFFALO, CHAUTAUQUA, GARDEN CITY, NEW YORK, ROCHESTER | WASHINGTON, DC | CANADA: WATERLOO REGION

OCT/ NOV 2014 TODAY’S GENER AL COUNSEL

Departments Editor’s Desk

2

Executive Summaries

10

Page 28

6

TGC SURVE YS

E-DISCOVERY

16 Arbitration Trends 2014

22 Using Analytics to Clean Out the ESI Garage

Trends and attitudes toward arbitration among in-house attorneys.

INTELLEC TUAL PROPERT Y

20 Noose is Tightening Around Abstract Business Method Patents Gregory A. Stobbs It may be just an idea, even if it takes a computer to express it.

Robert D. Brownstone and Gabriela P. Baron Effective information governance is a daunting task, but it pays.

24 OverPreservation is a Self-Imposed Sanction Brad Harris Saving everything is a losing game.

26 Supreme Court Should Address Ambiguous Federal Pleading Standards Dan Meyers and Kedar S. Bhatia If there is no case, there are no e-discovery costs.

CORPOR ATE GOVERNANCE

28 Communicating About Risk Craig Martin and Michael Werner Make sure you’re speaking the same language.

L ABOR & EMPLOYMENT

30 The Complexities of Leave of Absence Law Michelle Seldin Silverman and Kimberley E. Lunetta ADA and FMLA overlap, and occasionally clash.

Move to the Head of the Class

TAR + CAL = Greater Review Savings The results are in: Continuous Active Learning is the most effective method for Technology Assisted Review.¹ Rather than one-time training, submit review team judgments back to the algorithm to make it smarter. You save by finding relevant documents faster and reviewing fewer overall.

Insight Predict is the first TAR engine to integrate CAL into the review workflow. Our secure-cloud analytics engine ranks your documents automatically and intelligently as the review progresses, saving on review time and costs while making the process more fluid and flexible. Try Insight Predict and move your discovery to the head of the class.

Keep Learning | Get Smarter | Save More

¹ Grossman & Cormack, Evaluation of Machine-Learning Protocols for Technology-Assisted Review in Electronic Discovery, SIGIR’14, July 6–11, 2014

www.catalystsecure.com/CAL

editor-in-Chief Robert Nienhouse Chief operating offiCer Stephen Lincoln managing editor David Rubenstein

exeCutive editor Bruce Rubenstein

senior viCe president & managing direCtor, today’s general Counsel institute Neil Signore art direCtion & photo illustration MPower Ideation, LLC law firm business development manager Scott Ziegler database manager Matt Tortora

Contributing editors and writers

8

Gabriela P. Baron Kedar S. Bhatia Robert D. Brownstone Ed Chang Jeffery Cross Anthony Di Bello Mark E. Harrington Brad Harris Michael M. Hupp Jamie Koumanakos Kimberley E. Lunetta Craig Martin Laura Martino

Daniel W. McDonald Dan Meyers Bernd Meyring Mark Michels Rees Morrison Anshu S. K. Pasricha Chris Salamon Howard Scheck Michelle Seldin Silverman Gregory A. Stobbs James W. Walker Michael Weil Michael Werner

subsCription Subscription rate per year: $199 For subscription requests, email subscriptions@todaysgc.com

reprints For reprint requests, email rhondab@fosterprinting.com Rhonda Brown, Foster Printing

editorial advisory board Dennis Block GREEnBERG tRAuRiG, LLP

Dale Heist BAKER HOStEtLER

Robert Profusek JOnES DAy

thomas Brunner

Joel Henning

Art Rosenbloom

WiLEy REin

JOEL HEnninG & ASSOCiAtES

CHARLES RivER ASSOCiAtES

Peter Bulmer JACKSOn LEWiS

Sheila Hollis

George Ruttinger

Mark A. Carter

DuAnE MORRiS

CROWELL & MORinG

David Katz

Jonathan S. Sack

DinSMORE & SHOHL

James Christie BLAKE CASSELS & GRAyDOn

Adam Cohen

WACHtELL, LiPtOn, ROSEn & KAtz

Steven Kittrell MCGuiREWOODS

Fti COnSuLtinG

Jerome Libin

Jeffery Cross

SutHERLAnD, ASBiLL & BREnnAn

FREEBORn & PEtERS

thomas Frederick WinStOn & StRAWn

Jamie Gorelick WiLMERHALE

Robert Haig KELLEy DRyE & WARREn

Jean Hanson FRiED FRAnK

Robert Heim DECHERt

timothy Malloy Mc AnDREWS, HELD & MALLOy

Jean McCreary nixOn PEABODy

Steven Molo MOLOLAMKEn

thurston Moore HuntOn & WiLLiAMS

MORviLLO, ABRAMOWitz, GRAnD, iASOn, AnELLO & BOHRER, P.C.

victor Schwartz SHOOK, HARDy & BACOn

Jonathan Schiller BOiES, SCHiLLER & FLExnER

Robert townsend CRAvAtH, SWAinE & MOORE

David Wingfield WEiRFOuLDS

Robert zahler PiLLSBuRy WintHROP SHAW PittMAn

Ron Myrick ROnALD MyRiCK & CO, LLC

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information or retrieval system, with out the written permission of the publisher. Articles published in Today’s General Counsel are not to be construed as legal or professional advice, nor unless otherwise stated are they necessarily the views of a writer’s firm or its clients.

Today’s General Counsel (ISSN 2326-5000) is published six times per year by Nienhouse Media, Inc., 640 Park Avenue, Hinsdale, IL 60521-4644 Image source: iStockphoto | Printed by Quad Graphics | Copyright © 2014 Nienhouse Media, Inc. Email submissions to editor@todaysgc.com or go to our website www.todaysgeneralcounsel.com for more information.

Postmaster: Send address changes to: Today’s General Counsel, 640 Park Avenue, Hinsdale, IL 60521-4644 Periodical postage paid at Hinsdale, Illinois and additional mailing offices.

Delivering a single platform for managing all of your e-discovery processes. Only Xerox makes it that simple.

Integrating technology can be risky, time consuming and costly. Viewpoint™ streamlines e-discovery by delivering an all-in-one platform with everything needed to manage your needs – including collection, processing, early case assessment, analytics, technology-assisted review, review and production. This discovery platform is available both as an on-premises software solution and a managed service. It’s one more way Xerox simplifies business, so you can focus on what really matters.

xerox-xls.com ©2014 Xerox Corporation. All rights reserved. Xerox ®, Viewpoint,™ Xerox and Design® and Ready for Real Business® are trademarks of Xerox Corporation in the United States and/or other countries. Xerox does not offer, and is not authorized to provide, legal advice, representation or counseling in any jurisdiction.

OCT/ NOV 2014 TODAY’S GENER AL COUNSEL

Executive Summaries TGC SURVE YS

INTELLEC TUAL PROPERT Y

PAGE 16

PAGE 20

PAGE 22

Arbitration Trends 2014

Noose is Tightening Around Abstract Business Method Patents

Using Analytics to Clean Out the ESI Garage

How in-house attorneys use, and don’t use, the process

By Gregory A. Stobbs Harness Dickey

10

E-DISCOVERY

A Today’s General Counsel survey conducted in July and August sought to capture trends and attitudes toward arbitration among in-house attorneys.

The primary reasons respondents gave for choosing arbitration over litigation were that it was required by contract, it preserved confidentiality and it was less costly. The reasons given for choosing not to arbitrate included the difficulty of appealing the decision and the fact that the arbitration process is not required to follow established legal rules.

An accompanying article, based on survey results, notes that in-house attorneys are of two minds about arbitration. Asked if they thought arbitration generally turned out to be a better solution than litigation, 42 percent called it a toss-up. Respondents liked the less formal setting and the chance to avoid unfavorable courts and runaway juries, but they didn’t like what they viewed as the compromise verdicts that arbitrators sometimes render.

Executives of the two leading arbitration providers, the American Arbitration Association and JAMS, commented on the results. AAA’s general counsel said that data compiled by his company indicates there are several myths about arbitration, among them that arbitrators tend to “split the baby” with their verdicts. But according to the data all-or-nothing decisions are the usual result, he says Executives of JAMS noted that the arbitration appeals process, like many other elements of arbitration, is governed by what contending parties agree on, and they first must agree on whether or not an appeal will be possible.

In Alice Corp. V. CLS Bank, the Supreme Court ruled that an abstract idea – in this case, use of a neutral intermediary party as an escrow agent – cannot be patented, and the fact that the patent claims to administer the escrow relationship using a computer made no patentable difference. Few expected the Alice patents to survive.

More interesting is why the Court has recently been tinkering with this seemingly arcane rule of patentable subject matter eligibility, and what it means for the fate of patents.

The Supreme Court has become active because lower courts and the Patent Office have been struggling to appease both the pharmaceutical industry, which needs strong patents, and the financial and information technology industries, which perceive many recent patents as akin to a plague of locusts.

Alice, just the latest round, is a boon for companies that fear infringing financial products or services patents. For applicants who have legitimate inventions needing protection, Alice raises the bar.

We know that merely reciting that the invention is performed using a computer is not enough.

What does the future hold? Short term, patent examiners and the courts will redouble their efforts to weed out unbridled abstract idea patents.

Regretfully, some legitimate inventions will be lost as collateral damage. But eventually, patent examiners, patent applicants, and the courts will find a new equilibrium point and a new resonance, and the patent system will go on as it always has.

By Robert D. Brownstone, Fenwick & West LLP Gabriela P. Baron, Xerox Litigation Services

As time passes and we acquire more “stuff,” it gets harder to winnow down our possessions. Who longs to spend the weekend cleaning the garage? It’s easier to keep piling things up, with no discipline for storage or removal. The same issues pervade the electronic information management environment; the overwhelming volumes of data generated daily lead to a similar approach to electronically stored information.

Savvy companies are adopting sound information governance (IG) policies to promote efficiency when locating information, and to facilitate greater compliance with electronic discovery, data security and privacy requirements.

As companies look toward the next generation of technology and archiving systems, establishing a solid IG program will make moving data from one system to another and retrieving it easier.

Embarking on a program can be daunting. Start by culling through the data in discrete chunks until all has been reviewed and a system is in place for future storage. Legal and Compliance should ensure policies are sound; data deletion must be defensible.

Employees need to be aware of the corporation’s records retention and information management policies. Training should teach managers and staff to rethink how they use data, so they keep only what is required or needed.

Individuals should be guided by the legal and compliance specialists, as well as e-discovery experts conversant in defensible deletion. Training contemporaneous with establishment of a new system provides an opportunity to emphasize the importance of litigation holds.

TODAY’S GENER AL COUNSEL OCT/ NOV 2014

Executive Summaries E-DISCOVERY

GOVERNANCE

PAGE 24

PAGE 26

PAGE 28

Over Preservation is a SelfImposed Sanction

Supreme Court Should Address Ambiguous Federal Pleading Standards

Communicating About Risk

By Brad Harris Zapproved

Data preservation is the foundation of a defensible e-discovery process.

When a party is sanctioned for ediscovery mistakes, it usually involves failing to preserve electronically stored information (ESI).

While the legal duty to preserve potentially relevant evidence is understood by corporate legal teams, the methods for carrying it out are at issue in the courts. The proliferation of email, cloud storage and other ESI has made the “collect everything” approach too expensive for many businesses, yet they must take reasonable steps to ensure data is being preserved. The foundation of intelligent preservation is a sound legal hold notification process. The process need not be complex. The standard is reasonableness, good faith and competence.

To meet high standards of preservation, mitigate the risk of costly sanctions and prepare for adversaries, the following elements are imperative: proportional and cost-effective response; ability to act immediately following a triggering event; visibility of the custodians: real-time tracking of compliance; detailed audit trail of actions; process automation for repeatability and costefficiency; and strong internal communications to reinforce the importance of the preservation process.

Best practices and automation enable cost-effective and intelligent preservation, mitigate the risk of inadvertent spoliation and make it easier to negotiate a fair and reasonable scope of discovery, with proportionality and collaboration. The key is to collect, process, review and produce only what’s necessary, and to get past the “preserve everything forever” mentality.

By Craig Martin and Michael Werner Jenner & Block

By Dan Meyers and Kedar S. Bhatia Bracewell & Giuliani

The predominant factor driving litigation costs today is e-discovery. In a recent study analyzing the cost of litigation across 57 large cases, the RAND Institute for Civil Justice concluded that the cost of pre-trial document production alone was as high as $27 million in a single case and had a median cost per action of approximately $1.8 million.

These costs have rendered illusory the goal of the Federal Rules of Civil Procedure to “secure the just, speedy, and inexpensive determination of every action and proceeding.”

The Supreme Court therefore should seize the opportunity to provide much needed elucidation concerning the federal pleading standards, so that cases that lack merit are more likely to be dismissed before they reach the document production stage.

An upcoming case will give the Court a new chance to offer guidance.

In Dart Cherokee Basin Operating Co. v. Owens, likely to be argued in early October, the justices will decide whether a defendant seeking removal of a class action lawsuit from state to federal court should first be required to meet certain evidentiary requirements.

That case could have implications for federal pleading standards because language outlining the statutory requirements for removal of a class action closely mirrors pleading requirements applied to all complaints filed in federal court. The ruling could shine light on how the Supreme Court interprets the requirement of plausibility in the pleading context, and corporate defendants and their lawyers will be watching closely.

Productive risk assessment requires clear, direct communication among CEO, CFO, CLO and other executives.

But when each member of an executive team is focused on a different type of risk, such communication can be difficult. In order to put an effective risk management program in place, there must be a common language to discuss risks related to any issue, and to assess whether a particular risk is one the company should accept.

There are commonalities regardless of the type of risk being discussed: the likelihood of a risk occurring, the impact it might have, and a company’s tolerance for handling an event if it should arise.

All parties addressing the issue should learn to discuss those issues using the same language, so that different types of risks can be analyzed and compared. More important than the specifics of the language is that it be simple to understand and used consistently, so that a complex analysis of risk in one area can be discussed by team members whose expertise falls elsewhere.

Executives should devise a scale that equates different types of risk according to the impact of the potential consequences. An assessment of risk tolerance requires an analysis of the company’s stability in individual areas.

The stability of a company’s reputation, for example, is likely unrelated to its ability to engage in a long-term legal battle.

A company’s financial stability is a major factor in risk assessment and requires additional consideration.

11

OCT/ NOV 2014 TODAY’S GENER AL COUNSEL

Executive Summaries L ABOR & EMPLOYMENT

12

FEATURES

PAGE 30

PAGE 40

PAGE 42

The Complexities of Leave of Absence Law

Burying Bribes in the Books and Records

Your Vendor Can Be an Attack Vector

By Michelle Seldin Silverman and Kimberley E. Lunetta Morgan, Lewis & Bockius

By Howard A. Scheck KPMG

By Mark E. Harrington and Anthony Di Bello Guidance Software, Inc.

The Family Medical Leave Act (FMLA) provides eligible employees with 12 weeks of unpaid medical leave per year, but employers must consider additional leave required by a number of other laws, including the Americans with Disabilities Act (ADA), state disability anti-discrimination laws and, increasingly, state and municipal paid sick leave laws that address absences arising from minor illnesses.

For many employers, FMLA administration is less of a problem than the ADA, which imposes an affirmative obligation to reasonably accommodate employees with a disability. Courts have held that a leave of absence may be a form of reasonable accommodation, but neither the ADA nor its governing regulations provide any tangible guidance about when leave must be provided.

Given the ADA’s mandate that accommodations be managed case-by-case, it can be difficult for large organizations to achieve consistent leave management across their businesses.

Some employers have adopted policies setting a maximum amount of job protected leave, but the EEOC considers these policies to be an inflexible interference with the ADA’s individualized interactive process. Some courts have rejected the idea that uniform policies are always unlawful. A recent panel of the Court of Appeals for the Tenth Circuit upheld an employer’s policy limiting medical leaves of absence to six months.

Employers must also be aware of the requirements imposed by state and local leave and disability accommodation laws. Some of them impose even greater obligations on employers than their federal counterparts.

This article reviews the books and records and internal controls provisions of the Foreign Corrupt Practices Act, and it analyzes 70 FCPA enforcement actions initiated by the Securities and Exchange Commission since 2009, highlighting the financial accounts and expense categories that the SEC alleged were involved in concealing corrupt payments. Knowing where the SEC is looking can help guide a company when it assesses its own bribery risks and when targeting potential corrupt payments with data analytics.

There have been 70 cases since 2009 in which the SEC made FCPArelated allegations. The accounts most used to cover up bribes were “Commissions” and “Consulting.” The next most commonly-used accounts were “Cost of Sales,” “Travel and Entertainment,” and “Customs.”

Some cases had multiple allegations. The internal controls allegations were generally less specific than for books and records violations. Typical allegations include: No controls to detect FCPA violations; no program to monitor employee compliance with the FCPA; lack of FCPA training; lack of management authorization for transactions; lack of oversight over foreign agents; and failure to follow-up on FCPA red flags.

Data analytic modules can be modified to focus on high risk expense categories. Each of these categories can be linked to transaction-level data in order to examine individual vendors, countries, frequencies and amounts of disbursements. Given the SEC’s focus on the use of third parties to facilitate bribes, data analytics also can be used to help investigate suspicious payments through link analysis.

It is impossible to implement effective information security until you address the “vanishing perimeter” in policies and agreements. This term refers to the porous nature of an organization’s network and information-sharing system. A company’s IP and other sensitive data no longer simply exists within the confines of a firewall. It travels “off network” and potentially around the world every day via email, and on the mobile devices of supplychain and other vendors, business partners and service providers, including outside law firms.

Most large organizations have already experienced breaches, whether they are aware of it or not. You are only as secure as the weakest link in your supply chain, and it should be assumed that if you and your supply chain have not yet been compromised, they will be.

This assumption should drive internal and supply chain information risk management and legal processes.

A program to mitigate risk in the supply chain begins with identifying which data is considered “sensitive” by your organization. Next, assess which vendor or partner that has access to the network, or that retains copies of your IP, PII (personally identifying information) or financial data, represents the greatest risk to information security. Rank your vendors. Creating such a list lays the groundwork for a tiered approach to agreements, as well as to the level of network and/or data access granted.

General counsel can play a role in supply chain cybersecurity by working with other stakeholders to weave new protections into existing processes.

TODAY’S GENER AL COUNSEL OCT/ NOV 2014

Executive Summaries FEATURES PAGE 46

PAGE 50

PAGE 52

Seeing and Believing Key for Compliance Regulators

Legal Department Delivered Big Results on a Flat Budget

Mega-Deals Up in Canada

By Laura Martino CPA Global

By Ed Chang LexisNexis CounselLink®

.2

.1

By Jamie Koumanakos and Chris Salamon Blakes

.3

With the sharp rise in anti-bribery enforcement in recent years, many companies have sought protection by putting compliance programs in place.

The problem for some is that, having established such programs, they are lulled into a false sense of security.

Anti-bribery settlements are signaling that the mere existence of a compliance program may not be sufficient.

Enforcers are scrutinizing compliance measures to determine whether they are robust enough to actually mitigate risk and reduce the likelihood of illegal conduct. Ironically, companies that have transgressed in the past may be ahead of the curve, as they are likely to have forcibly or voluntarily improved their compliance protocols.

U.S. regulators have enhanced their arsenal in several ways, including by heightened international cooperation with other government authorities. Also, Dodd-Frank has given the SEC the authority to settle civil cases through administrative proceedings.

Requirements for an effective compliance program are outlined in the Federal Sentencing Guidelines, and in further guidance published by the SEC and DOJ. The author suggests several ways to enhance programs, among them: Scrutinize relationships with subcontractors; be wary of gifts, even small ones; monitor for commercial bribes; expand due diligence to span the entire counter-party population instead of just high-risk third parties. Take particular note of a recent jury conviction that added clarity to the FCPA’s meaning of “foreign official,” to include “any officer or employee of a foreign government or any department, agency or instrumentality thereof.”

