Today's General Counsel, V12 N1, February/March 2015 by Today's General Counsel

FEB/ MAR 2015 VOLUME 1 2 / NUMBER 1 TODAYSGENER ALCOUNSEL.COM

Defensible Deletion Cybersecurity Risk for Boards A General Counsel’s Wish List Post-Breach Shareholder Suits The Evolution of “TAR” Social Media Assets in M&A “Dry Run” for a Merger Labor Laws Cross-Border TGC Survey: In-House Staffing Employer’s Dilemma: Guns in the Workplace

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feb/ mar 2015 toDay’s gEnEr al counsEl

Editor’s Desk

Our trial system, our legal system in general, is adversarial. The presumption on which it is based, that a contest between well-matched adversaries will result in a reasonable outcome, usually works pretty well. But not always. Sometimes it doesn’t even work when wealthy individuals or powerful corporations are in the dock. In this issue of Today’s General Counsel, Glen Kopp and Kedar Bhatia discuss a closely watched case in which controversial provisions of the Foreign Corrupt Practices Act were at issue. Unfortunately, the U.S. Supreme Court denied certiorari. As the authors point out, defendant individuals and corporations rarely contest prosecution under the Act because the penalties are so severe. Therefore, the government’s interpretation of the FCPA continues to drive resolutions. Brendan Sullivan, Benjamin Fink and Neil Weinrich outline the dos and do nots of dealing in an ethical and legally defensible way with a common phenomenon, employee theft of trade secrets. They discuss the problem from the perspective of an employer that has hired a competitor’s former employee and discovers that he/she has brought protected information along to the new job. The concept is “defensible deletion,” prior to or under the threat of litigation, without running the risk of sanction for spolitation if and when e-discovery is ordered. Two articles, one by Stacy Fulco and Nicole Milos, another by Mark R. Waterfill, discuss an emerging issue of special importance to multi-state retail or other companies that give the general public access to their properties. The issue is property rights vs. gun rights. Concealed weapons can legally be carried in all 50 states and Washington D.C., but the liability implications of these laws on businesses and/or managers is not yet clear. Nevertheless, if a shooting happens on a business’s prop-

erty the victim (or the victim’s survivors) is likely to sue for damages. This is another situation in which case law is scarce so far, but suits will soon be working their way through state courts and the results will likely be different depending upon the venue. How “no guns” signs affect immunity is an open question. In our next issue we begin running a column titled Workplace Issues. The first one will deal with recent developments at the EEOC concerning workplace discrimination.

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

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FEB/ MAR 2015 today’s gener al counsel

Features

BILLION DOLLAR FAILURES

SOCIAL MEDIA ASSETS IN M&A TRANSACTIONS

STILL WAITING FOR AN FCPA SUPER BOWL

TEN COMMANDMENTS FOR PREPARING THE DEPOSITION WITNESS

FEDS CRACK DOWN ON DEALING WITH RUSSIA

LAW DEPARTMENT SPEND TILTING IN-HOUSE

Jeff Golman New tax rules were behind some big busts.

Aaron Rubin Not exactly property, but it might be an asset.

Glen Kopp and Kedar Bhatia Closely watched case didn’t materialize.

John C. Maloney Jr. Don’t get me talking, I’ll tell you everything I know.

Harvey Cohen and Jerrad Howard More than $1 billion in penalties assessed last year.

Lauren M. Chung Trend that began in 2008 gathers steam.

COLUMNS

THE ANTITRUST LITIGATOR Jefferey M. Cross A dry run is one way to steer clear of Hart Scott Rodino.

Page 50

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

FEB/ MAR 2015 toDay’s gener al counsel

Departments Editor’s Desk

Executive Summaries

Page 16

intELLEc tuaL propErt y

16 Inter Partes Review, Developments and Procedures Thomas J. Wimbiscus, Troy A. Groetken and Scott P. McBride Answers to questions about the PTO’s new procedure.

18 Upcoming Supreme Court IP Cases Will Have Big Impact Makan Delrahim and Cara Crowley-Weber Issues are induced infringement, and royalty payments after patent expiration.

E-DiscovEry

22 A Different Take on Tar John Tredennick A new development in e-discovery technology.

24 A Litigation Support Wish List for General Counsel Kate Holmes and Ari Kaplan Legal too dependent on IT, say managers.

26 Defensible Deletion after Information Theft Is Discovered Brendan Sullivan, Benjamin Fink and Neal Weinrich How to avoid a spoliation sanction.