Pennsylvania-based Kennametal, a global industrial technology company that conducts business in more than 60 countries and has 80,000 customers worldwide, defined a new mission: to secure 40 percent of sales from the development of new products. For the company’s three-person IP team, that meant doing more with less, and they found themselves unable to keep up with the demands of safeguarding the company’s global IP without additional resources.

The department responded by investing in a matter management technology solution to better manage their billing and invoicing process. It helped them save nearly $100,000 annually by capturing billing violations, consolidating outside firms from 200 to 30, reducing administrative work by 4.5 days per month and automating bill review for compliance violations and making corrections as part of the process.

The company’s chief counsel says the original intention wasn’t to streamline work with outside firms, but that followed from the technology change. In order to gain clarity concerning billing, they established new billing protocols that included rules for what would fall under hourly rates and when alternative billing methods would apply. To establish more predictability on matter pricing and to make more accurate comparisons, they established fixed pricing on commodity-type legal matters, which were defined to include filing patents and trademarks in specific countries. The result was more accurate budgeting and planning.

These were significant changes for the company’s outside counsel, but they benefitted by being paid faster and with fewer errors.

Reports indicate that M&A deal count volume has been down in 2014.

However, deal values have increased by 26 percent, a bright spot in transaction activity. Big ticket Canadian deal volume has seen an uptick, paralleling U.S. mega-deals, with 20 Canadian deals over US$1-billion announced by the time this article was prepared.

They had an aggregate deal value of US$46.5-billion.

This represents a 33 percent and 66 percent increase in deal number and value, respectively, of these larger deals as compared to the prior year period.

As confidence in the economy grows, risk-averse companies that hoarded cash through the downturn may feel new pressure to grow earnings through acquisitions. Continuing consolidation in many sectors of the Canadian economy also means that inbound investors need to move quickly and decisively to seize remaining opportunities of scale.

Supported by liquid capital markets and willing lenders both in Canada and the United States, financial buyers are also once again ramping up activity in Canada and providing meaningful competition to strategic buyers.

Oil and gas transactions led all private equity investments last year, and this activity is continuing.

Private equity funds have traditionally avoided mining investments due to high valuations, commodity price risk and volatility in earnings and cash flows. However, a number of Canadian and international sponsors have become increasingly focused in the sector, including by raising dedicated funds and with new asset allocations in existing funds.

13

OCT/ NOV 2014 TODAY’S GENER AL COUNSEL

Executive Summaries FEATURES

14

PAGE 54

PAGE 58

PAGE 60

Enforcement Trends in EU Competition Law

Mediation Strategies and Considerations

Strategic Considerations in Cross-Border Joint Ventures

By Bernd Meyring Linklaters

By James W. Walker Cole, Schotz, Meisel, Forman & Leonard

By Michael M. Hupp and Anshu S. K. Pasricha Koley Jessen

During the last ten years, competition law enforcers in Europe have been busy “waging a war on cartels,” as former Competition Commissioner Neelie Kroes put it in 2006. With one exception, the ten highest fines ever were imposed in the past decade.

These developments have been the result of a deliberate strategy to strengthen enforcement.

A trend that has been less visible is focusing on practices other than traditional hard-core cartel behavior.

Certain kinds of information exchanges between competitors were among the first of these new targeted practices.

Gathering of market information can often be structured in ways that comply with antitrust concerns, but the Commission has fined companies where exchanges concerned future pricing or other strategic information.

Indirect communications are another area of recent focus. The line between normal business conduct and violation of antitrust laws is often difficult to draw. Discussions with customers or suppliers can lead to exposure if the received information is passed on to competitors, for example. Such cases have led to significant fines in a number of European jurisdictions.

Price announcements are becoming another area of intense enforcement.

European regulators are assessing how and why companies communicate prices. Are they speaking to customers in order to promote their offering?

Or are they essentially aiming to tell competitors that the market is ripe for a price increase? Shipping companies, Dutch telecommunication providers and UK cement companies currently are under investigation in this regard.

In order to direct a case toward mediation in a way that gives your company the best opportunity for settlement at the earliest point in the dispute, first consider how the prospect of mediation arises.

If you have already been involved in pre-suit negotiations, suggesting mediation before the suit is filed allows both sides to close the gap in a confidential and non-binding setting. Has the mediation been ordered by the court? Being ordered to mediate a suit provides cover for both sides.

There are three types of mediators you should consider: the substantive expert, the former jurist and the prominent neutral. The dispute’s subject matter may be so technical that having a mediator with substantive expertise will help cut short the learning curve.

Sometimes the successful resolution of a dispute lends itself to the experience and perspective of a former trial court judge. This is particularly true where the dispute involves a layperson as plaintiff against a corporate defendant.

And sometimes there is a senior statesman who both sides respect and trust to be fair, and who can provide a reasoned evaluation that moves both sides closer to compromise.

If used properly, mediation remains an effective means of resolving even the largest and most complicated disputes.

The process has matured over decades of use by counsel in all types of commercial disputes, but it must be utilized correctly in order to provide the greatest chance of success.

Joint ventures are the preferred strategy for cross-border M&A. There are several strategic considerations when entering into cross-border joint ventures, and for documenting JV agreements.

Identifying specific objectives is the first step. The relative importance of a JV for each party may be different because of different strategic interests.

They can be better aligned by valuing the assets and services to be provided, clearly specifying the goals for the early years of the venture, and documenting the goals in the JV agreement.

Joint-venturers must consider “soft” issues such as cultural differences and possible conflicting incentives. To provide for more efficient governance a joint venture should consider forgoing linear decision-making and instead devise roles and responsibilities for each party. The parties may also decide to include geographic and other restrictions on the joint venture operations.

Financing is a critical item. JV agreements typically give careful consideration to future debt, equity financing, and the joint-venturers putting in more equity or bringing in new investors.

Safeguarding intellectual property is a major issue. Safeguarding proprietary technology is especially critical in emerging markets.

A JV strategy can be potent and with appropriate strategic maneuvering still leave open long-term options. However, successful execution requires advance preparation, thoughtful implementation of strategic considerations, and simple but well-designed deal structures that leave room for sophisticated implementation but do not prove to be impediments in negotiations with regulators.

“THE EXCHANGE”

THE LE ADING INTER AC TI V E CORPOR ATE E-DISCOVERY PROGR AM SERIES

Los Angeles BE V ERLY WIL SHIRE

DEC 9-10, 2014 SPECIAL OFFER FOR TGC RE ADERS: REGIS TER TODAY FOR

FREE

USING CODE T GCMAG100

FREE CA LIFORNIA CLE

TO REGIS T ER V ISIT www.todaysgeneralcounsel.com/institute/los-angeles Please no e-Discovery personnel allowed unless from one of the sponsoring companies

As in-house counsel you know litigation costs can blossom out of control often driven by e-Discovery. This two-day colloquium will give you the chance to share your experiences and develop solutions, all guided by and drawing on the expertise our panel of expert moderators.

2014 Exchange Program Series Sponsors Included:

Hear what a sampling of past attendees had to say: An educational bonanza for all litigators and those desiring a broader and more in-depth understanding of e-Discovery.

–DUK E ENERGY

“An outstanding and highly informative program.”

–R AY ASHBURG, SENIOR COUNSEL THE DOW CHEMIC AL COMPANY

“I thoroughly enjoyed this roundtable conference on a topic that is so important to today’s operation of business, learned a lot, met great people, and am looking forward to the next one.”

S T R AT E G I C A L L I A N C E

S T R AT E G I C A L L I A N C E

–DANIEL K IM, CORPOR ATE COUNSEL PMC BANCORP

L E A R N M O R E A B O U T T H E UP C O M IN G

SAN FRANCISCO EXCHANGE MARCH, 2015 www.todaysgeneralcounsel.com/institute/san-francisco USE C ODE T GC M A G10 0 T O R EGIS T ER FOR F R EE

oct/ nov 2014 Today’S Gener al CounSel

TGC Surveys

Arbitration Trends 2014 A Today’s General Counsel Survey The survey, conducted in July and August, sought to capture trends and attitudes toward arbitration among in-house attorneys.

What are the primary reasons to arbitrate, rather than litigate?

Respondents were allowed to choose up to 3 responses

16

It is required by contract

47%

It preserves confidentiality

38%

It’s less costly

38%

Discovery is limited

31%

It’s less time-consuming

30%

Uses expertise of a neutral third party

24%

Allows parties to resolve disputes themselves

21%

Advantages of a particular forum, or seat of arbitration

10%

Senior management wants to arbitrate

7%

Ease of enforcement of award / solvency of respondent

6%

Reasons cited not to choose arbitration: The respondents were asked to select up to three reasons why they might choose not to arbitrate.

Sixty-six percent said one reason was the difficulty of appealing the decision. The fact that the arbitration process is not required to follow legal rules was a major problem for 43 percent. Thirty-eight percent lacked confidence in the neutrality of the third party.

Other reasons cited to choose arbitration: • • •

Avoids run-away juries and unfavorable courts.

Can prohibit class actions.

Generally decided quicker.

Other reasons not to arbitrate:

Some other responses:

•

•

•

•

Arbitration panels tend to be quick, hear every argument and in the end just “split the baby.”

Arbitrators are likely to award a compromise verdict instead of a defense verdict when the plaintiff fails to prove its case.

Cost and time advantages can be illusory. May not be binding.

Asked if they thought arbitration generally turned out to be a better solution than litigation, 42 percent called it a tossup. About one-fourth said it was a better solution, 21 percent said it was not.

• • • •

Arbitration is usually better than litigation in a civil law jurisdiction.

Arbitration with a mediation prerequisite is probably the best approach.

Arbitration is definitely better than employment litigation.

Personnel decisions are litigated, claims or payment issues are arbitrated.

Arbitration is only a better solution when there is liability on both sides.

If one side does not have any exposure, then it is better to litigate and win on summary judgment.

continued on page 19

Today’S Gener al CounSel oct/ nov 2014

TGC Surveys

Respondents: Arbitration an Excellent Alternative Except When It’s Not

I

n-house attorneys are of two minds about arbitration, judging from the results of the TGC Arbitration Trends survey. They like the less formal setting, and the chance to avoid unfavorable courts and runaway juries.

But they view the decisions of arbitrators as difficult if not impossible to appeal, and they deplore the compromise verdicts that arbitrators render. Asked if they thought arbitration generally turned out to be a better solution than litigation, 42 percent called it a toss-up.

According to Cheryl Smith, general counsel at Western New England University, a case is a candidate for arbitration if the parties have expended time and resources in litigation or some other process without a satisfactory result, especially if financial, emotional or reputation issues arise.

“If mediation has not resolved the issue, arbitration is an excellent alternative,” says Smith.

Joshua Frank, General Counsel, DHL Americas Global Business Services, prefers litigation to arbitration, except in limited circumstances.

“If we’d be litigating in a very proplaintiff jurisdiction, or where there are very sensitive facts involved, such as with a former executive, a customer or key vendor, arbitration is preferable,” says Frank. “Otherwise, I prefer to litigate.”

The primary reason for arbitrat-

ing rather than litigating, according to almost half the respondents, was that it is required by contract. The presence of that clause in so many contracts is indicative of the fact that even those who are lukewarm about arbitration recognize its advantages.

The primary reason respondents gave for choosing not to arbitrate was the difficulty of appealing the decision. Other reasons cited were that arbitration is not required to follow legal rules; lack of confidence in the neutrality of the third party; opposing parties were not willing

Even those who are lukewarm about arbitration recognize its advantages.

The parties can lay out reasonable rules of engagement prior to a dispute arising,” says Frank. “Otherwise, one side will likely prefer litigating, and then it would be impossible to get agreement to arbitrate.”

That contract clause serves as notice that litigation will not be available, according to Smith, and that the parties value alternative dispute resolution as a means to end any potential dispute.

Other reasons for choosing to arbitrate were that it was less costly; it preserved confidentiality; and that it limited discovery. However, many respondents viewed discovery limits as a problem, not an advantage. (There appear to be many misconceptions about this issue – see the following articles.)

to arbitrate; and arbitration could result in a less than clear-cut decision.

Asked her opinion of the last arbitrator(s) she encountered, Smith said: “Excellent. He was a retired judge at the Mediation Group, Brookline, Massachusetts. He was informed, thoughtful, probing, and insightful.”

“They took too long,” said Frank, when the same question was posed.

“They were too lenient with discovery requests by the plaintiffs, and they unnecessarily ‘split the baby.’”

More than 60 percent of respondents said that their organization’s legal department did not have a dedicated disputes team, department or function. One-third said that they did have a person or group dedicated to this function. ■

17

oct/ nov 2014 Today’S Gener al CounSel

TGC Surveys

More than half of respondents to the TGC survey said they used the American Arbitration Association (AAA) for arbitration, and another one-third said they used JAMS. Today’s General Counsel discussed the results of the survey with executives of both organizations.

18

Disputants Must Agree to Expedite Appeals

Decisions Are Usually All or Nothing

T

S

he difficulty of appealing an arbitrator’s decision was cited by more than two-thirds of survey respondents as their main gripe with arbitration. Most of the difficulties referenced by respondents probably arise from one of the fundamental facts of arbitration, according to Sheri Eisner, Associate General Counsel at JAMS: Both parties have to agree in advance on whether an appeal will be allowed.

“They can put it in their arbitration clause, or they can agree somewhere along the way,” Eisner explains, “but it’s a pretty contentious issue, and they do have to come to an agreement, unlike litigation where it’s a given.”

Nevertheless, in Eisner’s, opinion the appeals process JAMS offers has many advantages. “It is quicker and less expensive than litigation appeals normally are, and often in court one appeal doesn’t end things. With us you get one shot. The panel will look at the record, do some briefing, there may or may not be oral arguments, and 21 days later you’ll get a decision.”

The limits on discovery in arbitration were seen as an advantage by many survey respondents, but others viewed them as a problem.

Eisner acknowledges it’s an issue but, she says, “We’re often stuck with what the parties get themselves into in respect to discovery.”

If the contract calls for full discovery there will inevitably be more expense, according to Eisner, but if both sides have savvy counsel who will allow the arbitrator(s) to guide a more reasonable discovery process, it will be faster and less expensive.

“Our protocols are designed to be a roadmap for the arbitrators and the parties and their lawyers to think differently about discovery,” she says, “but sometimes it’s difficult for them to give up the right to every option under the sun.”

Arbitration and other forms of alternative dispute resolution came into being in reaction to the escalating cost of litigation, but several survey respondents complained that expense-wise there is little to choose between them now.

Says JAMS President and CEO Chris Poole: “The thing to keep in mind is that we have many ways to keep costs down.

We have a streamlined process with its own rules, and there are cost-efficient procedures the arbitrator can follow, but again,

everal survey respondents voiced a common complaint about arbitration, that more often than not it results in the arbitrator “splitting the baby.”

“We have done study after study of both domestic and foreign arbitrations, and we’ve found the opposite,” says Eric P. Tuchmann, General Counsel and Corporate Secretary of the American Arbitration Association. “Arbitrators have a clear tendency to either grant or deny the relief sought. In a large number of cases they deliver all or nothing decisions, and in a smaller but still sizeable percentage they don’t grant everything, but almost everything.”

Parties have different views of discovery according to which side of the dispute they are on, Tuchmann observes, but generally speaking in-house counsel are very concerned about its burdens.

“We provide tremendous flexibility to modify the discovery rules,” he says, “and if the parties agree, it’s easy. They can limit depositions, they can limit the document exchange, they can work together to narrow it. But let’s say they don’t agree and they’re left with the default procedure. We talked with a lot of people, including in-house counsel, and revised our default to be less open-ended.”

Under that revision there is a presumption of a preliminary hearing, in which matters like discovery and appeals are addressed. “If you look at the checklist for the preliminary hearing, it notes that care must be taken not to import procedures from the court system. So that’s something specific that the arbitrator has to do to keep costs down.”

According to Tuchmann, ESI discovery is simpler in arbitration because it will be evaluated under that same standard – keep it as concise as possible, and don’t import rules from the litigation process. “The arbitrator will determine what search terms are appropriate considering what is being sought, and what is necessary and reasonable in a particular case,” he says.

In the past AAA had a model appeals clause that parties could adopt, but changes in the law, including a Supreme Court decision that limited the ability to create an appellate process from arbitration into court, necessitated a revision.

“We created new rules for cases where appeal rights are critical. Normally those are large cases where the stakes

Today’S Gener al CounSel oct/ nov 2014

TGC Surveys

Disputants Must Agree to Expedite Appeals

Decisions Are Usually All or Nothing

both parties have to agree. If one insists on a longer process it’s just going to cost more. I know there’s a perception that arbitration used to be a cheaper alternative and it’s not anymore. I may be a little biased on this, but I think it is cheaper. We have all kinds of ways to make sure of that. What we don’t have is full control over the process. At the end of the day, it’s what the parties want that determines how costly the process will be.”

Under many JAMS contracts, streamlined rules apply automatically for any dispute under $50,000, but those streamlined rules can be written into any contract to cover any amount, and the arbitrations become less costly as a result.

“A streamlined arbitration is a regular arbitration with some of the pieces missing,” says Eisner. “For example, summary disposition motions, which tend to eat up time and resources, are not allowed, and depositions can be limited. The parties get to the arbitrator and get a hearing scheduled a lot faster.” ■

are high,” Tuchmann explains. “It provides a streamlined process before a special appeals panel within the arbitration procedure.”

It is not a full-blown appeal in the sense that term is understood in litigation, he explains. The bases are limited to concerns about errors of law that are material or prejudicial, and there is a presumption that it will be handled via document submissions.

AAA outlines an expedited process in its commercial rules. Extensions are limited, notices are simplified and the choice of arbitrators is limited. Parties can adopt that process in any case, but it automatically applies in cases where the dispute is for $75,000 or less.

In cases where the dispute is $25,000 or less there is a presumption that the case will be heard based on documents submitted only. ■

Arbitration Trends 2014

Respondents had the opportunity to share experiences and opinions about arbitration. Here are a few of their responses:

continued from page 16

Does your organization’s legal department have a dedicated disputes team, department or function?

“Arbitration has proven to be a very effective means to resolve employee and 1099 disputes.”

“Arbitration is cheaper, faster, has less discovery and better results on average.”

Other responses: •

Other 4%

• •

No 61%

Yes 36%

A few attorneys are dedicated to disputes for certain areas. Other general attorneys will handle disputes in their functional area.

For employment matters only.

We have an administrative hearing division.

Slightly over half of respondents reported that their organization had a policy for including arbitration clauses in contracts. About half of respondents said that the CLO or general counsel has final say about whether or not to arbitrate, while 29 percent said it was the CEO who made the decision.

“In the maritime industry, arbitration has been a standard procedure for decades, and generally speaking, satisfactory to all concerned. The main issue is the small number of qualified arbiters.”

“Arbitration is not necessarily faster or cheaper. It has the advantages of contractually requiring the arbitrator to have technical experience in the matter at issue, and it is usually a confidential proceeding.”

“Domestic arbitration has become as expensive and time consuming as litigation.”

“The limited right to appeal is a very significant problem with arbitration as well arbitrator bias.”

19

OCT/ NOV 2014 TODAY’S GENER AL COUNSEL

Intellectual Property

Noose is Tightening Around Abstract Business Method Patents

By Gregory A. Stobbs

F

20

or the fourth time in four years, the Supreme Court fine-tuned its fundamental rule governing what subject matter is eligible for patent. In Alice Corp. V. CLS Bank, decided in June, the Court ruled that an abstract idea – in this case, use of a neutral intermediary party as an escrow agent – cannot be patented, and the mere fact that the patent claims to administer the escrow relationship using a computer made no patentable difference.

The outcome came as no surprise.

Few expected the Alice patents to survive. More interesting is why the Court has recently been tinkering with this seemingly arcane rule of patentable subject matter eligibility, and what it means for the fate of patents.

LEADUP TO ALICE

The Supreme Court has become active because the lower courts and the Patent Office have been struggling to appease both the pharmaceutical industry, which needs strong patents, and the financial and information technology industries, which perceive many recent patents as akin to a plague of locusts.

Alice is just the latest round.

In Bilski v. Kappos, 2010, the Court affirmed a lower court decision striking down a claimed method by which commodities buyers and sellers in the energy market can hedge against risk of price changes. The Court took up that case because a lower court had proposed a rule that too restrictively required all inventions to employ a particular machine or effect a physical transformation.

In Mayo Collaborative Services v.

Prometheus, in 2012, the Court struck down a claimed medical diagnostic process that relied too heavily on laws of nature governing how the human body metabolizes certain drugs. Along similar

lines, in Association for Molecular Pathology v Myriad Genetics, 2013, the Court drew a sharp distinction between naturally occurring DNA and synthetic DNA, ruling the former was a product of nature and thus ineligible for patent.

SECTION 101

At the heart of each of these cases is Section 101 of the patent statute, which states in sweeping terms that whoever “invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”

This law, enacted in 1952, was drafted largely by two men, Pasquale J. Federico, a high-ranking U.S. Patent Office official, and Giles S. Rich, a federal court of appeals judge with considerable patent law experience. In the Congressional record they placed words of legislative intent that patentable subject matter should “include anything under the sun that is made by man.” In this light, one can well understand how the patent attorneys representing Alice, Bilski, Prometheus and Myriad found ways to ensure their clients’ patents cast at least an arguable shadow “under the sun,” or so they thought.

But there is another side to Section 101 that is not in line with this sweeping congressional intent. Indeed, the

Supreme Court has held a view, stretching back for more than 100 years, that certain basic building blocks, such as laws of nature, natural phenomena and abstract ideas can never be patented.

Samuel Morse learned this when his lawyers stood before the Supreme Court in 1854, attempting to justify why Morse should be entitled to patent the broad concept of using electromagnetism – by whatever means developed – for communicating at a distance. His lawyers failed. The Supreme Court ruled Morse’s claim invalid, as an attempt to assert ownership over the abstract idea that one can communicate using electromagnetic signals.

The first time the Supreme Court applied its abstract idea rule to computers was Gottschalk v. Benson in 1972. The decision of the appellate court was written by none other than Judge Rich, the author of Section101.

Judge Rich wrote that Benson’s patent should be granted because it used “reentrant shift registers” in the claimed method for converting binary numbers used by computers into binary coded decimal (BCD) numbers used by telephones. Reentrant shift registers were to computers of that day what memory chips are to computers of today. By specifying reentrant shift registers, Judge Rich felt that Benson’s claim was tied to a particular machine, and thus should be eligible for a patent.

today’s gener al counsel oct/ nov 2014

Intellectual Property The Supreme Court saw things differently and reversed, ruling that since use of reentrant shift registers was the only practical way of performing the method, Benson’s claim effectively monopolized the fundamental relationship between binary and BCD numbers.

Judge Rich was respectful of the Supreme Court’s interpretation of Section 101 in his later decisions, but that did not deter him from continuing to press for an expansive patent system. For instance, in 1998 Rich penned the watershed decision in State Street Bank v. Signature Financial Group, in which he ruled that business method patents per se were not excluded from patentability under Section 101. Rich’s ruling surprised many patent attorneys, who had learned in school that business methods were not patentable. The ruling opened a floodgate from which flowed thousands of business method patents, to the chagrin of companies caught unprepared.

Having been burned in Benson, Judge Rich was careful in his State Street Bank ruling to merely state that business methods could not categorically be excluded under the broad language of Section 101. Rich did not disavow that business methods patents which sought to preempt an abstract idea might still be denied under the Benson reasoning.

CONSTITUTIONAL ROOTS

Given Section 101’s expansive language and legislative intent, why does the Court foster a rule against patents on abstract ideas? History provides the answer. The U.S. patent law issues from Constitutional roots that “Congress shall have the power to promote science and the useful arts.”

That Congress has the power, and not the President, was undoubtedly a rebuke by our founders against England’s practice of vesting patent granting power in the Crown. Nevertheless our laws and England’s are quite similar. Since at least the 1300s, the kings and queens of England had enjoyed the practice of granting patents for everything from salt making to playing cards, and even to ownership of the taverns in London. Typically

these patents were granted to personal friends, for which the Crown received a kickback in the form of a royalty.

In 1624 the English Parliament passed the Statute of Monopolies to limit the Crown’s power by invalidating patents for subject matter deemed unworthy in the eyes of society. Effectively, that is what the U.S. Supreme Court is doing today.

It is a fundamental premise of the patent system to reward inventors with a limited monopoly in exchange for full disclosure of the invention, so that others can learn from it. The inventor exchanges her idea for a property right.

But if the idea offered in exchange is nothing but an abstract notion – “We should mine the Moon for minerals” – with no particularly helpful guidance on how to do it (send a backhoe up on a space ship?), should society accept this bargain? No, and that is really all the Supreme Court is saying.

While the U.S. patent system certainly needs some mechanism to restrain the unbridled granting of overly broad patents, the Court’s focus on the abstract idea is unfortunately a bit too esoteric for day-to-day patent examination. As cases have demonstrated, the lower courts have several times pronounced formulaic rules for deciding what is and is not “too abstract,” but none of these rules has satisfied the Supreme Court. Human ingenuity knows no bounds, so it is doubtful we will ever see a bright line rule.

The Alice decision has all but cinched the knot around the throats of many broadly worded business method patents, and its grip is tightening on applications currently in prosecution. Recently the Patent Office began withdrawing previously issued allowances, instructing patent examiners to recheck whether an abstract idea may be lurking.

Alice is a boon for companies that fear infringing patents involving financial products or services. Using a recently enacted procedure called “covered business method review,” such accused parties can force these patents back for reconsideration to the Patent Office, and there the Alice issue can be raised. In the current anti-abstract-idea

climate, odds are good that the patent will be invalidated. One simply would need to articulate how the patent claim recites an abstract idea, and then argue that the claim lacks sufficient substance to negate the concern that it effectively monopolizes the abstract idea.

For patent applicants who have legitimate inventions needing protection, Alice raises the bar. Computerized systems, even highly technical ones, can be made to appear abstract, if that is the patent examiner’s goal (which now it likely is). Thus patent applicants will need to demonstrate in considerable extra technical detail how and why any perceived abstract idea is not being monopolized. We know from Alice that merely reciting that the invention is performed using a computer is not enough.

What does the future hold? In the short term, patent examiners and the courts will redouble their efforts to weed out unbridled abstract idea patents. Regretfully, some legitimate inventions will be lost as collateral damage. But eventually, patent examiners, patent applicants, and the courts will find a new equilibrium point and a new resonance. The patent system will go on as it always has.

Morse, Benson, Bilski, Prometheus, Myriad and Alice are stars in a constellation, gravitationally linked and circling the elusive abstract idea at the center of it all. ■

Gregory A. Stobbs, a principal of Harness Dickey since 1986, has practiced in the IP field for over 30 years.

He is the author of two leading legal treatises, Software Patents and Business Method Patents, and the editor of a third, Software Patents Worldwide. He has handled complex patent litigation, served as expert witness, argued before the Court of Appeals for the Federal Circuit, and he speaks internationally on patent issues. stobbs@hdp.com

21

oct/ nov 20 14 toDay’s gEnEr al counsEl

E-Discovery

Using Analytics to Clean Out the ESI Garage

By Robert D. Brownstone and Gabriela P. Baron

A

22

s time passes and we acquire more “stuff,” it gets harder to winnow down our possessions.

Who longs to spend the weekend cleaning the garage? It’s easier to keep piling up things up, with no discipline for storage or removal. Thus, many a garage keeps getting fuller and more chaotic until two distinct problems emerge: difficulty finding a particular object and increased risk of hidden hazards.

The same issues pervade the electronic information management (EIM) environment. The overwhelming volume of data generated daily leads to a similar approach to electronically stored information (ESI) for organizations of all shapes and sizes. Especially as companies grow, they are lulled into the sense that it is easier and better to focus on the urgent matters at hand and let the emails, electronic files and database contents keep stacking up.

But there are many risks inherent in saving all ESI forever. Potentially harmful content resides all over the place, whether it’s a “smoking gun” message, or something written and kept so long that it becomes susceptible to misinterpretation when taken out of context years later.

Within an organization that has a save-everything policy, there likely are redundant copies of information, resulting in sourcing and paying for extra storage space. These costs are multiplied by the “rule of three,” by which all live data is backed up in at least two places.

Moreover, the search for particular information becomes a near impossible and expensive chore. Additionally, more personally identifiable information (PII) and sensitive confidential data (i.e., intellectual property and trade secrets) stored at more locations means big risks.

The ESI garage model is the information governance (IG) strategy upon which organizations have traditionally

relied. Even when an IT department is tasked with the responsibility of managing the data, this strategy falls flat. The primary reason: IT focuses on what it does best, maintaining access to data rather than extracting the most value from data.

The notion of IG is vague, and no panacea but organizations need to start somewhere. An IG initiative should entail the use of advanced analytics and intelligent automated assessments of big data sets to cull out irrelevant data, keep relevant data, and identify PII, intellectual property and other sensitive data that must be kept and segmented in order to ensure data security and privacy.

Savvy C-suites are adopting sound IG policies to not only promote efficiency when locating information, but to facilitate greater compliance with electronic discovery, data security and privacy legal compliance. IG can help contend, for example, with thorny international legal issues in cross-border data transfers dayto-day, as well as in e-discovery. Furthermore, as corporations look toward the next generation of technology and archiving systems, a solid IG program make moving data from one system to another and retrieving it easier.

Companies implementing effective IG will also benefit from enhanced visibility of corporate data, enabling the use of more in-depth analytics and the discovery of valuable insights and trends to maximize the value of retained data. If data is a crystallization of a moment in time, then IG is the storyteller, piecing together facts and information into a narrative.

Even more significant, IG enables multiple cost savings. In proactive mode, IG-savvy organizations experience lower storage costs for live and backed-up data. In reactive mode – for example, addressing a lawsuit – they will see re-

duced e-discovery costs. Indeed, because IG and e-discovery have parallel workflows (finding relevant data is always the first step), IG-strong corporations will be in a stronger litigation posture.

WHERE TO BEGIN

Embarking on an IG program is daunting for any organization. In a packed garage, one would start by manually reviewing and organizing what’s been tucked away, shelf by shelf, until the space is neat and tidy. With ESI, the concept is similar. Cull through the data in discrete chunks until all of it has been reviewed, and a system is in place for future storage. By tackling small portions at a time, organizations will see results and a return on investment.

A careful, considered approach is key when starting to parse organizational data via this “data remediation” process. As a first step, Legal and Compliance should ensure the organization’s IG policies and procedures are sound. Some organizations may need to start by designing and implementing a corporate governance framework, while others will need to update their existing records retention policies and procedures.

This first step is critical from a risk and compliance standpoint because it can guard against future spoliation allegations. The organization’s data deletion project must be defensible, meaning it has memorialized reasons for the data destruction, covering what, why, how, by whom and when the ESI was destroyed.

toDay’s gEnEr al counsEl oct/ nov 2014

E-Discovery

Defensible deletion involves careful consideration of what ESI the organization intends to exercise its discretion to retain or purge, bearing in mind the nuances and contents of ESI. Different file types are used for different job functions. In addition, Legal should ensure retention of ESI that may be subject to a litigation hold or relevant to issues in litigation or government inquiries.

Once the process is clearly defined and memorialized, there are two approaches for data remediation. The first approach is akin to damming a stream.

With this approach, the organization must adopt a disciplined plan for newly generated data and information. The second approach is akin to cleaning a swamp. With that approach, companies must cull through existing data troves and purge the excess.

Interestingly, some organizations find the latter approach the easier to implement because most already have at least some applicable e-discovery tools in place. These work to automatically classify ESI using specified criteria, such as date and keywords.

THE RIGHT TOOLS

Using the right tools is essential for maximizing efficiency and cost-effectiveness. Some e-discovery analytics can be applied to IG simply by being deployed upstream in the process.

Those analytical tools, usually used for making sense of large data sets in incident-response scenarios, include: • De-duplication: identifying exact copies or similar versions of documents and messages.

• Concept analysis: clustering of e-documents, messages, etc. under substantive topics chosen/created by software.

• Email redundancy: separating last message from each string.

• Relationship analysis: graphically depicting who knows/communicates with whom.

Another key e-discovery analytical tool is artificial intelligence-based, technology-assisted review, often called “predictive coding,” which uses statisti-

cal modeling and machine learning. The technology underpinning predictive coding software functions like spam filters and targeted advertising. Predictive coding leverages machine learning and human review of samples in an iterative process, until the team is comfortable with the system’s decision-making.

In e-discovery, that person-plusmachine process parses relevant from irrelevant documents. In IG, that same process can parse to-be-retained from to-be-deleted documents.

Lawyers and records managers should stay abreast of ESI technologies.

Pertinent innovative technologies are evolving from the e-discovery and enterprise content management fields.

Savvy e-discovery providers will incorporate ECM technology into their existing review and analysis tools to help organizations save money by tackling ESI for both IG and e-discovery.

DEPLOYMENT: STARTING THE CLEANUP

A data remediation program can begin anywhere the organization prefers.

Tools can be deployed as part of a legacy data clean-up project, a litigation hold tracking system, a data loss prevention initiative, a big data analytics project or an enterprise-wide archiving migration plan.

Many organizations prefer to start by tackling unstructured data (i.e., email or instant messaging), because it is riskier than structured data (i.e. databasestored). Individuals often feel freer to express themselves in informal, unstructured environments, and unstructured ESI is more difficult to parse than already automatically-classified information.

No matter where the process begins, cull through the ESI first, then move data to new locations after remediation. Before you get to the details of deployment, vet any e-discovery or ECM platform for sufficient scalability to your IG initiative.

Ensure that IG becomes part of the corporate culture. Employees need to be aware of the corporation’s recordsretention and information-management policies just as they are mindful of corporate expectations regarding HR practices,

regulatory compliance or confidentiality requirements. Like violations in those areas, amassing large ESI volumes companywide can have a very high ultimate price.

Training on IG should teach managers and staff to rethink how they use data, so that they keep only what is required or needed, and no more. Individuals should be guided by the Legal and Compliance specialists as well as e-discovery specialists conversant in defensible deletion. Training contemporaneous with regime change also provides an opportunity to emphasize the importance of litigation holds.

Once IG becomes embedded in the fabric of corporate culture, organizations will reap the rewards from a cost-savings, risk-mitigation and business-value perspective. While cleaning up decades of ESI is daunting, it only becomes more so as more data is stuffed into the company storage bin. The time to start the clean-up is now. ■

Robert D. Brownstone is Technology and E-discovery Counsel, Litigation, and co-chair of the Electronic Information Management group at Silicon-Valley headquartered Fenwick & West LLP. He advises clients on a wide range of legal and IT issues. He has also taught e-discovery law and process as adjunct professor at a number of universities, and in 2015 will teach the course at the Brooklyn and University of San Francisco schools of law. rbrownstone@fenwick.com

Gabriela P. Baron is the Senior Vice President of Xerox Litigation Services (XLS). She has assisted clients with regulatory investigations, major class actions, employment matters and commercial cases filed in federal and state courts.

Gabriela.Baron@xls.xerox.com

23

oct/ nov 20 14 toDay’s gEnEr al counsEl

E-Discovery

Over-Preservation is a Self-Imposed Sanction

By Brad Harris

D

24

ata preservation forms the foundation of a defensible e-discovery process. Case law shows that when a party is sanctioned for e-discovery mistakes, more often than not it involves failing to properly preserve electronically stored information (ESI). While the legal duty to preserve potentially relevant evidence is generally well understood by corporate legal teams, the methods for carrying out that duty are at issue and frequently come under scrutiny by the courts.

The proliferation of email, cloud storage and other ESI has made the “collect everything” approach too expensive for many businesses, yet they must still take reasonable steps to ensure data is being preserved. If a company is unable to defend its methods, the associated risks include not only court-imposed sanctions and reputational damage, but also a reduced ability to negotiate a fair and reasonable scope of discovery, argue proportionality and avoid undue burden.

There remains much debate regarding the definition of “reasonableness and good faith” and how it should be balanced against the need for proportionality. Is the only safe approach collecting and sequestering everything that might be potentially relevant?

Traditionally, organizations facing e-discovery have responded by identifying key players, collecting all their data, and then using technology to reduce and cull irrelevant data as best they could. Even with the best of technologies, a typical custodian generates $15,000-$100,000 in discovery costs.

Additionally, it has become common practice in commercial litigation for opposing sides to challenge each

ProPortional

defensible

• Implement defensible, ‘good faith’ efforts • Minimize the cost and burden of preservation • Negotiate a narrow scope of discovery • Collect and review only when necessary

• Rely on employees to be responsible

other’s preservation efforts. According to the 2014 Legal Hold and Data Preservation Benchmark Survey, conducted for Zapproved by the Steinberg Group, approximately one in three of those surveyed (legal professionals who had issued legal hold notices) had to defend their preservation efforts this year. Compared to last year’s survey, this is a 10 percent increase in the need to defend preservation efforts.

There is a better way: “Intelligent Preservation.” Start with the fundamentals, and use them to your advantage to keep your preservation response reasonable, in good faith, and proportional to the risks and exposure of a given case.

The foundation of Intelligent Preservation is a sound legal hold notification process. This need not be a complex or overwhelming task.

The standard is not perfection, as Judge Shira Scheindlin has said, but reasonableness and good faith coupled with competency.

The following six elements are imperative to meet higher standards

n n n

Written legal hold Track compliance Regular reminders

• Monitor preservation efforts in real time • Rock-solid audit trail

of preservation, mitigate the risk of costly sanctions, and better prepare for adversaries that would challenge an opponent’s preservation efforts as a shortcut to victory: • Proportional and cost-effective response.

• Ability to act immediately following a triggering event.

• Visibility of the custodians and realtime tracking of compliance.

• Detailed audit trail of actions.

• Process automation for repeatability and cost-efficiency.

• Strong internal communications to reinforce the importance of the preservation process.

Adopting Intelligent Preservation means that data is routinely kept as soon as litigation can be anticipated. It provides a defensible audit trail to demonstrate thorough, repeatable, good faith efforts to preserve. It includes routine follow-up and reminders.

The result will be confidence that you can defend your actions if

toDay’s gEnEr al counsEl oct/ nov 2014

E-Discovery

challenged, and this confidence will enable you to negotiate scope of discovery from a position of strength.

It also will mean lower discovery costs and mitigated risk, essentially avoiding self-imposed monetary sanctions. Intelligent Preservation allows you to take control with visible, defensible analytics that will enable a “preserve-in-place’” strategy, allowing data to be available when needed, and not a moment sooner, with a resulting stronger bottom line.

Further findings from the 2014 Benchmark Survey demonstrate how automating data preservation yields significant benefits. From 2013 to this year, the percentage of those using automated systems rose from 34 percent to 44 percent. They reported more process maturity, greater efficiency and more confidence they could defend their preservation practices.

Best practices and an investment in an automation tool enables timely, cost-effective and intelligent preservation, mitigates the risk of inadvertent spoliation and makes it easier to negotiate a fair and reasonable scope of discovery, with proportionality and collaboration. The key is to collect, process, review and produce only what’s necessary and get past the “preserve everything forever” mentality. ■

25

Brad Harris is Vice President of Legal Products, Zapproved. His more than 25 years of experience in high technology and enterprise software includes assisting Fortune 1000 companies with e-discovery preparedness. From 2004 to 2009, he led the development of electronic discovery readiness consulting for Fios, Inc. He has also held senior management positions at public and privately held companies, including Hewlett-Packard, Tektronix and Merant. brad@zapproved.com

TodaysGC Daily Newsletter The daily newsletter is a terrific advertising vehicle to reach 46,000 corporate subscribers. With a high open rate, the newsletter is unmatched as a marketing vehicle within the corporate counsel community.