L abor & EmpLoymEnt

30 Gun Rights in the Workplace vs Employer Property Rights Mark R. Waterfill A classic clash of values is brewing.

32 Concealed Carry Laws and Liability By Stacy D. Fulco and Nicole D. Milos No-gun signs may or may not confer immunity.

36 National Limitations on Work Hours Complicate Multinational Projects Salvador Simão European work rules differ from ours, and from each other.

cybErsEcurit y

40 Survey Highlights Cybersecurity Risk to Board Thomson Reuters Risk has not led to change.

42 Special Litigation Committee Good Defense Against Derivative Lawsuits By Craig A. Newman and Daniel C. Zinman Shareholder derivative suits over data breaches inevitable. tGc survE ys

44 Law Department Staffing Trends Projected hiring up for 2015.

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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

Kedar Bhatia Lauren M. Chung Harvey Cohen Jeffery M. Cross Cara Crowley-Weber Makan Delrahim Benjamin Fink Stacy D. Fulco Jeff Golman Troy A. Groetken Kate Holmes Jerrad Howard Ari Kaplan

Glenn Kopp John C. Maloney Jr. Scott P. McBride Nicole D. Milos Craig Newman Aaron Rubin Salvador Simão Brendan Sullivan John Tredennick Mark R. Waterfill Neal Weinrich Thomas J. Wimbiscus Daniel Zinman

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editorial advisory board Dennis Block GReeNBeRG TRAuRiG, LLP

Dale Heist BAKeR HOSTeTLeR

Robert Profusek JONeS DAy

Thomas Brunner

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Peter Bulmer JACKSON LeWiS

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Jonathan Schiller BOieS, SCHiLLeR & FLexNeR

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

A Wake-Up Call To Counsel Over ESI Discovery

Presented by Zelle Hofmann A TGC Featured Partner

By Charles R. Ragan and Eric P. Mandel The 2014 case of Brown v. Tellermate Holdings Ltd. (2014 WL 2987051 (S.D. Ohio July 1, 2014)) serves as a wake-up call to litigation counsel to stay abreast of continuing changes in information technologies and critically assess client information about electronically stored information (ESI) to meet counsel’s duties to the courts, clients, and opposing counsel. Defendant Tellermate employed plaintiffs Robert and Christine Brown in sales positions until they were terminated in August 2011 for allegedly failing to meet increasing sales targets. The Browns sued claiming age discrimination. In the words of Magistrate Judge Terence P. Kemp, “[d]iscovery did not go smoothly.” Eventually, the Browns moved for judgment and other sanctions under Rule 37(b)(2). Judge Kemp’s opinion focused on three areas of discovery failure. We discuss two of them here. Failure to Understand Possession, Custody and Control of CloudBased ESI Salesforce.com is a popular cloudbased customer relationship management database system with more than 100,000 customers globally. Tellermate’s employees, including plaintiffs, used salesforce.com to keep track of daily interactions with customers. During discovery, plaintiffs requested information from defendant’s salesforce.com account they believed would evidence their diligent performance. However, based on information provided by their client, defense counsel repeatedly took the position that Salesforce.com, as opposed to their client defendant Tellermate, was in possession of the ESI, and that Tellermate was unable to preserve or produce the requested salesforce.com information because it had no ability to export the ESI from Salesforce.com and it was prohibited from providing the information under

its license agreement with Salesforce. The court, however, disagreed, and provided two important lessons to attorneys: First, litigation attorneys must understand that, while information may be stored outside the enterprise and under the immediate “custody and possession” of a third party (e.g., salesforce.com), it is likely it will still be deemed to be within the “control” of the owner of the data, in this case Tellermate, and, therefore, must be produced under Rule 34(a)(1)(A). Second, the court found that “counsel fell far short of their obligations to examine critically the information Tellermate gave them about the existence and availability of documents requested by the Browns.” In this case, had counsel done so, it would have quickly learned that Tellermate owned and controlled the data, and moreover, that Tellermate was able to download its own information at any time for preservation or potential production. Judge Kemp found that Tellermate’s failure to preserve and produce salesforce.com information irreparably deprived plaintiffs of reliable information relevant to their claims. To remedy the situation, the court precluded Tellermate from using any evidence which would tend to show that the Browns were terminated for performance-related reasons. Failure to Understand Search Term Limitations and Volumes of ESI As discovery was closing, defense counsel found that they had over 50,000 pages of documents that they located through running search terms. To meet the discovery deadline, defense counsel “dumped” all the “hit” documents into a production designated as “For Attorneys Eyes Only,” without reviewing them first and without making or having any requisite showing of cause for the designation. When plaintiffs questioned the search terms used to derive