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

OCT/ NOV 20 14 TODAY’S GENER AL COUNSEL

E-Discovery

Intractable E-Discovery Costs Persist

Supreme Court Should Address Ambiguous Federal Pleading Standards

By Dan Meyers and Kedar S. Bhatia

26

TODAY’S GENER AL COUNSEL OCT/ NOV 2014

E-Discovery

T

he predominant factor driving litigation costs today is e-discovery. In a recent study analyzing the cost of litigation across 57 large cases, the RAND Institute for Civil Justice concluded that the cost of pre-trial document production alone was as high as $27 million in a single case and had a median cost per action of approximately $1.8 million. Another study, conducted by the U.S. Chamber Institute for Legal Reform, surveyed Fortune 200 companies across 14 industry sectors and noted that in medium-sized cases involving e-discovery, the estimated cost of searching, retrieving, reviewing and producing electronic information averaged approximately $3.5 million per case.

Such exploding discovery costs have rendered illusory the goal of the Federal Rules of Civil Procedure to “secure the just, speedy, and inexpensive determination of every action and proceeding.”

Amendments to the Federal Rules of Civil Procedure discovery provisions have been proposed, as a way to streamline the process in federal courts, but they would only marginally limit the scope of discovery and do little to shield the vast troves of electronic documents generated by corporations in the twenty-first century. The simple fact remains that for any action that survives a motion to dismiss and enters the discovery phase, the costs to litigants will be substantial regardless of the underlying merits of the case.

That means that for corporate litigants, the pleading standards – the requirements that all complaints must meet in order to survive a motion to dismiss and proceed to discovery – have never been as critical as they are today. Current federal pleading standards, however, are plagued by ambiguity and confusion that have resulted in the inconsistent application of these vital benchmarks. As a result, frivolous complaints are more likely to drag corporate defendants through costly and drawn out discovery, the threat of which is often used to extract settlements that more closely reflect the heightened nuisance value of the claims than their underlying merit.

The Supreme Court therefore should seize the opportunity to provide much needed elucidation concerning the federal pleading standards. Although the Court recently side-stepped one such opportunity, another case currently before the Court presents the justices with another chance. If the Court can provide additional guidance, corporate defendants will be less likely to have to spend large sums of money on actions that should have been dismissed quickly and cleanly at their earliest stages. The Court should take advantage of this vehicle for reform and return to the promise of securing the just, speedy, and inexpensive determination of every action and proceeding.

RECENT DECISIONS FAILED TO SOLVE THE PROBLEM

To file a lawsuit in federal court, a plaintiff is required to draft a complaint that gives “a short and plain statement” of the facts of the defendant’s alleged misconduct and the plaintiff’s resulting injury. Throughout the twentieth century, plaintiffs were merely required to demonstrate in their complaint that their claims were conceivable.

As a result, under the Supreme Court’s 1957 decision in Conley v.

Gibson, a defendant seeking to move to dismiss the complaint at its outset, and thus avoid the burden of document production and discovery, had to demonstrate “beyond doubt that the plaintiff could prove no set of facts in support of his claim which would entitle him to relief.” That low “no set of facts” pleading standard did little to weed out frivolous lawsuits.

In the 2007 decision, Bell Atlantic v.

Twombly, the Supreme Court held that its prior construction of Rule 8 in Conley had “puzzl[ed] the profession for 50 years . . . [and] earned its retirement.”

Thus, the Court replaced Conley’s “no set of facts” standard with a new interpretation of Rule 8 requiring a plaintiff to present in its complaint factual allegations specific enough “to raise a right to relief above the speculative level” and “raise a reasonable expectation that discovery will reveal evidence” of a meritorious cause of action.

The primary concern articulated in Twombly to justify that heightened pleading standard was the costs and burdens associated with “a potentially massive factual controversy,” such as the antitrust dispute before the Twombly Court. The Court thus stressed that any “basic deficiency” in a claim should “be exposed at the point of minimum expenditure of time and money by the parties and the court.”

Twombly further recognized that “it is self-evident that the problem of discovery abuse cannot be solved by careful scrutiny of evidence at the summary judgment stage” because the “threat of discovery expense will push cost-conscious defendants to settle even anemic cases before reaching those proceedings.”

While Twombly’s desire to heighten federal pleading standards to weed out unsupportable claims before costly discovery is laudable, as a practical matter the heightened standard that the Court articulated lacked the clarity necessary to effect its stated purpose. Indeed, only two years later, the Supreme Court revisited and attempted to clarify that standard in Ashcroft v. Iqbal. The Iqbal Court explained that Rule 8 requires sufficient factual allegations to render the claim “plausible on its face,” meaning that the plaintiff must plead “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”

Under Iqbal, the new “plausibility standard” requires more than pleading a “sheer possibility” of actionable conduct, but less than pleading a “probability” of actionable conduct.

The Court again emphasized that pleading standards are the benchmarks that a plaintiff must satisfy in order to “unlock the doors of discovery.” Together, Twombly and Iqbal have come to signal the new heightened pleading standard for plaintiffs in federal court.

Nevertheless, since those cases were decided, federal courts have struggled to apply this new standard, leading to confusion and inconsistent application of the law. Some federal courts have noted that the Supreme Court’s rulings are inconsistent with other parts of the Federal continued on page 33

27

OCT/ NOV 2014 TODAY’S GENER AL COUNSEL

Corporate Governance

Communicating About Risk

By Craig Martin and Michael Werner

28

C

ompanies today are faced with a more diverse set of risks and challenges than in the past.

Plaintiffs are more litigious, with more civil complaints filed in federal court in 2013 than in any previous year. The 24-hour news cycle has amplified the risks negative press can have on a company’s reputation. And with new technologies, the market for consumer products and services is evolving so rapidly that predicting a new venture’s potential is becoming difficult.

Despite the uncertainty, a company that seeks an edge must take risks.

Productive risk assessment requires clear, direct communication among CEO, CFO, CLO and other executives, yet when each member of an executive team is focused on a different type of risk, communication can be difficult. This article will compare the

vastly different types of risk that must be faced and provide some practical advice for facilitating risk-related communication among executives.

CREATE A COMMON LANGUAGE

To put an effective risk management program in place, there must be a common language to discuss risks related to any issue – legal, financial or other – and to assess whether a particular risk is one the company should accept.

Regardless of the type of risk, common issues arise: the likelihood of it occurring, the impact it might have, and the company’s tolerance for handling it. All members of a company should be taught to discuss those issues using the same language, so that various risks can be analyzed and compared.

When considering likelihood, simple descriptive terms should be

used to describe how likely a risk is to occur. Companies might choose to grade risks as A, B, C, D or F, where an A-grade risk might be defined as one with a very low probability of occurring, a C-grade risk as a risk with a 50 percent chance of occurrence, and a risk rated F one that is almost certain to occur.

More important than the specifics of the language is that it be easy to understand and consistently used, so a complex analysis of risk in one area can be discussed and understood by team members whose expertise falls elsewhere.

Just as important as the probability of risk is the impact that it might have on a company. A highly probable risk that is likely to have minimal consequences will be less troubling to accept than a risk of something that is unlikely to occur but that would have

today’s Gener al Counsel oct/ nov 2014

Corporate Governance

a substantial cost in money Financial Risk Legal Risk Reputational Risk or resources if it did occur.

The discussion of potential impact can quickly Small lawsuit; can be Small amount of Mild Loss of $X create communication barsettled quickly negative publicity riers among members of an organization. A CFO may Year-long lawsuit; can Moderate negative think of the risks associated Moderate Loss of $Y be handled in-house publicity with a new project purely in terms of start-up costs and potential for future finanMultiple year Long term damage Severe Loss of $Z cial losses. Looking at the lawsuit; will require to reputation same project, a CLO may outside counsel see the potential for future lawsuits and regulatory to a financial loss that would subproblems. And through a pany from bringing its own claims stantially harm the company, a legal different lens, a CEO may see ways in in the interim. A company would be which the new project could damage battle that would deplete an in-house very tolerant of a risk to its reputathe company’s public reputation and counsel’s resources and compromise tion if it has a strong public relations affect the prices of its stock. the ability to handle other work, department, able to quickly mitigate long-lasting damage to reputation, Creating common language is the negative press. or any other harm that would have key to making communication regardFor a company to be successful, risk serious and long term effects. More ing such different risks possible. assessment must be an ongoing process moderate and mild risks should be Executives should decide on a that involves all executives. While the defined accordingly. scale that compares different types risk assessment procedures should of risk according to the impact of Even after the likelihood and change with the environment in which the potential consequences. The most impact of a risk have been categorized the company operates, clear language severe category of risk should equate in a way that allows comparison with that allows for comparison of all risks other risks, a company must undershould be at the foundation of any risk stand its tolerance to the potential assessment program. ■ Tolerance Effect of Impact consequences before determining whether a risk should be accepted. If a company is not stable enough to reCraig C. cover from the likely impact of a risk, Martin is Impact is beyond what a partner it might be wise to avoid it. company could handle in Jenner Assessment of risk tolerance 1 while continuing & Block’s requires analysis of the company’s operation Chicago office stability in individual areas. The and co-chair stability of a company’s reputation, of the firm’s for example, is likely unrelated to Litigation Deits ability to engage in a long-term partment. He pratices in complex civil legal battle.

Financial stability is a Impact may prevent and commerical litigation nation-wide, major factor in risk assessment and company from taking in both state and federal courts. requires additional consideration.

2 advantages of other cmartin@jenner.com Tolerance to a particular risk opportunities until can be rated on a scale from one to Michael recovery three by comparing the impact to the Werner is company’s ability to recover from it. an associate If a financial risk could result in ecoin Jenner & nomic loss that would prevent furBlock’s Litigather operation, the tolerance to that Company can tion Departrisk is low. A company would have a function as normal ment. He 3 higher tolerance to a legal risk that received his following impact could result in an extended lawsuit J.D. in 2013 in which the company may prevail, from Harvard Law School. but which might prevent the commwerner@jenner.com

29

oct/nov 2014 today’s gEnEr aL counsEL

Labor & Employment

30

today’s gEnEr aL counsEL oct/ nov 2014

Labor & Employment

The Complexities of Leave Of Absence Law

By Michelle Seldin Silverman and Kimberley E. Lunetta

I

n recent years, leave administration has become increasingly complex and burdensome for employers. The Family Medical Leave Act (FMLA), which provides eligible employees with 12 weeks of unpaid medical leave per year, is no longer the only measuring stick by which employee leave entitlement is measured. Instead, employers must consider additional leave required by a number of other laws, including the Americans with Disabilities Act (ADA), state disability anti-discrimination laws and, increasingly, state and municipal paid sick leave laws that protect absences arising from minor illnesses.

Given the number of intersecting leave laws, many of which are implemented through regulations that are simultaneously hyper-technical and vague, there is little wonder that many employers now consider leave administration to be one of their most vexing human resources tasks.

FMLA

The Family Medical Leave Act was passed in 1993, just weeks after the inauguration of President Bill Clinton.

The new law provided eligible employees with 12 weeks of unpaid leave per year for their own serious health condition, or to care for a new child or a family member with a serious health condition. The FMLA had been vetoed twice by President George H.W. Bush, and it was passed over steep opposition from business interests who predicted that it would be so costly that it would drive many employers out of business.

Now, more than twenty years later, it is apparent that at least some of those concerns were unwarranted. But there can be no debate that FMLA has been widely invoked and has imposed significant costs on employers. In 2013, a Department of Labor study found

that 16 percent of eligible workers take FMLA leave each year, requiring their employers to maintain their health benefits and hold open their positions.

In addition to the FMLA’s direct economic costs, there is a significant burden in its day-to-day administration. FMLA regulations are highly technical and leave little room for error with regard to the timing of employer notice obligations. At the same time, the regulations lack meaningful guidance in critical areas, including steps employers can take to manage situations where the law is chronically abused or an employee refuses to provide complete medical certifications. the ADA

For many employers, the frustrations of FMLA administration are dwarfed by those resulting from the ADA, which imposes an affirmative obligation on employers to reasonably accommodate qualified employees with a disability.

Employers must engage in an interactive dialogue with qualified disabled employees to identify reasonable accommodations that would allow them to perform the essential functions of the job, absent undue hardship.

Courts have held that a leave of absence may be a form of reasonable accommodation. But notably, neither the ADA nor its governing regulations provide any tangible guidance about exactly when employers must provide ADA leave to disabled employees, or how much leave they must provide. Indeed, the interpretive guidance to the ADA states simply that reasonable accommodation may include “… providing additional unpaid leave for necessary treatment.”

Employers also have Equal Employment Opportunity Commission guidance stating that “indefinite leave” is not a reasonable accommodation.

But the definition of “indefinite leave”

remains unclear. In 2011, the EEOC explained that a leave is indefinite when an employee “can give no indication of if or when he or she will be able to return to work.” However, the Commission was careful to distinguish between that situation and one where an employee is able to give an approximate date of return or a range of possible return dates, which according to the EEOC renders the leave sufficiently definite to be reasonable. hOW the ADA AND FMLA INteRACt

As noted, the FMLA provides 12 weeks of unpaid leave to eligible employees. At the end of an FMLA leave, employers generally must reinstate employees to their prior position with no change in the terms and conditions of employment.

But when an employee has exhausted the full 12-week allotment for his or her own serious health condition and asks for additional leave, the employer must determine (1) whether the employee’s medical condition qualifies as a disability under the ADA (or other applicable law), (2) whether additional leave is required, (3) whether additional leave would be an effective accommodation and (4) whether the leave would cause an undue hardship (to the employer).

The law directs employers to make these determinations on a case-by-case basis after engaging in an interactive dialogue with the employee. While this may sound daunting to those who prefer the FMLA’s clear-cut leave allotment, the ADA’s interactive process offers certain leave management tools that are not available to employers during an FMLA leave. Most critically, employers managing ADA leaves are permitted to explore accommodations other than leave that might be equally effective.

31

oct/nov 2014 today’s gEnEr aL counsEL

Labor & Employment

32

The ADA does not require employers to provide the exact accommodation requested by an employee. So an employee who requests leave to receive weekly medical treatments might instead be offered a modified schedule that would allow the employee to return to work in some capacity while receiving treatment.

This was explored by the United States Court of Appeals for the Second Circuit in Graves v. Finch Pruyn, a 2009 case. The plaintiff, a paper inspector, had developed a painful foot condition.

In the months leading to surgery, he had been given light duty. After surgery, he was on leave for several months before returning again to light duty. After one month back at work he was again granted leave, during which he received wages through the employer’s disability plan. Once those benefits ended, the company engaged in the interactive process and offered the employee reassignment to a desk position.

The plaintiff refused the alternate accommodation, asking instead for two additional weeks of leave to obtain an appointment for a foot examination with his health care provider. The company refused and discharged the employee.

The court held that the additional leave was not a reasonable accommodation because the employee had not provided any assurance that it would have effectively allowed him to perform the essential functions of his job.

Graves highlights employees’ obligation to engage in the interactive process in good faith, keeping an open mind about alternate accommodations. At the same time, it is a reminder to employers that they must engage in robust interactive dialogue with disabled employees, even if the initial accommodation requested seems unreasonable.

This was highlighted in in a 2007 case, Gibson v. Lafayette Manor, Inc. Here, an employee requested additional leave after exhausting FMLA, submitting a medical note stating that no returnto-work date could be specified. The employer denied the leave and discharged the employee. The court held that the employee’s request was for “indefinite leave” and therefore unreasonable. However, the court denied summary judgment

to the employer because it had failed to engage in the interactive process to determine whether there were any alternate reasonable accommodations.

RISK OF INFLEXIBLE LEAVE POLICIES

Given the ADA’s mandate that accommodations be managed on a case-bycase basis, it can be difficult for large organizations to achieve consistent leave management across their businesses. As a result, some employers have adopted policies setting a maximum amount of job protected leave. But, the EEOC considers these policies to be an “inflexible” interference with the ADA’s individualized interactive process.

For example, in 2012 Interstate Distributor paid nearly $5,000,000 to settle a class action brought by the EEOC challenging its leave policy, which purportedly granted a maximum of 12 weeks’ leave per year without any individualized interactive process.

But it’s important to keep in mind that some courts have rejected the idea that uniform policies are always unlawful. Most notably, a recent panel of the Court of Appeals for the Tenth Circuit upheld an employer’s policy limiting medical leaves of absence to six months.

In that case, Hwang v. Kansas State University, the plaintiff was terminated after requesting an extension of leave beyond the six-month maximum. The court found that “an employee who isn’t capable of working” for six months or longer is not protected by disability laws because he/she would not be a qualified employee “capable of performing a job’s essential functions.”

STATE AND LOCAL LAWS

While the FMLA and ADA present separate and overlapping challenges, employers must also be aware of the requirements imposed by state and local leave and disability accommodation laws. Some of them impose even greater obligations on employers than their federal counterparts. By way of example, employers in New York City must contend with federal, state and local accommodation laws, and the differences among them. Under the New York City Human Rights Law, an

“indefinite leave” is not per se unreasonable, and an employer needs to prove that it poses an undue hardship.

Employers also must consider the impact of paid sick leave laws, which are popping up around the country. These laws impose obligations to provide jobprotected paid sick time for even minor and transient illnesses. Many of them permit paid sick time to be run concurrently with FMLA, where both laws apply. But employers must ensure that they are abiding by their obligation to permit absences for reasons covered by paid sick leave laws, and that they are not imposing employee documentation and call-out obligations greater than those permitted by any applicable law.

Given the complexity of these laws and their often overlapping protections, it is no wonder that many employers now employ a small army of human resources professionals, with outside counsel at the ready to guide them through these difficult issues. ■

Michelle Seldin Silverman is a partner in the Labor and Employment Practice at Morgan, Lewis & Bockius LLP. She counsels and defends clients in connection with employment discrimination claims, both single plaintiff and systemic, and she frequently handle matters involving ADA and FMLA claims. msilverman@morganlewis.com

Kimberley E. Lunetta is an associate at Morgan, Lewis & Bockius LLP, in the Labor and Employment Practice.

She counsels and defends clients in connection with employment discrimination claims, both single plaintiff and systemic, and she frequently handle matters involving ADA and FMLA claims. klunetta@morganlewis.com

toDay’s gEnEr al counsEl oct/ nov 2014

E-Discovery

Federal Pleading Standards continued from page 27

Rules, including the model forms included with the Rules themselves. Indeed, the U.S. Court of Appeals for the Third Circuit observed in Phillips v. County of Allegheny that issues surrounding the new pleading standard “are not easily resolved, and likely will be a source of controversy for years to come.”

Likewise, the leading treatise on civil procedure recognizes that “courts continue to struggle to categorize what allegations meet [Twombly’s and Iqbal’s] amorphous requirements.”

Because of this confusion, many courts have been hesitant to depart from the pre-Twombly regime and continue to “unlock the doors of discovery” to plaintiffs without critically evaluating whether they have stated a valid cause of action.

WHY CLEAR PLEADING STANDARDS ARE CRUCIAL

Pleading standards play a key role in limiting the impact of frivolous litigation.

A heightened pleading standard requires plaintiffs to plainly state the bases for their lawsuit in order to prove that they have adequate support for their claim.

When plaintiffs are required to meet an exacting standard in their initial court filings, meritless cases are less likely to ever see the light of day, let alone survive a motion to dismiss. Furthermore, the cases that are successfully filed will be more focused and narrow in scope. When those cases are allowed to proceed to discovery or even to trial, defendants are given the opportunity to counter specific, clearly articulated allegations.

Vague pleading standards can hurt a defendant even before a lawsuit is filed.

Because the efforts of general counsel to estimate the costs of litigation and prospective liability are complicated by uncertain standards, plaintiffs are more likely to make off with windfall settlements when they raise even the mere specter of litigation. When suits are in fact initiated, defendants faced with discovery on expansive, meritless claims and six or seven-figure discovery costs will often choose to settle cases that should have been dismissed promptly.

In cases where discovery is actively employed, one recent study reported that pre-trial discovery alone can register up to 90 percent of the overall cost of litigation. But litigation expenses, including lawyers, document vendors, and production outlays, are not the only costs associated with drawn out discovery. Cases that go into the discovery phase also extend the uncertainty of liability, which can become a black cloud over vital dayto-day business operations.

pleading requirements applied to all complaints filed in federal court. The ruling in Dart Cherokee could shed light on how the Supreme Court interprets the requirement of plausibility in the pleading context.

Dart Cherokee and other cases provide the Supreme Court with openings to clarify exactly what plaintiffs should be required to prove when they launch their suits in federal court. Whatever the Supreme Court does next, corporate defendants and their lawyers will be watching closely. ■

OPPORTUNITIES FOR CLARIFICATION

As lower federal courts struggle to define the contours of the federal pleading standard, the Supreme Court should seize any opportunity to clarify its aging precedents. One case that the justices recently decided, Wood v. Moss, gave the Court a square opportunity to further spell out the level of detail required to properly bring claims, but the Court avoided any substantive discussion of the pleading standards. In that case, decided in late-May, the Supreme Court was tasked with deciding whether a group of protesters adequately pleaded their allegations that Secret Service agents discriminated against them by positioning them further away from former President George Bush than a group of pro-Bush protesters.

The justices ruled on an important qualified immunity issue in the case, but gave less attention to whether the claims had been adequately pled at the outset of the lawsuit.

An upcoming case will give the Court a new chance to offer guidance on the standards. In Dart Cherokee Basin Operating Co. v. Owens, which is likely to be argued in early October, the justices will decide whether a defendant seeking removal of its class action lawsuit from state to federal court should first be required to meet certain evidentiary requirements.

That case could have implications for federal pleading standards because language outlining the statutory requirements for removal of a class action lawsuit closely mirrors the

Dan Meyers is a partner in the New York office of Bracewell & Giuliani in New York and a member of the firm’s Litigation Section. He represents private investment funds, financial institutions and energy companies in a wide range of complex commercial disputes before federal and state courts, and he handles issues involving cross-border litigation and arbitration. His practice also focuses on e-discovery and information governance, including issues involving crossborder discovery. daniel.meyers@bgllp.com

Kedar S. Bhatia is an associate at Bracewell & Giuliani. His practice is focused on general civil and commercial litigation, and on white collar defense.

His writing about the litigation process has been cited by national news sources, including the New York Times, Wall Street Journal and Washington Post, and in numerous law journal articles. Since 2010, he has written for SCOTUSblog and published the Stat Pack feature, an annual sixty-page collection of statistics, data, and analysis related to the Supreme Court term. kedar.bhatia@bgllp.com

33

oct/nov 2014 today’s general counsel

Developments in mobile Device electronic Discovery Colum n

by miChael W eil and m ark miChels

l

34

egal counsel and their supporting forensic teams face vexing challenges when it comes to preserving and collecting mobile device data. SmartMiCHAeL WeiL phones and tablets frequently contain unique data that must be preserved, collected, processed, reviewed and produced in litigation just like any other form MArk MiCHeLS of electronically stored information.

Mobile device data is often critical for internal and regulatory investigations, as well. Unlike personal computer data that can often be collected remotely with relatively little impact on custodians, mobile device data collection usually requires separating

Michael Weil is a Chicago-based director for Deloitte Discovery in Deloitte Financial Advisory Services LLP, where he leads the Computer and Cyber Forensics Market Offering. He has 16 years of computer forensic examination experience, including criminal, civil, and national security matters. miweil@deloitte.com

Mark Michels is a San Jose-based director for Deloitte Discovery in Deloitte Transactions & Business Analytics LLP. He has 15 years of experience managing corporate discovery issues as well as 8 years of experience in patent litigation, pre-merger reviews and internal investigations. mmichels@deloitte.com

custodians from their phones, sometimes for a very long time. Fortunately, there have been some important breakthroughs that may allow for remote, over-the-air, data collection from mobile devices, permitting a more efficient and less disruptive process.

It is not uncommon for a litigation matter or investigation to involve a large number of custodians, sometimes into the hundreds. In general, computer forensics professionals can gain access to the mobile device ESI only by physically connecting specialized forensic collection tools directly to the smartphone or tablet. This is unlike personal computer or server data collection, where they can remotely access hard drive files, or export email from a server for preservation, collection, processing and hosting.

Since physical access to the mobile device is the only way to collect email, text messages and other ESI, the custodian must part with the phone, causing serious “separation anxiety,” and loss of a business tool and a personal lifeline. In some cases, companies have found that they must immediately issue new phones to custodians.

Mobile device management (MDM) systems allow IT teams to provision devices, maintain some level of security, and otherwise track mobile devices over-theair. Some MDMs also enable recording of SMS messages, not other text messaging applications. MDMs cannot access all of the files on the device because the mobile device operating system’s security

scheme does not allow remote level of access to some critical data. For example, mobile devices may hold SMS messages that have not been logged, third party text messages and other application data that cannot be accessed remotely through the MDMs. There is some cause for hope, however. At the 2014 Barcelona World Mobile Congress there were a few companies that showcased some remote collection concepts. Furthermore, through some of our R&D efforts we have completed a

proof-of-concept that demonstrated viable over-the-air remote data collection for most of the data on a smartphone.

While these remote-collection developments are encouraging, it will take some time for the operating system owners and the forensic tool developers to create protocols for complete remote over-the air mobile device data collection. Until they do, counsel and their forensic team will need to contend with in-person device collections or cumbersome mobile device backups. ■

today’s gener al counsel oct/nov 2014

Charting Where experienCe Counts Colum n

by rees morrison

Rees Morrison is an attorney and principal at Altman Weil, Inc. For the past 26 years he has consulted solely to law departments on a wide range of management challenges. As the founder of General Counsel Metrics, LLC, Morrison coordinates the largest law-department benchmarking database and analysis ever conducted, with more than 1,200 participants last year. This year’s GC Metrics survey is available at: https://novisurvey.net/n/GCM2014.aspx All readers who are with an-house law department are encouraged to take it and receive the no-cost report. rees@reesmorrison.com

there is hardly any correlation: years out of law school doesn’t seem to be related to the size of the company.

But we can also have software put in what is called a “linear trend line” (or “best-fit line”). That line minimizes the distance between itself and each of the points. Here the line slopes slightly downward to the right, which means that to a small degree, larger companies tend to have more experienced general counsel. That relationship is narrow between 1975 and 1990 graduation dates, where there is more data, so the confidence interval is narrower.

Other ways to portray this data could include creating clusters of revenue or graduation years. In other words, for every $2 billion of revenue, what was the average year of graduation. Or for every three years of graduation, what was the average revenue. These would be methods of what is called “smoothing data” to make overall patterns more apparent.

It would also be easy to present this data in terms of industries. The colors of the points could tell you which industry the general counsel’s company is in. Perhaps we would see that some industries expect a more mature general counsel than do others. Or that may really reflect the maturity of the industry itself. One could imagine younger general counsel in technology companies than in utility companies, for example.

Years of experience since law school is only one of a multitude of factors that a board of directors considers when appointing a new general counsel. Whether the lawyer has worked in the company for a period of years, is a desired minority, or whether the department is at an inflection point and needs a different kind of chief lawyer, or the influence of a dominant law firm can all contribute to the selection factors. ■

foR tune 500 gc s, l aw school gR aduation Y e aR and coMpan Y Re v enue

150

Rev. in Millions

Y

ou might think it would make sense for general counsel with the most years of legal experience to head the legal departments of the largest companies. They have risen to the top over the years, seen everything, dealt with everything, become skilled at corporate politics. Their graduation from law school was long ago and their value is great. Surprisingly, the truth is different.

Let’s test this hypothesis with data for 234 general counsel of the Fortune 500. We obtained the data set and supplemented it with the year of law school graduation for quite a few of the top lawyers. In case you are curious, the earliest graduate was 1968 (two of them) and the most recent was in 2000.

We thus have both the revenue of the company and the law school graduation year of its top lawyer. With that data we can create a scatterplot that shows law school years against company revenue.

In the plot below, each point corresponds to one general counsel and his or her company’s revenue in 2013 on the vertical Y-axis, and the year of graduation from law school on the horizontal X-axis. You can see that

100

50

0 1960

1970

1980

1990

2000

35

OCT/ NOV 2014 TODAY’S GENER AL COUNSEL

T WO RECENT COURT DECISIONS MAY BREATHE LIFE INTO COUNTERAT TACKS AGAINST TROLLS COLUM N

by DANIEL McDONALD

L

36

ast spring, the U.S. Supreme Court handed down a ruling that breathes life into potential attorney fee recoveries against patent owners who bring weak claims.

A related, more recent decision may revive another potential retort in the face of weak patent infringement claims from overzealous patent owners: antitrust claims.

In Octane Fitness, LLC v. ICON Health & Fitness, Inc., the Supreme Court made it easier for defendants accused of infringement to recover attorneys fees when they prevail. The Court lowered the accused infringer’s burden of proof, broadened the situations in which an accused infringer might recover attorney fees, and required appellate courts to give greater deference to trial court decisions awarding fees.

The proper standard, consistent with the underlying fee statute (35 U.S.C. §285), is whether the case is “exceptional” in view of the totality of the circumstances. While Octane did not involve a patent troll, its holdings could help any party that successfully defends against a weak patent infringement claim. Thus it enhances protection from unscrupulous plaintiffs who assert frivolous patent infringement claims.

Daniel W. McDonald is a partner at Merchant & Gould. He represents clients in patent, copyright, trademark/ trade dress and trade secret litigation, with an emphasis on electronics, software, and Internet issues. He has represented clients ranging from individual inventors to the British Post Office. dmcdonald@merchantgould.com

Fee awards will occur only in rare cases under this new standard, where the patent owner’s claims are exceptionally weak or where its litigation tactics are exceptionally bad. So it remains difficult for defendants to recover fees even when they win the case. But the decision rejected the Court of Appeals for the Federal Circuit’s more rigid standard, under which a bad-faith suit with merely a slight probability of success could not

give rise to a fee award. It also returns to trial judges the discretion to determine what constitutes an exceptional case.

Thus the decision may help deter frivolous infringement claims, as one of the temptations for such claims has been the near-negligible financial risk to the plaintiff even when it loses.

Accused infringers got more help recently when the Federal Circuit addressed antitrust claims against patent

today’s gener al counsel oct/nov 2014

owners. Patent owners are rarely found liable for antitrust violations, regardless of how weak their patent infringement claims may have been.

But in Tyco Healthcare Group LP v. Mutual Pharmaceutical Co., Inc., however, the Federal Circuit determined such a claim may have merit.

Tyco involved a drug patent. The day after the district court entered a judgment of non-infringement, the patent owner filed a citizen petition with the Food and Drug Administration (FDA). The petition urged the FDA to change the criteria for evaluating the bioequivalence of the defendant’s proposed generic product to make it more difficult for the defendant to get FDA approval for its generic version.

The FDA eventually approved the defendant’s generic drug and denied the patent owner’s petition, finding there was no basis for adopting the patent owner’s proposed bioequivalence criteria.

Meanwhile, the district court dismissed antitrust claims brought by the defen-

dant, even though it found the patent was invalid as well as not infringed.

On appeal, the Federal Circuit vacated in part the dismissal of the antitrust claims. It sent the case back to the district court, which must now reconsider whether the patent owner’s FDA petition was objectively baseless and brought with bad intent. The Federal Circuit found some evidence to support the antitrust claim in the FDA’s strong rejection of the petition.

It also noted bad faith may be supported by the patent owner’s decision to delay bringing the petition until the day after it lost the infringement case, potentially injecting delays into the defendant’s ability to market its generic drug. Other evidence, including an internal email of the patent owner, also could support a finding that the petition to the FDA was a sham and thus subject to an antitrust claim.

One judge on the split panel strongly dissented, stating that the court “now creates several new

grounds of antitrust liability.” The dissent warns that the decision “inserts a strong antitrust presence into routine patent litigation, adding the potential of antitrust penalties for patent enforcement.”

While the decision may be good news for those fighting “trolls,” it might cause concern for those seeking to assert their patents.

If the dissent is upheld, this new decision from the Court of Appeals may signal that courts will become more receptive to antitrust counterclaims brought against patent owners who assert infringement.

This may provide a countermove for accused infringers, deter baseless patent infringement cases, and give pause to patent owners considering an infringement suit.

Whether this new decision creates an “unprecedented new ground of antitrust liability” as the dissent suggests, or is merely a limited victory for accused infringers, remains to be seen. ■

TO D AY S G E N E R A L C O U N S E L . C O M

37

oct/ nov 2014 today’s gener al counsel

Get control of Internal Documents Before merGers or acquIstIons Colum n

by Jeffery m. Cross

M

38

ergers and acquisitions have increased during the last couple of years. My advice to clients contemplating such deals is to get control of their internal documents first.

If the transaction meets certain dollar thresholds, it will have to be reported to the Department of Justice and the FTC pursuant to the Hart Scott Rodino (HSR) Act. Under HSR, companies reporting the transaction have to provide certain information about the deal.

Significantly, the parties also must attach so-called “4(c)” and “4(d)” documents to the HSR form. These are any “studies, surveys, analyses and reports” prepared by or for any officer or director, for the purpose of evaluating the acquisition with respect to market share, competition, competitors, markets, potentials for sales growth, or expansion into product or geographic markets.

Item 4(c) documents are generally prepared within the reporting company.

Item 4(d) documents are generally prepared by third-party advisors, such as investment bankers or consultants. Any confidential information memorandum prepared for potential buyers must also be produced.

The documents that must be attached to the HSR form need not be formal. It is the content that mat-

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

ters. Guidance from the FTC’s Pre-Merger Notification Office indicates that the types of documents that would qualify as 4(c) include “overhead slides used in presentations, emails, recordings of presentations or meetings, handwritten notes on index cards or the back of an envelope, a spreadsheet showing how market shares may be impacted by the transaction, a map with different colors representing the regions covered by different competitors, and bullet points explaining the competitive benefits the acquisition will provide.”

The FTC has noted that this list is not exhaustive, but illustrative.

The DOJ and the FTC place a great deal of weight on these documents in undertaking their initial assessment of the reported merger or acquisition. After all, the reviewing agency has only 30 days under HSR to decide to let the merger proceed or ask for additional information, a so-called “Second Request.” Even if a document does not qualify as 4(c) or 4(d), documents dealing with competition and the markets would likely have to be produced in response to a Second Request.

The 4(c) and 4(d) documents, as well as those prepared in the ordinary course of business analyzing competition or markets, and produced in response to a Second Request, are the documents that counsel must get under control.

First, I recommend that an audit of these documents be undertaken to determine what they say about

today’s gener al counsel oct/nov 2014

competition and the markets. Before you prepare arguments to the government that the deal will not have an anti-competitive effect, it is important to make sure there is nothing in the files that would contradict those arguments.

Second, I recommend that a memo be circulated to all personnel that might be preparing such documents urging them to exercise care in drafting to make sure that they do not write something that might be misunderstood.

Third, I recommend that all documents that are to be presented to the board of directors be vetted by antitrust counsel. Drafts need not be produced unless the drafts are reviewed by the board or there is no actual final document.

It never ceases to amaze me how often people write things without really thinking. For example, I once reviewed the draft of a confidential information memorandum that extolled the value

of the company to be sold by asserting that there were barriers to entry that prevented new competition from blunting any pricing power that the merged company might be able to exercise. Not only was this statement unnecessary, but it was wrong. I had just successfully defended the company being sold in a class-action antitrust case by proving the opposite.

A recent case illustrates how poorly worded or sloppily written internal documents can defeat a merger or acquisition. United States v. Bazaarvoice, Inc. involved an acquisition by Bazaarvoice of its closest rival, PowerReviews. Both were involved in providing ratings and review platforms to companies that were engaged in online commerce.

The trial court found that the arguments in favor of the acquisition were undermined by pre-acquisition statements by the defendants’ executives.

The court’s opinion cited one example where a top executive of Bazaarvoice

wrote that the acquisition of PowerReviews would “eliminate [Bazaarvoice’s] primary competitor” and provide “relief … from price erosion.” Another Bazaarvoice executive wrote that he expected the combined company would have a higher valuation as a public company because it would have “literally, no other competitors.”

The court also cited evidence that, at the time of the merger, PowerReviews executives pitched the merger as one that would result in a “monopoly in the market.” Based in great part on such documents, the court found the acquisition to violate the antitrust laws.

The Bazaarvoice decision shows the importance of conducting a full-fledged antitrust audit prior to proceeding with a deal. It also shows the need to get control of internal documents by counseling the client’s employees to be careful what they write and, if in doubt, have antitrust counsel review the documents first. ■

View our digital edition

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

39

oct/ nov 2014 today’s gener al counsel

Burying Bribes in the Books and Records

By Howard A. Scheck

N

40

ot so long ago, you had to buy a spy novel to read about secret offshore bank accounts, shady intermediaries “entertaining” government officials, and cash passing in briefcases under barroom tables. Now you can just google “FCPA recent cases” and narrow your search from there. The headlines these cases produce are often so sensational they obscure the fact that the violators had to “cook the books” in some way to conceal the corrupt payments.

This article reviews the often overlooked – but highly potent – books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA), and analyzes 70 FCPA enforcement actions initiated by the Securities and Exchange Commission (SEC) since 2009. The adjacent chart highlights the financial accounts and expense categories that the SEC alleged were involved in concealing corrupt payments. Knowing where the SEC is looking can help guide a company when it assesses its own bribery risks and in targeting potential corrupt payments when using data analytics.

The FCPA includes two accounting provisions that are part of the Securities Exchange Act of 1934. Section 13(b)(2)(A) requires public companies to maintain accurate books and records and Section 13(b)(2)(B) requires public companies to devise and maintain an adequate system of internal controls. Congress enacted these provisions to prohibit companies from concealing the true nature and purpose of corrupt payments in their financial statements. Violations of these provisions are alleged in the vast majority of FCPA enforcement actions because bribes – for obvious reasons – are not reflected in company transaction documents, accounting journals and ledgers (rendering such books and records inaccurate). Additionally, violators circumvent internal controls or take advantage of inadequate ones to hide corrupt payments. Notably, fraudulent intent is not required to violate these provisions, and the dollar amounts involved do not need to be particularly large. Under this broad reach, the SEC has filed enforcement actions against public companies, their employees and agents, among others.

In fact, recent FCPA enforcement actions paint a vivid picture of where in the books and records the SEC has found violations – which may be a good place for you to look as well. There were 70 cases since 2009 in which the SEC made FCPA-related allegations. The adjacent chart reflects an analysis of the accounting classifications (and key terms) used to inaccurately record, falsify, and/or disguise the improper payments in these cases. The accounts most used to cover up bribes were “Commissions” and “Consulting.”

The next most commonly used accounts were “Cost of Sales,” “Travel and Entertainment,” and “Customs.” Some cases had multiple allegations.

The SEC cases reviewed also highlight the kinds of benefits that companies have procured, or attempted to procure, through alleged bribery schemes.