the produced data set, defense counsel objected on the basis the search terms were privileged. In fact, the search terms counsel used consisted solely of the full names and nicknames of certain identified sales personnel. There are two important takeaways from this aspect of the decision. First, search terms by now are notoriously perfidious. They often produce results that are both over-inclusive and under-inclusive, and should be crafted with care and diligence. See Da Silva Moore v. Publicis Groupe & MSL Group, 287 F.R.D. 182, 190-191 (S.D.N.Y. 2012). Second, because ESI volumes increase exponentially, even what may seem at first blush to be a reasonable search query may return a surprisingly large volume of “hit” documents, making for a potentially expensive and time-consuming post-search, pre-production review. Conclusion The Brown v. Tellermate Holdings decision has provided a clear wake-up call that even experienced and well-regarded counsel can get tripped up by ever-changing and expanding information technologies. Counsel must either take the time to investigate and understand client information technologies or, consistent with 2012 amendments to the ABA Rules of Professional conduct, associate with knowledgeable experts as necessary to meet their duties. Charles Ragan is special counsel and Eric P. Mandel is national e-discovery counsel and leader of the e-discovery and information governance practice group at Zelle Hofmann Voelbel & Mason. Both are located in the firm’s Minneapolis office. (Excerpted from article published in Law360)

originally

feb/ mar 2015 today’S gEnEr al counSEl

Executive Summaries intellec tual ProPert y

e-Discovery

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Inter Partes Review, Developments and Procedures

Upcoming Supreme Court IP Cases Will Have Big Impact

A Different Take on Tar

By Thomas J. Wimbiscus, Troy A. Groetken, and Scott P. McBride McAndrews, Held & Malloy, Ltd.

By Makan Delrahim and Cara CrowleyWeber Brownstein Hyatt Farber Schreck

Inter partes review (IPR) is a new USPTO procedure. It allows a challenge to patents by a party who is not the patent owner and has not previously filed a civil action challenging the validity of a claim. The vast majority of challenged patent claims have been rendered unpatentable. This article answers questions regarding the IPR from the perspective of both the petitioner (challenger) and the patent owner. To date, the Patent Trial & Appeal Board has invalidated nearly 80 percent of challenged patent claims, but the filing of an IPR petition presents risks. The most significant concern is statutory estoppel. The petitioner is prevented from raising invalidity defenses in another action (e.g., a district court infringement action) based on the subject prior art, and all other patents or printed publication prior art that could have been presented. Given the impact of an estoppel, one must carefully assess the likelihood of success and the availability of other defenses. The patent owner has the right to file a motion to amend its claims. Because the claims are not subject to typical patent office examination, the patent owner has the burden of proving that its amended claims are patentable. This has proven to be a nearly insurmountable barrier, as virtually all such motions have been denied. The board is experienced and adept at limiting grounds for trial, and discovery is limited. Resolution of most cases occurs within one year of institution of the proceeding.

Two cases to be heard soon by the U.S. Supreme Court, one concerning induced patent infringement and the other regarding enforceability of a license requiring royalty payments after patent expiration, will have a significant impact on patent holders and portfolio valuations. In the first, a petition was filed by CommilUSA, requesting the Supreme Court to grant certiorari in CommilUSA, LLC v. Cisco Systems, Inc. A jury found Cisco liable for direct infringement and, at retrial, liable for inducing infringement. The Court of Appeals for the Federal Circuit reversed and remanded on the question of intent regarding Cisco’s knowledge of Commil’s patent, and additionally held that Cisco’s “good faith belief” that the patent was invalid was a defense to induced infringement. Commil filed a petition for certiorari with the Supreme Court, which has been accepted. In the second case, Stephen Kimble, the owner of a patent covering a glove that shoots a pressurized foam string from the palm (much like Spider Man), filed a petition for certiorari in December 2013. Kimble had earlier reached a settlement with Marvel, but the company stopped paying him when the patent expired. Kimble sued for breach of contract, and lost on the grounds that the courts were bound by Brulotte v. Thys Co. The Supreme Court granted cert despite the DOJ’s opposition. The authors advise intellectual property owners to consider filing amicus briefs, given the potential consequences of the court overturning Brulotte.

By John Tredennick Catalyst Repository Systems

The e-discovery method known as continuous active learning (CAL) enables technology assisted review systems to continually learn and improve results. The process starts with a seed set actively selected through keyword search. The seed set is reviewed and coded and used to train the learning algorithm to score documents by their likely relevance. The highest-scoring documents that have not already been coded are reviewed and coded and then used to create the training set. Based on this training set, the highest-scoring documents are again coded and fed back into the system. The system uses that added input to refine its rankings. This process is repeated until the review is finished. Thus, there are two aspects to CAL. The first is that the process is continuous. Training doesn’t stop until the review finishes. The second is that the training is active. That means the computer feeds documents to the review team with the goal of making the review as efficient as possible and thereby minimizing the total cost of review. The author describes a method of reinforcement learning that does not require training by a high-level attorney, and uses judgmental seeds and relevance feedback to continuously learn and rank throughout the review process, and is said to avoid problems of bias or incomplete coverage through its use of contextual diversity sampling. This allows the review to get started sooner while accommodating rolling document uploads, which is the norm in document review.

TODAY’S GENER AL COUNSEL FEB/ MAR 2015

Executive Summaries E-DISCOVERY

L ABOR & EMPLOYMENT

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A Litigation Support Wish List for General Counsel

Defensible Deletion after Information Theft is Discovered

Gun Rights in The Workplace vs Employer Property Rights

By Kate Holmes FTI Consulting and Ari Kaplan Ari Kaplan Advisors

By Brendan Sullivan SullivanStrickler LLC Benjamin Fink and Neal Weinrich Berman Fink Van Horn P.C.

By Mark R. Waterfill Benesch Friedlander Coplan & Aronoff

Based on interviews with law department administrators and e-discovery managers, there is increasing acceptance of advanced technologies, such as predictive coding, for e-discovery. Those involved with the process are seeking ways to address “big data,” and improvements in software deployment, training and workflows. They want better “Bring Your Own Device” policies because of the difficulty of collecting data from numerous sources and devices. Litigation support teams are looking for a repeatable collection method and elimination of the common problem of over-collecting. Many confirmed that companies often collect too much data because they are concerned about risk of failing to collect, or because they don’t know how to reduce volumes. As a solution, they want wider adoption of predictive coding, concept search and other analytics. One major complaint regarding the early case assessment stage is that much of the software requires IT support, making the legal team dependent upon IT’s availability. Respondents asked for more attention to training, in order to provide autonomy. Better management of email archiving to avoid duplicate data could also improve efficiency. Many companies are handling review in-house only for small investigative matters, while playing a supervisory role in larger matters. Overall, e-discovery managers want better control of the process, simpler approaches to collecting, processing and reviewing data, and budget predictability. Chief legal officers who take note of these requests are likely to see significant progress toward ediscovery budget transparency.

Advances in technology make it easier for employees to take competitive information from their employers when they leave to join a competitor. If the competitor discovers its new employee has taken information, it can preemptively delete it from all computers and servers. This may prevent litigation. If it doesn’t, it demonstrates good faith and can be used as a defense. However, the information must be deleted in a way that does not violate the default obligation to preserve evidence, in order to avoid the risk of sanctions for spoliation. These sanctions can be leveled if a party that could reasonably anticipate litigation destroys relevant evidence. Defensible deletion is also a helpful strategy for settling litigation over information theft. The parties may agree that the misappropriated information will be purged from the new employer’s systems and draft an acceptable protocol. Sometimes both parties will participate in the drafting. Other times, the party that will be deleting the information drafts a protocol to govern compliance with the settlement, and then certifies it has followed the protocol. In either case, it is recommended to consult a forensic expert to advise on the technical process and achievable results. For a variety of reasons, defensible deletion projects can fail, but when done properly they can help employers avoid or minimize liability. They can also assist parties in resolving protracted litigation over information theft. The authors outline methods and procedures for successful implementation of these projects.