These fall into four categories, with the following benefits sought: • Customs related, including importing products; obtaining licenses; customs dispute/violations; and preferential treatment • Tax reduction related • Securing Favors, including to repeal foreign ownership restriction laws; to support presidential re-election; to repeal government decree; and to overlook regulatory violation • Other, including providing travel benefits to overlook financial penalty; obtaining certification/registration of products

Account Category

Commissions

Consulting

Number of Instances Alleged

Examples of Expense Classification

33

“Commissions” “Overriding commissions” “Success based fee” “Referral fee”

26

“Consulting fees” “Business development” “Customs advice” “Advisory services” “Legal fees” “Business introduction services” “After sales service fees” “Service contract”

18

“Payments to subcontractors” “Other vessel costs” “Loading and delivery expenses”

17

“Crew travel expenses” “Travel advances” “Travel costs”

11

“Stamp/label tax” “Customs agency services” “Special handling charges” “Urgent processing” “Additional assessments”

Marketing

10

“Marketing and developing services” “Market development” “Special marketing” “Promotional expense”

Donations

4

“Honoraria payments” “Donations and grants”

21

“Training expenses” “Service contract” “Petty cash” “Interest expense” “Installation services expense” “Software services” “Electricity maintenance”

Cost of Sales

Travel and Entertainment

Customs Related

Other

TODAY’S GENER AL COUNSEL OCT/ NOV 2014

gesting that some controls had been in place but were inadequate or simply overridden).

Knowing the kinds of accounts and expense categories that have been involved in recent SEC enforcement actions allows you to design targeted data analytics to search books and records for potential corrupt payments. For instance, data analytic modules can be modified to focus on the types of high risk expense categories identified in the above chart of SEC cases. Each of these expense categories can be linked to transaction-level data to drill down into individual vendors, countries, frequencies and amounts of disbursements, among other things.

Given the SEC’s focus on the use of third parties to facilitate bribes, data analytics also can be used to help investigate suspicious payments through link analysis procedures. This type of analysis culls through large databases of transactions to highlight relationships with third parties and transaction flows. These procedures can be used to identify payments made between a company, government officials, politically exposed persons, and third parties. An example of link analysis is below.

The internal controls allegations in the 70 SEC cases were generally less specific than for books and records violations. Typical allegations include: • No controls to detect FCPA violations • No program to monitor employee compliance with the FCPA • Lack of FCPA training • Lack of management authorization for transactions • Lack of oversight over foreign agents • Failure to follow-up on FCPA red flags All levels of management were alleged to have been involved in the violations, including CEOs, presidents and regional directors. The most common management-level employees involved were mid-level sales and country managers. In about 70 percent of the cases, the bribes were funneled solely through third-party agents while the rest involved intermediaries and payments directly to foreign officials. About 17 percent alleged that there had been a circumvention of controls (sug-

Howard A. Scheck is a partner in KPMG LLP’s Forensic Advisory Practice in Washington, D.C. where he leads the firm’s SEC regulatory enforcement and compliance efforts. Prior to joining KPMG, He served as the Chief Accountant of the SEC’s Division of Enforcement. hscheck@kpmg.com

DATA ANALYSIS

41

Link Analysis - Payments Suppliers of Raw Materials

ABC Company – Subsidiary in Developing Market

PEPs List Building & Utility Providers

Government Official

Public Records Sales Agent’s Relative

Transportation & Delivery Vendors Sales Agent

Consultant 1

Consultants IT Service Providers

Consultant 2 Consultant 3

Payments with no identified red flags Payments with identified red flags Potential path of red-flag payments Identified family relationship

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

These are just a few examples of how organizations use technology to be able to identify potential problems that might be buried in the books and records, targeting exactly where the SEC has recently been finding alleged violations. By leveraging technology (and conducting risk assessments) companies can be proactive in the prevention of bribery and corruption.

0

0

42

Your Vendor Can Be an attaCk VeCtor

By Mark E. Harrington and Anthony Di Bello

W

ith the advent of cyberwarfare and 24/7 cyberthreats, the scope of risk management has grown beyond preventing “taints” and “fakes” to encompass the need for a stringent defense of sensitive data. The landscape now includes threats to intellectual property, financial data and customers’ personally identifying information (PII), originating with everyone from organized crime groups to Chinese espionage units.

Inside counsel should be aware that it is impossible to implement effective information security until you understand and directly address the “vanishing perimeter” in policies and agreements. This term refers to the increasingly porous nature of an organization’s network and information-sharing ecosystem. No longer does your IP and other sensitive data exist with some degree of security within the confines of your firewall. It travels “off network” and potentially around the world every day via email and on the mobile devices of supply-chain and other vendors, business partners and service providers, including outside law firms.

today’s gener al counsel oct/ nov 2014

VENDORS AS VULNERABILITIES In research released in 2013, the Information Security Forum (ISF) found that “of all the supply chain risks, information risk is the least well managed” and that “forty percent of the data security breaches experienced by organizations arise from attacks on their suppliers.”

Consider that in the past year there has been extensive media coverage of three separate data breaches of industry giants, each of them originating from a supply chain partner or other type of vendor or service provider: Retail. The Target breach began with a stolen login and password, originally issued by its information security team to a heating, ventilation and air conditioning vendor. This enabled the infiltration of malware that in a later stage of the attack scraped credit card data from pointof-sale (POS) terminals.

Telecommunications. One telecom giant suffered a data breach when 300,000 customer records were stolen from a third-party marketing firm within its supply chain.

Energy. The Dragonfly/Energetic Bear hack of U.S. and European energy companies began with a spear-phishing campaign against senior employees in energy sector companies and moved on to compromise legitimate software used by industrial control system manufacturers. Three providers were infected, and then malware was inserted into software updates sent by the manufacturers to their clients.

Cyber attackers who find defenses too challenging are likely to move on to a vendor who is less well defended to get at data. Remember, you are only as secure as the weakest link in your supply chain, and it should be assumed that if you and your supply chain have not yet been compromised, you will be, and this assumption should drive internal and supply chain information risk management and legal processes.

EVALUATING RISK BY VENDOR A program to mitigate risk in the supply chain begins with identifying and assessing data that is considered sensitive by the organization.

As a visual reference for this process, consider working with your IT or security team to create maps showing where and how this sensitive data flows through your network and those of your partners and vendors. This will help identify during which steps of key business processes your data is at most risk of interception. For example, in the Target breach,

the credit card data was hijacked from POS terminals prior to its encryption for transmission to remote payment processors.

Next, identify and assess which vendor or partner that has access to the network – or that retains copies of your IP, PII or financial data – represents the greatest risk to information security. (Two helpful templates for this are the annotated ICT Supply Chain Risk Management Plan Template in NIST guideline Appendix H, and the ISF Supply Chain Information Risk Assurance Process template.)

The question is: what are the potential consequences to the company if this vendor’s security fails?

Requesting a simple survey of standard security measures early in the process of signing up a supply chain partner can be very revealing. If the vendor will not provide details of its security controls, it is incumbent on you and your team to determine what type of reassurance or information, such as documentation of the vendor’s incident-response plan, would be sufficient.

In addition to a standard survey, request information on the vendor’s business continuity and disaster recovery plans. Then be sure to reintroduce the survey during any subsequent contract-renewal process.

At this point, you can begin ranking your vendors based on the degree of risk each represents. Creating this list lays the groundwork for a tiered approach to agreements, and to the level of network and/or data access that will be granted.

BUILD SECURITY ASSURANCES INTO AGREEMENTS Having a robust agreement that directly addresses information security can save time, as well as trouble and confusion, when a data breach occurs. It’s critical to be prepared to enforce this and all related policies, including non-disclosure agreements, and to clearly communicate to vendors that you will enforce them.

The shortest section of the agreement will stipulate compliance with your corporate data-security and incident response policies, with links to those policies. The longest section should outline who is responsible for what in the event of a breach – that is, which actions (e.g. notifications) will be executed by which party. The chief information security officer of one global automobile manufacturer noted that his company’s supplier agreement

43

Mark E. Harrington is general counsel and corporate secretary of Guidance Software, Inc. He previously held senior legal positions at Intel and other technology companies, and at the law firm of Munger, Tolles & Olson. mark.harrington@ guidancesoftware.com

oct/ nov 2014 today’s gener al counsel

Anthony Di Bello is Director, Security Practice, at Guidance Software, Inc. He writes for technology publications on cybersecurity issues and is a frequent speaker at security events anthony.dibello@ guidancesoftware.com

44

has doubled in length since the advent of comprehensive security policies for all business partners and vendors.

You may wish to consider addressing indemnification as a framework for risk allocation. This could include seeking indemnification for third-party damages caused by breach or noncompliance with information security and privacy obligations and laws.

Other key elements of your agreement include: • Specification of ownership of the data.

• A requirement that all data be encrypted.

Encryption is not a sufficient security measure, but it is a fundamental one.

• Determination of whether your data will be returned or destroyed upon request, and upon contract termination. Lost or forgotten data has been at the center of some very large recent privacy incidents.

• Verification that partners are using technology that monitors and alerts in the event of unusual activity on network endpoints (servers, laptops) that contain copies of sensitive data.

• Requirement of third-party verifications, such as certifications and/or independent audits.

• Data breach insurance.

• The right to seek immediate judicial relief for breaches of confidentiality or intellectual property rights (although in many cases arbitration may be most efficient).

The agreement discussed above will be more effective if created in partnership with your information security and purchasing or procurement teams.

Another critical step is to work with IT or Information Security on process and policy improvements that will ensure certain basic protections related to third-party network access.

These should include: • Network segmentation. This refers to the division of your organizational network into sub-networks that restrict various groups of users to working or accessing data only within appropriate areas.

• Two-factor authentication. This adds a second step in the identification of users at log-in, requiring them to answer a personalized security question in addition to providing the correct user name and password.

• Strong passwords, which require combinations of letters and numerals as well as spe-

cial characters. This lowers the chances that they can be guessed or “broken” in attacks driven by malware that rapidly checks every key or password combination known to it.

• Active anomaly hunting on all network endpoints, especially those storing or providing access to sensitive data (email servers, partner information portals, financial and transactional databases). This can be achieved by the use of endpoint security tools that create baselines of normal behavior for all network endpoints, and then alert where there is anomalous or unauthorized behavior.

• Working with purchasing teams to incorporate data security processes into purchasing and vendor management life cycles. Simply adding a new layer of process onto an existing one, instead of collaborating with all stakeholders to integrate new procedures into existing processes, is likely to be ineffective or to extend the period required for acceptance and adoption.

CYBER “WAR GAMES” TRAINING Everyone in your company who shares information with supply chain vendors, as well as the vendors themselves, should consider conducting cyber “war games,” similar to those run by military units and forward-thinking enterprise security teams. These drills have been found to make organizations faced with a real breach more effective.

Your security team can create exercises that include what are functionally cyberattack fire drills. These require every stakeholder from security, legal, human resources, and vendor teams to practice the critical steps in incident response once a breach has been detected.

Such drills can involve sending fake “phishing” emails, purportedly from someone recipients know, to test both the company’s and its vendors’ cybersecurity. The results can be very instructive and provide valuable information for future drills.

General counsel can play a role in supply chain cybersecurity by working with other stakeholders to weave new protections into existing processes. A thorough and well thought out vendor agreement, along with ongoing security education for your legal team, will help insure the continued effectiveness of your organizational defense practices, and protect your corporation from the worst consequences of the inevitable data breach. ■

NEW! Today’s General Counsel Career Center Let TGC help you find your next job.

New in-house postings added daily.

Plus, for a limited time TGC is offering employers a complimentary listing.

Use code TGCintro when submitting your job listing.

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

.1

Seeing and Believing Key For ComplianCe regulatorS

.2

.3

By Laura Martino

46

W

ith the sharp rise in the number of anti-bribery enforcement actions in recent years, many companies have sought protection by putting compliance programs in place. The problem for some organizations is that, having established such programs, they can be lulled into a false sense of security.

Increasingly, anti-bribery settlements are signaling that the mere existence of a compliance program, while fulfilling a baseline requirement, may not be sufficient. For the enforcers of antibribery laws – the SEC, the UK’s Serious Fraud Office (SFO) – seeing is not necessarily believing. They are closely inspecting compliance measures to determine whether they are robust enough to mitigate risk and reduce the likelihood of illicit conduct.

As a result, corporations around the world need to look at their compliance policies and third-party due diligence programs under a high diopter lens. Ironically, companies that have transgressed in the past may be ahead of the curve, as they have forcibly or voluntarily enhanced their compliance protocols.

Meanwhile, the fall-out has also provided the larger corporate universe with a better framework in the form of core anti-bribery compliance components that are generally understood and accepted.

INCREASED ENFORCEMENT, BIGGER FINES The past decade has seen a marked increase in the number of Foreign Corrupt Practices Act (FCPA) enforcement cases, from as few as four cases annually to 30-40 a year today. Three cases that settled in the past 12 months or so

saw fines ranging from $152 million to $384 million, propelling each into the top ten largest penalties in the history of FCPA enforcement, with two making it into the top five.

U.S. regulators have also enhanced their arsenal in several ways, including heightened international cooperation with other government authorities. In addition to such cross-border collaboration, foreign jurisdictions are also enacting and enforcing their own anti-corruption laws.

Brazil and Russia are two recent examples.

The cornucopia of foreign laws adds an element of complexity to anti-bribery enforcement compliance, due largely to the variations among them. For example, while the FCPA prohibits bribes to foreign government officials, but does not cover bribes to private entities, the UK Bribery Act and China’s Criminal Law extend to commercial bribes. The legality of ‘facilitation payments’ and the ‘receipt’ of bribes are also treated differently across jurisdictions. Exacerbating this complexity, companies can also face the possibility of settling charges in one country, only to face investigation in another jurisdiction related to the same matter.

With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010), the SEC gained the authority to settle civil cases through administrative proceedings. Prior to this, the SEC was restricted in its use of the administrative process to filing cease-and-desist orders to prevent companies from further violations of law. Notably, the agency achieved two of its recent massive monetary settlements through administrative actions.

Earlier in 2014, the SEC used the administrative mechanism to settle civil charges with Alcoa

today’s gener al counsel oct/ nov 2014

Inc. to the tune of $161 million, which made up part of the total $384 million that Alcoa was forced to pay to settle anti-bribery charges. Alcoa’s SEC settlement is ranked among the top three highest disgorgement amounts in FCPA history.

The SEC is now vested with sufficient authority to assess civil penalties, disgorgement and interest, as well as prohibit further violations, without filing an enforcement action in court. Such authority may limit judicial review in future FCPA cases, even though we have seen several settlements reviewed by judges in 2013 and a review over questions of law in 2014, as discussed below.

An effective compliance program can help prevent a violation of anti-bribery laws, and the existence of such a program is a mitigating factor that regulators will take into account in enforcement actions. The requirements for an effective compliance program are outlined in the U.S. Federal Sentencing Guidelines and in further guidance published by the SEC and Department of Justice in 2012. They include taking a risk-based approach and doing ongoing evaluations of the program. The 2012 guidance stated that “no compliance program can ever prevent all criminal activity,” but that the government will assess the design and good faith implementation and enforcement of a company’s compliance program in determining what action to take.

The SEC’s review of the compliance programs of companies under investigation presents an opportunity for other companies to learn and enhance their programs accordingly.

Where violations occur, maintaining a robust compliance program can affect whether a company is to be subject to a full-blown DOJ court prosecution, or to a pre-trial agreement, such as a deferred or non-prosecution agreement.

PROGRAM ENHANCEMENTS TO CONSIDER Scrutinize subcontractors. Second-tier relationships with subcontractors are often omitted from due diligence, as companies consider them too attenuated to worry about. However, in a recent FCPA settlement, the secondlevel relationship was precisely where the bribery scheme was manifested. In performing due diligence on subagents and subcontractors, relevant questions would include: (1) Does the subagent or subcontractor have a history of paying bribes? (2) Are payments to agents justified, based on their experience and industry norms? (3) Is the service adequately described and validated?

Beware of gifts. Recent FCPA settlements and pending investigations involve instances where bribes were paid in the form of improper travel, luxury gifts and entertainment. But among these expensive leisure trips and lavish gifts were items valued at less than $100.

Such cases underline the SEC’s attention to payments in kind. Accordingly, companies should ensure they have internal controls that monitor gifts, meals and entertainment, and that include pre-approval for high-risk transactions such as hospitality for government officials and valuable gifts.

Measures should also cover due diligence of third parties who are likely to receive gifts; thirdparty training on anti-bribery and corporate policies regarding gifts; and contractual provisions with third parties, including significant representations and warranties concerning the third party’s understanding of the company’s gift policy and its own due diligence responsibility.

Compliance programs that take a risk-based approach may not detect small gifts. Some corporate polices, for example, will permit gifts under $100 without prior approval. While this monetary trigger for approval may have seemed reasonable in the past from a risk standpoint, recent investigations underscore the importance of some level of monitoring for gifts, no matter how small – such as the combination of an internal tracking system and basic due diligence for small gifts, with automated analytics and periodic audits.

Monitor for commercial bribes. With the uptick in the number of enforcement cases under the UK Bribery Act, which prohibits commercial bribes in addition to bribes to government officials, it has become increasingly important to focus on the risks posed by commercial bribery, such as a payment to a private company in order to obtain or retain business.

In October 2013, Diebold settled with the SEC for actions taken by its Russian subsidiary, which had created and executed false contracts with a Russian distributor as a means to disguise approximately $1.2 million of bribes – paid through that distributor to employees of private banks in Russia – in order to secure business.

The Diebold case reminds companies that, while the FCPA does not prohibit commercial bribes, the SEC can use the books and records and internal controls provisions of the FCPA to prosecute commercial bribes, even though the underlying conduct does not itself violate the FCPA. For this reason, through corporate policies, contractual terms and anti-corruption training, companies should, at minimum, prohibit their employees and third parties from paying or offering to pay commercial bribes.

47

Laura Martino is an attorney and regulatory compliance officer at CPA Global. Previously, she worked in private practice, representing clients before various federal agencies and the U.S. Court of International Trade. She began her legal career at the White House in the Executive Office of the U.S. Trade Representative. lmartino@ cpaglobal.com

oct/ nov 2014 today’s gener al counsel

As an added measure, companies might consider modifying their due diligence programs to elevate controls around commercial bribes in relation to third parties. Historically, companies have placed more emphasis on third-party intermediaries that interact with government officials. While this approach made reasonable sense in the past, it can overlook the increased risk posed by third parties who pay commercial bribes.

Questionable prior conduct of a third-party intermediary, including previous acts of bribery, should be cause for concern, even though the agent is not expected to directly interact with the government. Such a red flag was discovered

by Diebold during due diligence of its Ukrainian distributor. Despite the regional risks this unveiled, the company ignored the red flag, failed to elevate controls over its Russian distributor, and ended up settling bribery charges for the acts of that distributor.

48

Broaden definition of “government official.”

In upholding a 2011 jury conviction of Joel Esquenazi and Carlos Rodriguez, the two individuals found guilty of bribing telecom officials in Haiti, the 11th Circuit added clarity to the FCPA’s meaning of “foreign official,” which law explicitly states shall now include “any officer or employee of a foreign government or any department, agency or instrumentality thereof.” The legality of the bribes paid by the two defendants to employees at state-owned Telecommunications D’Haiti rested on the court’s interpretation.

The court took an expansive view by defining “instrumentality” as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” As companies continue to monitor third parties who interact with government officials, they should keep the Esquenazi decision in mind.

Doing so might mean expanding the criteria for defining who is a government official. For example, within the meaning of FCPA, employees of a private company with monopoly power over the provision of a public service can be deemed an instrumentality of the government. A company’s vendor who comes into contact with such individuals should be subject to elevated controls.

Expand due diligence. Companies should consider putting in place due diligence protocols that span their entire counter-party population. As a starting point, companies often begin their compliance program with heightened

due diligence for “high-risk” third parties, based on the work, geography and deal value, among other factors. In doing so, a company may forego a baseline review of lesser risk counter-parties.

Government agencies are increasingly cooperating with each other during investigations.

So, for example, where the SEC is investigating a company for potential FCPA violations, other agencies may become aware of violations of other regulatory schemes, such as those involving sanctions and export regulations. A key compliance program enhancement would be to widen the reach of due diligence, so that clients and low-risk vendors receive at least minimal baseline review, proportionate to risk.

Minimal baseline treatment might include watchlist screening and due diligence with regard to reputation.

Enlist experts. SEC criticism of compliance programs in recent actions targets the lack of dedicated compliance officers or compliance personnel, as well as inadequate training and internal controls.

Enlisting experts in these areas, on staff, in a consultative capacity or a combination of the two, is a strong signal of intent to regulators that a company is taking its compliance obligations seriously.

Experienced internal compliance resources and/or external partners can regularly evaluate compliance programs to ensure they are relevant, effective and robust. They can also conduct employee and agent training, due diligence, and corporate policy drafting in relevant languages.

Looking ahead, it is unclear whether more FCPA cases will be settled administratively, resulting in less judicial oversight. Even though key take-aways can be gleaned each year as cases are settled in this way, there are still ambiguities and inconsistencies that make compliance a challenge. Recent cases reflect that the SEC is enforcing commercial bribes, that the acts of subcontractors can trigger a penalty, and that the court has embraced a wider interpretation of “government official” – all factors that impact compliance programs.

As the regulators advise, compliance cannot be a check-the-box exercise. Compliance programs will require ongoing evaluation, evolution and enhancement to keep up with the changing legal and enforcement landscape. For regulators, seeing that a company has a compliance program in place is not enough. They also have to believe that the company is serious about its enforcement of the program. ■

The Magazine The six-time yearly publication, with strategies, best practices and analysis written by expert practitioners within the legal profession, offers an excellent branding opportunity to 58,000 qualified subscribers.

T ODAYS G ENER A L C OUNSEL .C OM / SUB S C R IBE

50

today’s gener al counsel oct/ nov 2014

imes are challenging for corporate legal departments, but some would argue that challenges are simply opportunities in disguise. That proved to be the case for Kennametal’s intellectual property legal team, led by Chief Counsel Larry Meenan.

In less than six months the team was able to accomplish the following: • Save close to a projected $100k annually by capturing billing violations.

• Streamline and consolidate work with outside firms, from 200 firms to 30.

• Reduce administrative work by 4.5 days per month.

• Automatically review bills for compliance violations and correct them on the spot.

• Produce automatic reports for direct payments to be made to accounts payable.

• Analyze and compare matter cost versus value for budgeting purposes.

• Tackle additional intellectual property matters on a flat budget.

A few years ago, Meenan and his department were in a predicament. Their company, Pennsylvania-based Kennametal, a global industrial technology company that conducts business in more than 60 countries and has 80,000 customers worldwide, was about to embark on a new mission: Secure 40 percent of sales from the development of new products.

The goal was to focus all efforts on innovation, which for Meenan’s three-person IP team meant doing more with less. They analyzed where the bulk of their money was going, in order to see if they could find a way to save money and work more efficiently, and they realized their paper-intensive billing and invoicing process was costing them a fortune and not meeting their needs. They decided it was time to invest in a matter management technology solution to better manage their billing and invoicing process.

Once the technology was in place, Meenan and his team realized they would also have to work differently with their clients. This empowered them to develop new rules and guidelines to run the business. In other words, it put them in the driver’s seat.

Meenan says the original intention wasn’t to streamline work with outside firms, but that came as a result of the technology change. Today the IP group has retained only law firm partners with whom they have

the strongest relationships, giving them a more manageable number of outside firms to work with.

The Kennametal IP group immediately put into motion two important rules for working together: • First, in order to gain more clarity for billing practices with outside counsel, they established new rules around billing arrangements. This included, for example, rules for when work would fall under hourly rates versus when alternative billing methods would apply. They also established guidelines for things like business-related meals, travel and expenses.

51 • Second, to establish more predictability on matter pricing, and to make more accurate matter comparisons, they established fixed pricing on commodity type legal matters – for example, filing patents and trademarks in specific countries. This enabled the department to budget and plan more accurately. While this was certainly a change for Kennametal’s outside counsel, they also benefitted by being paid faster and with fewer errors.

When investing in IT, it’s generally sage advice to start with small projects and build on their success. Especially in corporate legal departments it is generally best to hone in on the one or two areas where in-house attorneys have a hunch that legal work can be performed more efficiently. Piloting new programs in this way can provide a platform for larger initiatives, which is exactly how it worked out for Kennametal’s legal IP team. Not long after learning about the IP team’s project, the company’s general legal team, which with seven attorneys is slightly larger, decided to emulate the IP team’s process. As a result of their changes, the overall legal department processed 2,426 invoices, and automatically captured $32.3 thousand in invoice reductions. ■

Ed Chang is senior account executive with LexisNexis CounselLink® and an attorney licensed to practice in Texas. He works with corporate legal departments implementing new technologies. edward.chang@ lexisnexis.com

Mega-deals

Up In Canada

By Jamie Koumanakos and Chris Salamon

52

today’s gener al counsel oct/ nov 2014

oming off moderate Canadian M&A activity in 2013, M&A deal count reportedly has been down in 2014. However, deal values have increased by 26 percent, a bright spot in transaction activity.

Contributing to the decrease in deal numbers has been some softness in the natural resources sector, which had helped Canada outperform other economies through the recession.

But big ticket Canadian deal volume has seen an uptick, paralleling U.S. mega-deals, with 20 Canadian deals over US$1-billion having been announced when this article was prepared, with an aggregate deal value of US$46.5-billion. This represents a 33 percent and 66 percent increase in deal number and value, respectively, of these larger deals as compared to the prior year.

In terms of outbound M&A, Canada has remained powered by a strong domestic economy, leading Canadian companies’ international acquisitions to be strengthened relative to inbound transactions, with the U.S. remaining by far the most popular target country. More than 55 percent of Canadian outbound M&A in 2014 involved U.S. targets.

Although overall Canadian pension plan acquisition activity has been down thus far this year compared to last year, we expect the pension plans to continue active investment platforms in a broad range of sectors both in Canada and abroad, including energy, infrastructure and real estate. Plan investors were again involved in many of the biggest Canadian private equity deals so far this year, and we also expect continued club deals among Canadian pension plans, as well as with private equity sponsors as a risk-sharing approach to pursuing larger acquisitions.

Some factors that have contributed to a weaker global M&A environment, including low commodity prices, relatively slower growth in China and economic and political challenges in Europe, will likely remain.

There are, however, some positive signs that inbound deal activity will rise, including a number of significant strategic M&A transactions, a strengthening U.S. recovery, a rebound in U.S. housing activity and a weakening Canadian dollar.

As confidence in the economy grows, riskaverse companies that hoarded cash through the downturn may feel new pressure to grow earnings through acquisitions. Continuing consolidation in many sectors of the Canadian

C

economy also means that inbound investors need to move quickly and decisively to seize remaining opportunities of scale. Supported by liquid capital markets and willing lenders both in Canada and the United States, financial buyers are also once again ramping up activity in Canada and providing meaningful competition to strategic buyers.

Activist shareholders continue to agitate and wage proxy contests to effect changes in public companies, exerting substantial influence over board composition, corporate management, strategy and operations. Last year, JANA Partners lost its bid to elect five directors to the Agrium board following a lengthy and well-publicized proxy contest, while Talisman Energy and shareholder Carl Icahn reached an agreement whereby two of Icahn’s representatives were appointed to the Talisman board.

Dissidents have at their disposal a number of tools that can raise serious challenges for public companies, regardless of size. Investors continue to leverage Canada’s relatively liberal corporate laws, which permit shareholders holding five percent of the votes to call special meetings and seek to replace directors. Despite a mixed track record, we expect activist investors to continue to see Canadian issuers as potential targets for governance improvements and value maximization. The proposed reduction of the early warning disclosure threshold and associated enhanced disclosure requirements should provide issuers with better insight into when an activist has acquired an influential stake and its intentions for the company.

The Canadian Securities Administrators (CSA) continues to review comments on draft National Instrument 62-105 – Security Holder Rights Plans (NI 62-105), and the alternative competing proposal from Quebec’s Autorité des marchés financiers (AMF). These proposals offer divergent approaches to the treatment of shareholder rights plans (poison pills) in unsolicited take-over bids.

In September the CSA published proposed amendments to address key issues identified in the CSA Proposal and the AMF Proposal. They aim to facilitate shareholders’ ability to make voluntary, informed and co-ordinated tender decisions and to provide target boards with additional time to respond to hostile bids, each with the objective of rebalancing the current dynamics between hostile bidders and target boards. continued on page 57

53

Jamie Koumanakos is a partner at Blakes.

He practices Canadian corporate and securities law with a focus on domestic and crossborder mergers and acquisitions, private equity transactions and Canadian corporate matters. jamie.koumanakos@ blakes.com

Current enforCement trends in eu Competition Law

By Bernd Meyring

54

A

nti-cartel enforcement in Europe appears to be mainly about ever higher fines for hardcore cartels. Recently, private actions for damages have played an almost equally important role to increase deterrence even further. There are now examples of companies that filed for bankruptcy as a result of such sanction, and the wisdom of further increasing fines is increasingly questioned.

At the same time, enforcers are looking at new practices to which these sanctions could be applied. These go beyond the traditional price fixing or market allocation cartels, and they include practices that often are not easily identifiable as antitrust violations. Compliance and the defense of such practices are a challenge.

“war on cartels” During the last 10 years, competition law enforcers in Europe have been busy “waging a war on cartels,” as former Competition Commissioner Neelie Kroes colorfully put it in 2006.

In the 1990s, the European Commission imposed total fines of less than EUR 85m per year.

This amount has skyrocketed to EUR 1.8bn for the past decade, more than a twenty-fold increase.

With only one exception, the ten highest fines ever were imposed in the past decade. These increases are the result of a deliberate strategy to hit harder.

(A turning point in this respect was 2006.)

These fines no longer target only the infringing companies. In recent years, the

today’s gener al counsel oct/ nov 2014

Commission has systematically gone after the top holding companies at group level, irrespective of whether they were involved in the infringements. More recently, the Commission has done this even outside consolidated groups. Where 50-50 joint ventures commit infringements, parents can now expect to face fines, and even private equity investors are being fined for the cartels in which portfolio investments may be involved. The message is clear: compliance is a responsibility at group level.

Damage claims against cartelists were a rare exception ten years ago. Today there is hardly a cartel decision that is not followed by such claims, and legislation is being adopted in order to further encourage and facilitate such claims.

Does the apparent need to permanently increase sanctions cast doubt over the effectiveness of enforcement so far? Not in the eyes of the Commission, which hardly misses an opportunity to present record fines as a major success.

In the coming months, the outgoing Commission will make best use of such messages to publicize its legacy.

An enforcement trend that has been less visible is the focus on practices beyond traditional hard core cartels. The Commission has moved on to enforce competition laws against practices that few in years past would have seen as comparable to hard-core cartels.

INFORMATION EXCHANGES Historically, information exchanges between competitors were among the first of these new targeted practices. Unlike hard-core cartels, information exchanges are not always illegal.

The assessment is made case-by-case, and the line between good and bad is not always easy to draw. Benchmarking, or gathering of market information, can often be structured in ways that comply with antitrust concerns.

However, the Commission has fined companies where exchanges concerned future pricing or other strategic information.

Companies have frequently argued that such exchanges take place in a “grey zone,” but both the Commission and courts have made clear that exchanges that mainly aim to remove uncertainty about competitors’ conduct are illegal. This was found to be the case for an exchange between mobile telecom operators regarding dealer remuneration, between banana traders about future expected price trends and between private schools about their future fees.

HUB-AND-SPOKE CARTELS Indirect communications have recently been another focus area. The distinction between normal business conduct and a violation of antitrust laws is often not easy. Discussions with customers or suppliers can lead to exposure if the received information is passed on to competitors, for example. Such cases have led to significant fines in some parts of Europe.

Assume that a manufacturer of soccer shirts sells the same model to two retailers, A and B. Retailer B uses the shirts for promotions, selling them with no margin in order to attract customers to its shop. Retailer A faces the choice between being seen as overpriced (if it offers the shirt at a normal margin) or losing its margin if it wants to avoid that.

Retailer A therefore complains to the manufacturer and says that it will stop selling the shirts unless it can sell them at their market price and still make a margin. As a result, the manufacturer recommends higher retail prices to retailer B. One way of looking at this pattern is as a normal negotiation on commercial conditions, driven by the need to make rational choices about retailer A’s assortment. How can retailer A be expected to distribute a product if there is no benefit in doing so?

And how can the manufacturer be expected not to care about commercial behavior by retailers that prevents proper distribution of its goods in the retail channel?

However, competition authorities have increasingly looked at such conversations another way. It seems obvious that the retailers must not discuss how they price the soccer shirts between themselves. But should it make a difference if they use the manufacturer as a messenger in order to align their retail pricing? If retailer B must not talk to retailer A about A’s pricing, can it ask the manufacturer to do so on its behalf?

Authorities in the UK and some other EU Member States have imposed fines in such cases, and it is probably only a matter of time before the European Commission sets its precedent in that area.

MOST FAVORED CUSTOMERS Let us look at another practice that used to be common in many distribution agreements.

Retailers have often insisted on a “most favored customer” treatment. In essence, they request that their suppliers give them the best available price. Should they offer better conditions to

55

Bernd Meyring is a partner at Linklaters, working out of Brussels and Düsseldorf. His main areas of practice include merger control proceedings in the European Commission, the German competition authority and coordination of merger control proceedings worldwide. He also represents clients in cartel investigations and leniency applications, advises on dominance issues and litigates cases in German and the European courts, and he is global sector leader for automotive at Linklaters. He teaches EU competition law at the University of Frankfurt/ Main (Germany). bernd.meyring@ linklaters.com

oct/ nov 2014 today’s gener al counsel

56

someone else, “most favored customer” treatment obliges them to align the conditions to meet the best conditions they offer.

At face value, such a provision is obviously good for competition and good for consumers.

It will lead to lower prices and ensure that more customers can benefit from favorable conditions that a supplier offers to some of its customers.

But is this really always good for competition? Where a supplier has granted most favored customer treatment to all or many of its customers, it might be reluctant to offer special conditions in order to realize additional sales. And this might mean that some customers will not be served, despite the fact that they could be.

Similarly, most favored customer treatment increases the transparency of supply conditions.

At retail level, this means transparent margins, which facilitates co-ordination.

A number of recent decisions have discussed the topic in the context of on-line platforms.

Amazon used to request sellers using its platform not to offer their goods at better prices elsewhere. HRS, an on-line booking service for hotels had a similar requirement. Both suppliers had to drop these conditions because they were found to restrict competition.

A high-profile case on e-books against Apple and the main U.S. publishers highlights another potential negative effect of most favored customer treatment. Apple’s most favored customer request was found not only to prevent promotions in other channels but also to facilitate an alignment of prices and conditions between publishers and, ultimately, price increases on the market for e-books. It was therefore found to be illegal and is exposing Apple to hundreds of millions in damage claims, despite the fact that it helped Apple enter a market on which Amazon had enjoyed a quasi-monopoly. This must be the first case in which market entry has been found to restrict competition.

TRADING Record fines for the manipulation of interest rates and investigations in derivatives, foreign exchange rates, crude oil and precious metals highlight exposure in another area that had escaped antitrust scrutiny until recently. In the context of an increasing awareness about market manipulation, antitrust is becoming an additional tool of deterrence.

The theory is relatively straightforward.

Where traders discuss, directly or indirectly, where they think the market will go, this

might influence their offers and ultimately the market. Risk can result from participating in trading structures that are set up in a way that facilitates collusion, for example when there is a small number of participants who interact frequently, or there are aligned interests among market participants on price setting.

How participants communicate can create another risk factor. Marketing representatives have long since learned the lesson that talk about future price trends is off limits, but traders might be less familiar with this concept and the reasons for it.

These new areas of enforcement create a need to scrutinize trading structures, and to train personnel, particularly in high-risk areas.

SIGNALING Price announcements are becoming another hot enforcement area.

Price increases in concentrated commodity markets need first movers. But first movers take a risk. If the market quickly follows, they will increase margins as a result of their price increase. If it does not, they will lose volumes quickly, and these losses will hit their bottom line. Time is of the essence in this situation. Any first mover will want to know quickly whether the increase is a success in order to decide whether it should be sustained.

This is where market transparency and signals play a key role. If information on prices is transparent and up to date, this reduces the risk involved in a price increase. “Errors” can be corrected quickly, and there is more comfort to sustain a price increase if the leader knows that it is followed.

On the other hand, price transparency is good for customers. It facilitates comparing offers and thereby drives competition. Banning this transparency would be a burden for customers and may well restrict competition.

Increasingly, European regulators are assessing how companies communicate prices. Are they speaking to customers in order to promote their offering? Or are they essentially aiming to tell competitors that the market is ripe for a price increase? Are price increases publicized in the same way as promotions? And why?

These questions will need answering when the line is being drawn between harm and benefit for competition. And these are questions that are currently being put to shipping companies, Dutch telecommunication providers and UK cement companies, all of whom are under investigation in this regard. ■

TODAY’S GENER AL COUNSEL OCT/ NOV 2014

Mega-Deals

continued from page 53 Oil and gas transactions led all private equity investments last year, and thus far this year and we see this activity continuing. Perceiving an opportunity to invest at reduced valuations due to lower commodity prices, sponsors have increasingly looked to Canada’s oil patch for acquisitions or investments, including in related service sectors.

In addition, while private equity funds have traditionally avoided mining investments due to high valuations, commodity price risk and volatility in earnings and cash flows, a number of Canadian and international sponsors have become increasingly focused in the sector, including by raising dedicated funds and new asset allocations in existing funds. Last year, mining was the second-largest sector for deployment of private equity capital in Canada, and we see interest from sponsors continuing for the remainder of the year, including in distressed mining investments.

Buyout dealmaking was moderate in 2013 and thus far in 2014, with aggregate value and volume down five percent and 10 percent, respectively, from prior year periods. However, there are some bright spots thus far this year, with a reported uptick of six percent in the number of transactions over the same period in 2013. Availability of debt capital, both from U.S. and Canadian sources, remains high and on favourable terms, and lower commodity prices may have reset some pricing expectations in the resource sector.

In contrast, equity capital raising remains challenging in Canada, and initial public offering activity has not rebounded as strongly as in the United States, leaving sponsor acquisitions as a favoured alternative for strategic, financial, and family-owned or controlled dispositions. Anecdotal evidence of a resurgence in private equity investing in Canada is high, with numerous sponsors repeatedly participating in public and private company auctions, and a few large sponsors dedicating greater resources to the Canadian market, including assigning coverage teams and opening Canadian offices.

We expect sponsors to continue to focus on the middle market – the heart of LBO activity in Canada – having accounted for a reported 70 percent of all buyouts in 2013.

In addition to acquisitions, minority equity investments by sponsors have also recently trended upwards, representing a reported 18 percent of all private equity deals in Canada last year, and we see this continuing for the remainder of the year.

We expect Canadian public-to-private buyout deal terms to continue to parallel U.S. terms in many respects. However, some notable market differences exist, including in deal protection provisions. As highlighted in the inaugural 2013 American Bar Association Canadian Public Target M&A Deal Points Study, in Canada a target board’s ability to change its recommendation in support of an agreed acquisition transaction is generally limited to circumstances in which there is a bona fide “superior proposal” by a third party (65 percent of transactions

Chris Salamon is an associate at Blakes. He has experience advising with respect to capital market transactions and business law matters, including equity and debt financing, initial public offerings, mergers and acquisitions. chris.salamon@ blakes.com

57

ACTIVIST SHAREHOLDERS CONTINUE TO AGITATE AND WAGE PROXY CONTESTS TO EFFECT CHANGES IN PUBLIC COMPANIES. surveyed) as compared to a minority of U.S. transactions (only 22 percent of U.S. deals reviewed in the corresponding U.S. deal points study).

Interestingly, while almost half of the U.S. deals surveyed also contained a board right to change its recommendation for an “intervening event,” generally being a material development or change in circumstances occurring after the date of the acquisition agreement, no Canadian transactions surveyed included this provision.