States are enacting laws that prohibit employers from banning firearms on their property. Sometimes called “parking lot laws,” these laws pit an employer’s right to control its property and workplace against the right, which is codified in many states, to own and bear firearms. Some of these laws provide employers with immunity from liability if employees cause harm with firearms while on the property. Other proposed laws provide no such liability protection. In either case, the extent of employers’ liability and what they should do to minimize it is not clear. Even with the immunity in some proposed legislation, employers might be subject to a claim based on negligent hiring if an employee were to use a firearm in an incident of workplace violence. In Bastible v. Weyerhauser Company, the Tenth Circuit addressed the issue of whether the Oklahoma constitution provided a right to bear arms on an employer’s property when the employer has banned employees from bringing firearms onto company property. The court affirmed the lower court’s finding that Oklahoma’s constitution does not provide a right to possess firearms that negates the right of a private property owner to regulate who and what is allowed on the property. Employers can take steps to reduce potential liability if a parking lot law is enacted in their state. Even in the absence of one of these laws, they will benefit by creating a safer and more efficient workplace and reduced potential for liability.

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Executive Summaries L ABOR & EMPLOYMENT PAGE 32

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Concealed Carry Laws and Liability

National Limitations on Work Hours Complicate Multinational Projects

Survey Highlights Cybersecurity Risk to Board

By Stacy D. Fulco and Nicole D. Milos Cremer, Spina, Shaughnessy, Jansen & Siegert, LLC

CYBERSECURIT Y

Concealed weapons can be carried legally in all 50 states and Washington D.C. The implications of these laws with regard to liability for businesses open to the public and/or managers of those businesses is not yet clear. In any case, if a shooting happens on a business’s property, the victim is likely to sue for damages. The legal concept of liability for criminal acts of a third party focuses on reasonable foreseeability. There is very little case law analyzing a business’s liability for criminal acts of third parties in which a legally concealed weapon is involved. “Nogun” signs will be a primary issue, and there are conflicting views on how they will impact liability. One view, which is likely held by most defense attorneys, is that posting signs decreases civil liability. The business receives the protection of trespass law, and is in a position to advance notice and foreseeability arguments. Gun rights advocates take the opposite view, that posting signs increases liability. Licensed concealed carry gun owners can argue that they are left unprotected from criminals. Another probable argument by this group is that if no-gun signs are posted and a shooting takes place, the store failed to enforce its policy. There are 10 states that have civil immunity statutes. The general concept is that a property holder can get immunity from liability when a shooting happens with a legally concealed weapon, but the statutes vary and may affect immunity differently.

Thomson Reuters

By Salvador Simão FordHarrison

Multinational corporations face challenges ensuring compliance with jurisdictional variations on allowable worker hours. Several European nations limit the number of hours employees may work and are considering additional restrictions. In France, employees are limited to working an average of 35 hours per week, calculated over a one-year period. Hours exceeding this threshold are limited and must be paid at a higher rate and/or give rise to a special rest period. Additionally, the French government recently lowered the limit on part-time contracts to a weekly working time of at least 24 hours. However, numerous exceptions to this rule exist. Due to the complexity of French legislation on working time, it is hard to implement global working time policies in France. The Swedish Working Hours Act is based on the Working Time Directive of the EU. The SWHA contains several limits on working time for employees, but many of the rules can be modified in collective bargaining agreements. UK legislation on work time derives from European Law, implemented into UK law by the Working Time Regulations (WTR), which provide rest breaks, paid annual leave, maximum average weekly working time of 48 hours (workers can opt out) and special protections for night workers and those aged 16-18. In contrast to the European approach, U.S. law restricts hours-worked only for minors and for safety reasons in certain professions, such as air traffic control, interstate truck drivers, and nuclear reactor operators.

According to a recently released Thomson Reuters governance survey, corporate boards are increasingly exposed to cybersecurity risk. Respondents represented firms from financial services, education, life sciences, energy and other highly-regulated industries, located in the United States and abroad. Insecure board communication continues, with minimal measures to prevent a breach, and cybersecurity information is the type of information least frequently requested by the board. There has been an increase of eight percent in the number of organizations that always encrypt board communications since the last survey, but 60 percent of organizations still never or only occasionally encrypt board communications, and only a quarter indicated they always do so. Over half of organizations indicated that at some point board members had left sensitive documents in public places, and an increasing proportion of respondents, and 60 percent of organizations, are not confident board members destroy sensitive printed board documents. Private devices are used by most board members for board communications, but only a third of those devices are provided by the company. There has been an increase in the frequency with which those devices are stolen or lost. Ten percent of organizations reported they have had a board member to whom this has happened, and five percent said sensitive board materials had been left in a public place. Many organizations continue to use non-secure commercial email accounts to send information to board members.