There are some positive signs in the Canadian M&A marketplace, but it remains to be seen whether commodity market volatility and temperamental international economic confidence will hinder corporate and private equity interest in dealmaking in Canada and abroad. ■

Mediation Strategies and Considerations

By James W. Walker 58

W

e have all heard the maxim that “ninety-nine percent of all law suits settle.” The certainty that a settlement represents, and the fact it puts an end to litigation costs, may explain why we hear it so often. At the same time, a successful settlement requires correct timing and being positioned to justify or compel a settlement. Perhaps one of the parties is emotionally invested in the dispute. The case may be inordinately complex, or represent an important part of a party’s business.

How do you direct a particular case toward mediation in a way that gives your company the best possible opportunity to secure a settlement at the earliest possible point in the dispute?

The first factor to consider is how the prospect of mediation arises in the case.

Is the dispute amenable to a pre-suit settlement effort? If you have already been involved in pre-suit negotiations, suggesting mediation before the suit is filed allows both sides to close the gap in a confidential and non-binding setting. Attempting mediation under these circumstances can be very effective because a settlement will mitigate the parties’ litigation costs.

You should consider, as well, that most parties negotiating on a pre-suit basis are not so angry that there is an emotional impediment to a negotiated settlement. Similarly, an early mediation suggests the parties did not feel compelled to “win the race to the courthouse”

due to forum selection or some other issue.

Has the mediation been ordered by the court? Most court- ordered mediations must be completed by a specific date set forth in a scheduling or docket control order. Courts often leave the selection of a mediator to the parties, and if an agreement cannot be reached, will appoint someone. Being ordered to mediate a suit provides both sides the cover they need to direct the case toward mediation without having to wait until one side finally breaks down and suggests mediation as an option. This also allows both sides to time the mediation session so that it offers the best chance to resolve the dispute.

The second factor relates to the type of mediator you should consider, given the context of the parties involved and the nature of the dispute.

There generally are three different types of mediators you should consider: the substantive expert, the former jurist and the prominent neutral.

• The substantive expert. The dispute’s subject matter may be so complex or technical in nature (for example, intellectual property, complex financial transactions or accounting malpractice) that having a mediator with substantive expertise will help to eliminate the learning curve during the negotiations. A mediator with subject matter expertise will be better able to evaluate the claims and defenses, and to craft a strategy for securing a resolution.

TODAY’S GENER AL COUNSEL OCT/ NOV 2014

The substantive expert will also be more able to explain why there are certain weaknesses in claims or defenses that should be factored into the settlement position.

Both sides will want to watch for bias that the expert might bring to the mediation proceeding based upon, for example, years of experience in a specific part of the industry before accepting mediation assignments. Still, on those cases involving disposition of a complex matter, having a mediator with relevant expertise can make the difference between success or failure in securing a settlement.

• The former jurist. Sometimes the successful resolution of a dispute lends itself to the experience and perspective of a former trial court judge. This is particularly true where the dispute involves a layperson as plaintiff against a corporate defendant. At the end of the day, the retired judge can look the plaintiff in the eye and say “in all my years as a trial court judge, I never saw anyone win more from a jury than the company has put on the table.” This can often successfully close out the negotiations.

• The prominent neutral. Sometimes there is a senior statesman who both sides respect and trust to be fair, and who can provide a reasoned evaluation of the dispute and the likely range of outcomes in such a way that moves both sides closer to a compromise. This type of mediator can be particularly effective in resolving a dispute between parties that have an established relationship and would like to see the issue decided by someone they mutually trust and admire.

The third factor to consider relates to the timing of a mediation in relation to the procedural status of a case. This factor requires considering the type of case you are trying to resolve. If you are looking to file suit and feel confident in the merits of your company’s case, but the other side is playing hardball, you might decide to file a “shock and awe” pleading – a highly detailed complaint, complete with exhibits, such as key e-mails and correspondence that support your company’s claims – to tell the complete story in a way that may cause a defendant to reevaluate its interest in litigating the matter rather then trying to settle.

The advantage of such an approach is that, by exposing these kinds of details to the light of day, it educates your opponent about the risks that litigating can present. This may prompt a reluctant party to negotiate. If successful, it prompts a mediation sooner, rather than later in the procedural history of the case, with significant savings.

Sometimes one or both sides in a dispute needs additional information in order to make an informed decision about settlement and to reach a comfort level in accepting a compromise. In this case, once suit is filed, counsel should be instructed to reach out to opposing counsel and secure an agreement on the fundamental discovery both sides need to enable such an informed decision.

An agreement allowing for the exchange of documents and the targeted depositions of key fact witnesses as a predicate to a mediation will enable both sides to ascertain what seeing the most relevant documentary and testimonial evidence will really determine, as opposed to what their posturing suggests it might show, prior to filing suit. This gives both sides an opportunity to take stock of their respective claims and defenses before the full costs of completing discovery and proceeding to motions have been incurred.

Some disputes are simply not amenable to mediation until the parties sense they are nearing the point of no return. Perhaps the business judgment of a prominent officer of the company is in question. The amount in controversy may simply be so large that it bestows a bet-thecompany mantle on the dispute. A bitter rivalry may have elevated the intensity level. Before filing, there may have been heated emotional exchanges of the sort that leave reason and sound business judgment on the courthouse steps.

This type of dispute may still be successfully mediated prior to trial, despite the investment of substantial litigation costs. It is not uncommon even for heated rivals to ultimately appreciate the certainty and refuge of confidentiality brought by settlement, in lieu of a public determination of right and wrong that results from a jury trial.

If used properly, mediation remains an important and effective means of resolving even the largest and most complicated disputes. The process has matured greatly over decades of use by corporate and outside counsel in all types of commercial disputes, but it must be utilized correctly in order to provide the greatest chance of success. This requires consideration of the timing and the most favorable mediator profile from the inception of a dispute.

These decisions should be seen as a threshold determination to be made at the same time as decisions about forum selection, choice of law and the initial claims and defenses that will be asserted in the pleading. In this way – regardless of the dispute’s complexity, the personality and history between the parties, or the significance of the case to both sides – the benefits that flow from a proper and timely compromise settlement will become available. ■

59

James W. Walker a member at Cole, Schotz, Meisel, Forman & Leonard, P.A., handles both trial and appeal of complex commercial disputes nation-wide for Fortune 500 companies, municipalities and individuals. His experience includes litigation in commercial contract and business torts, private associations, energy and electric utilities, municipalities, executive and professional liability and commercial insurance claims. jwalker@ coleschotz.com

60

Strategic Considerations in Cross-Border Joint Ventures

By Michael M. Hupp and Anshu S. K. Pasricha

J

oint ventures are the preferred business development strategy for inbound and outbound mergers and acquisitions originating into or from the United States. Businesses enter into such JVs for a variety of reasons, including: access to capital, technology or expertise; access to new geographic markets, especially those otherwise closed to international investors, or where local regulatory schemes make it difficult to go it alone; to achieve synergies of large scale investment cost-sharing; and to manage risks in uncertain markets.

This article explores strategic considerations for management when entering into JVs and documenting JV agreements.

EVALUATION Identifying specific objectives is the first step.

The following issues merit discussion between management teams early in the negotiations: Strategy: The relative importance of a JV for each joint-venturer may be very different because of different strategic interests. Strategic interests can be better aligned by valuing the assets and services to be provided, clearly specifying the goals for the early years of the venture, and documenting the goals in the agreement.

Organizational Issues: Joint-venturers must consider “soft� issues such as cultural differences and possible conflicting incentives. Unless and

today’s gener al counsel oct/ nov 2014

until certain key employees are committed to spending a significant amount of time with the JV, its long-term success may be undermined.

As a result, the agreements often provide that certain key employees will spend a specified amount of time with joint venture activities.

Governance: Typically, because joint-venturers share decision-making and each may have different decision-making processes (e.g., differences in reporting systems, processes and metrics), governance can be complicated. To provide for more efficient governance and decision-making, a joint venture should consider forgoing linear decision-making and instead devise carefully crafted roles and responsibilities for each party.

Economics: The parties may desire to have geographic and other restrictions on the joint venture operations, engage in certain business opportunities outside the venture when such opportunities could also be explored by the joint venture, or provide the joint venture with ongoing services, staffing and other resources, and charge market rates. If time is not spent socializing these issues internally, it may lead to a misalignment of interests and sow the seeds of failure down the road.

Honest discussions of these exploratory themes determine the negotiating stance of management with regard to the joint venture and the counterparty, in turn significantly impacting the governance, funding, and exit and liquidity rights in the agreement.

DOCUMENTING THE AGREEMENT Often JVs are formed for a single purpose, but occasionally they can take the form of “platforms” on which both joint-venturers seek to build a long term growth model. Regardless of the form, when negotiating JV agreements, the joint-venturers need to take into account governance, funding, transfer restrictions, exit rights and liquidity provisions, and deadlock and dispute resolution mechanics.

Because JVs are inherently “one-off” transactions, every element gets negotiated taking into account the overall business dynamics and negotiation leverage of each party.

One critical issue is governance. Governance provisions vary depending upon the chosen management model and ownership structure.

For example, fifty-fifty JVs will mean joint decision-making for all or almost all matters. In such agreements, the managing body typically includes equal appointees from each party, pos-

sibly with the addition of independent directors, and acts within specified parameters, by a majority or supermajority. More critical decisions are then undertaken only upon approval of all board members, or possibly only upon further approval by both joint-venturers.

In JVs with unequal ownership structures (e.g., 25:75), the majority would want little interference, while the minority will push for some control over issues that it views critical to protecting its own rights and maximizing its benefits. Decisions regarding such issues typically require that both parties agree to take such decisions only after a supermajority board vote. In a two-party JV, usually an affirmative vote of the minority is required.

In all these scenarios, there is a risk that joint-venturers may not see eye-to-eye after operations begin. To minimize disruption, parties should consider negotiating a business plan that would be attached to the JV agreement.

It would include detailed metrics with operational targets and financial milestones, funding requirements, and brand strategies. Changes would be permitted only with approval of both parties. Such an arrangement could last a fixed number of years or until the joint-venturers feel the need to revisit the plan, with a review scheduled for pre-specified times (e.g., annually).

Financing is another critical item for JVs. Unless both parties agree on the funding form and terms, financing needs are unlikely to be satisfied. Accordingly, JV agreements typically give careful consideration to future debt and equity financing. Although joint-venturers often prefer to utilize third party debt financing sources for future funding, JV agreements typically also address joint-venturers putting in more equity, or bringing in new investors.

When there is a majority joint-venturer, typically there are provisions requiring that debt funding by either party be on arm’s-length terms or approved by the other party. Additionally, future equity issuances are typically subject to pre-emptive rights so all parties are entitled to a pro-rata portion to avoid dilution. If one joint-venturer is financially constrained, it may negotiate rights to have the other divest a certain portion when it is able to obtain financing to purchase such additional equity. Minority parties often demand that any equity securities not be issued without its consent.

Other key issues involve transfer restrictions, exits and liquidity. JVs involve significant collaboration and differential skill-sets, and therefore rarely do joint-venturers consider each other fungible. Thus, certain ownership interest transfers are usually prohibited in the agreement. If

61

Michael M. Hupp is the President of Omaha-based Koley Jessen and chair of the firm’s M&A/Securities practice group. mike.hupp@ koleyjessen.com

oct/ nov 2014 today’s gener al counsel

Anshu S. K. Pasricha is a member of the M&A/Securities practice group at Koley Jessen, where he counsels corporate clients as well as private equity sponsors in domestic and international mergers and acquisitions, joint ventures, divestitures and in general corporate matters. anshu.pasricha@ koleyjessen.com

62

permitted, typically, elaborate transfer restrictions purporting to lock the joint-venturers up for a set time (e.g. two to three years) are included. After the initial lock-in period, joint-venturers may be able to freely transfer their ownership interests, subject to exit provisions, such as forced-sale provisions, drag-along rights, tag-along rights, and rights of first offer or refusal.

Generally, these provisions intend to ensure that a joint-venturer is not able to leave the JV unless (1) the other joint-venturer can exit on the same terms, (2) the other joint-venturer will buy out the exiting joint-venturer’s interest, or (3) the other joint-venturer will remain with a new replacement joint-venturer.

Finally, liquidity provisions allow for one or more joint-venturers to exit from the JV. These provisions typically provide that within a set period of time (e.g. five years) the jointventurers will exit the JV by way of an IPO or other change of control transaction. Typically, such provisions also provide that if the exit event has not happened by mutual agreement within the specified time period, then either can force an IPO or sale to a third-party buyer, provided the price received exceeds a minimum threshold price.

Deadlocks and disputes are issues that result in joint-venturers resorting to elaborate conflict resolution provisions typically included in the JV agreement. Deadlocks arise when joint-venturers exercise their rights in accordance with the JV agreement, but fail to reach mutual understanding.

Disputes involve more acrimony between the parties, and they typically involve one alleging that the other is breaching JV agreement terms.

As a result, JV agreements contain escalation mechanics. Typically, they include, progressively: (a) cooling off period, (b) escalation of the issue to the senior management of the jointventurers, (c) mediation or submission to an expert, (d) arbitration, and (e) litigation. With these escalation provisions, joint-venturers are incentivized to resolve issues early.

However, as a practical matter, parties often try to resolve differences by negotiating outside the contract. Having such carefully negotiated provisions can provide significant leverage to a joint-venturer facing a less than forthright counterparty and are therefore considered valuable points during the JV agreement negotiations.

INTERNATIONAL JVs There are a few issues that merit specific mention in connection with international JVs, especially in emerging markets.

A joint-venturer should investigate the JV’s business and the reputation of the proposed joint-venturer(s) by undertaking standard corporate and organizational due diligence, and by background checks on the controlling persons though specialized investigative firms. Strict compliance procedures should also be maintained, including controls over the JV bank accounts.

Maintenance of operational control and diligent oversight requires managing relationships and interactions between senior executives of the joint-venturers, and otherwise utilizing non-linear reporting channels. Without such non-linear channels, because of cultural differences, senior executives may not become aware of issues until they become significantly bigger problems.

Safeguarding intellectual property is a major issue. In particular, safeguarding proprietary technology is critical in emerging markets because some IP protection regimes do not protect proprietary technology in the way they do in the United States or the EU. Typically, JVs limit access to such technology to a “need-to-know” basis and limit the intellectual property brought to the JV as ready-touse technology and equipment rather than basic prior art, to avoid rogue personnel pilfering.

Joint-venturers typically seek to avoid getting stuck in local litigation quagmires, and the JV agreement will often provide for arbitration in neutral venues (e.g., London or Singapore) as the sole dispute resolution method. Another good practice is to carve-out local laws that may otherwise seek to bring the joint-venturer within the local legal regimes purview.

A joint-venturer may need the ability to take control of the JV in due course. However, where countries permit only minority ownership by foreign persons, it may be appropriate to negotiate for options or other “creeping acquisition” rights (e.g., future ability to acquire such ownership as permitted at a pre-determined price) that allows the joint-venture to, as closely as possible, achieve the business deal it seeks through the JV while complying with local laws.

Businesses can advance a long-term growth agenda by carefully curating strategic JV investments in international markets. A JV strategy can be highly potent and with appropriate strategic maneuvering leave open long-term options. However, successful execution requires careful advance preparation, thoughtful implementation of strategic considerations, and simple but well-designed deal structures that leave room for sophisticated implementation, but that do not prove to be impediments in negotiations with regulators. ■

Sponsored Sponsored Partners Partners

Presents

LEADERSHIP PROFILES LITIGATION

Litigation Defense.

Litchfield Cavo.

BEYOND PRINT T ODAYS G ENERAL C OUNSEL.COM

we blend the vast resources of a nationwide law firm with the responsive service and reasonable billing practices typically found only at small firms.

IN YOUR INBOX D IGITAL. T ODAYS G ENERAL C OUNSEL.COM

E-DISCOVERY CONFERENCES T ODAYS G ENERAL C OUNSEL.COM/ INSTITUTE

Accessibility | Courtroom skill Adaptability | Innovative Strategies litchfieldcavo.com

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

ChiCago ChiCago || hartford hartford || Boston Boston || new new York York || new new JerseY JerseY || PittsBurgh PittsBurgh || PhiladelPhia PhiladelPhia houston houston || los los angeles angeles || fort fort lauderdale lauderdale || tamPa tamPa || wisConsin wisConsin || west west Virginia Virginia

Database Marketing for Lead Generation With over 300,000 names, the TGC database enables marketers an unmatched array of choices to send out co-branded emails with content of their own choosing to several desirable segments within the database.

T ODAYSG ENER A LC OUNSEL .C OM /A DV ER T ISE

63

Sponsored Partners

Presents

LEADERSHIP PROFILES

LITIGATION

What’s Next With the dawn of each business day, clients across industries and geographic boundaries, of every shape and focus, rise to meet a unique, yet universal, set of challenges.

Windels Marx understands and anticipates these challenges because our experience — both as lawyers and as business professionals — informs our solutions. We appreciate the gravity of connecting with an experienced practitioner for the road ahead. Because peace of mind is as much about finding the winning solution as it is knowing you have a partner who will stand the test of time.

We’re thrilled to be among the roster of elite law firms that Forbes has recognized for ‘providing critical legal services to major U.S. and global corporations.’ For this, we owe a debt of gratitude to our steadfast clients who put their trust in us.

Let’s talk about what’s next.

64

www.windelsmarx.com

Twitter @WindelsMarx

NEW YORK, NY

NEW BRUNSWICK, NJ

MADISON, NJ

STAMFORD, CT

C OMMERCIAL LITIGATION & ARBITR ATION

Kieve | Law Offices Partnering with clients for constructive legal solutions in complex litigation and dispute resolution Loren Kieve has represented and advised major U.S. and foreign companies and individuals in a broad variety of trials, appeals and settlements, including securities, insurance coverage, construction, environmental, derivative, financial services, commodities, antitrust, contract, RICO, insurance sales practices, products liability, defamation, personal injury, employment, discrimination, real estate, mine disaster, Foreign Corrupt Practices Act and other commercial cases. He is rated as a “Best Lawyer” in commercial litigation and, for fourteen consecutive years, as a San Francisco Bay Area “Super Lawyer.” He was previously a partner with the Quinn Emanuel and Debevoise & Plimpton law firms. When he practiced in Washington, D.C., he was listed among the city’s leading lawyers by The Washingtonian magazine. He was inducted into Stanford University’s Multicultural Alumni Hall of Fame in 2012.

San Francisco, California • www.kievelaw.com

THOMSON REUTERS

LEGAL EXECUTIVE INSTITUTE STRATEGIC INSIGHT FOR LEGAL INDUSTRY LEADERS.

INTRODUCING ...

THE THOMSON REUTERS LEGAL EXECUTIVE INSTITUTE Connect with legal industry experts, news, and insight and make more confident, strategic decisions for your organization in an increasingly complex world.

Starting in October, the new Thomson Reuters Legal Executive Institute brings law firm partners, corporate legal department executives, and government regulators together to clarify the latest developments in the legal marketplace. We cover all aspects of executive thought leadership, offering content and events exclusively for leaders in the legal community.

Visit www.legalexecutiveinstitute.com today to start your complimentary access to the profession’s leading publications, white papers, blogs, conferences, news and insight, and more.

Upcoming Events November 5th Western M&A Forum - Santa Clara December 4th Patent Disputes Forum - Santa Clara December 10th 3rd Annual Institute for Corporate Counsel - New York December 11th Defending Corporations and Individuals in Government Investigations - New York

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. NDPPS 295519

One corrupt deal can put your entire organization in a bad light.

In today’s global marketplace, a single act of bribery can quickly damage even the best corporate reputations. That’s where KPMG can help through our global network of over 3,000 forensic professionals. We offer a range of services to assist companies in preventing, detecting and responding to these risks. Because when it comes to bribery and corruption, you can’t afford to have a shadow of a doubt.

Learn more by visiting kpmg.com/us/forensic