TODAY’S GENER AL COUNSEL FEB/ MAR 2015

Executive Summaries CYBERSECURIT Y

TGC SURVE YS

FEATURES

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Special Litigation Committee Good Defense Against Derivative Lawsuits

Law Department Staffing Trends

Billion Dollar Failures

Measured growth, especially in larger departments

By Jeff Golman Mesirow Financial

The survey captured information about legal department staffing trends for 2015. One-third of respondents came from departments of six to 24 lawyers, another third from departments of five or less and one fourth from departments with 26 or more lawyers. The larger departments expect to do some hiring. Only a small percentage of respondents reported planning layoffs, and those were more likely to be in smaller departments. Networking was reported to be the most popular method for recruiting new lawyers, but respondents from larger departments and organizations indicated that they used many more methods for recruiting than did smaller ones. More than a third of respondents said they used a legal recruiting firm. Two-thirds of respondents said that where someone went to law school is either highly important or somewhat important. There was no difference in how respondents answered this question based on the size of the department or organization. “I think in-house hiring will be stable this year, with some growth,” said Richards Gordon, Boston-based partner in the Major, Lindsey & Africa search firm and leader of the In-House Practice Group. “An example I use is a major law firm that laid off 15 lawyers when the recession came, and as things turned around they hired, but they didn’t hire 15 lawyers. They became more careful and made sure they could justify every decision to bring someone on. The same thing is happening in-house. Hiring is back, but staffing decisions are carefully measured.”

2014 was an active year for the M&A market due to low interest rates and available capital. Last year saw the highest level of successful M&A activity since the financial crisis, but big M&A busts made headlines too. Chiquita, Hillshire, and AbbiVie were just a few of the big-name companies to back out of deals. The failures, although a product of any robust M&A market, are ultimately consequences of new inversion regulations, high valuations and activist investors shaping the landscape. In September 2014, the Treasury Department modified tax rules so that firms would not only pay more to merge with or acquire foreign companies, they would also face more red tape acquiring deal financing. As a result, some of the country’s largest pending deals collapsed and firms paid out millions in termination fees. Record valuations made shareholders and boards more inclined to hold out for more attractive deal terms. Meanwhile activist investors emerged as the chief factor in the deal landscape. Although some activist investors have interests that align with long-term shareholders, others encourage risky transactions for short-term gains. Dollar Tree’s surprise takeover of Family Dollar, for example, was spearheaded primarily by activist investor Carl Icahn, despite mixed feelings from shareholders. Investors should not be surprised to see record transaction levels through 2015. The momentum generated in today’s M&A market will be difficult to wind down, and many large firms facing anemic growth will see acquisitions as a means to quick profits.

By Craig A. Newman and Daniel C. Zinman Richards Kibbe & Orbe LLP

Every instance of data theft raises the possibility of litigation, and just as companies are building up their defenses against data breaches, their legal departments should be planning their responses against shareholder derivative lawsuits. Data breach incidents are fertile soil for shareholder suits, spawning legal claims that corporate officers and boards have breached their fiduciary duties by failing to implement reasonable safeguards against cyber-theft. In the hands of skilled plaintiffs’ attorneys, any conflicts of interest among board members can be exploited. One important tool for any corporation facing a shareholder derivative action is the special litigation committee. Before bringing a derivative suit in court, shareholders must first make what is known as a “derivative demand,” a formal request specifying the legal claim and demanding that the corporation take action. At this point in the process special litigation committees can come into play and offer significant advantages in controlling the derivative litigation. A special litigation committee is generally a subcommittee composed of independent and disinterested board members who have no conflict of interest relating to the proposed legal action. The disinterested nature of special litigation committees allows corporations to fend off frivolous claims, and to implement focused reform in cases where the shareholder has raised legitimate issues. General counsel can benefit themselves and their companies by standing ready to deploy special litigation committees in the event of a data breach incident or other derivative demand.

FEB/ MAR 2015 TODAY’S GENER AL COUNSEL

Executive Summaries FEATURES

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Social Media Assets in M&A Transactions

Still Waiting for an FCPA Super Bowl

By Aaron Rubin Morrison & Foerster

By Glen Kopp and Kedar Bhatia Bracewell & Giuliani LLP

Ten Commandments for Preparing the Deposition Witness

A company’s social media pages and profiles, and associated followers, friends and other connections, may constitute valuable business assets. However, social media assets often receive little attention in M&A transactions. Purchasers generally require sellers to make robust representations and warranties regarding the target company’s assets, but a typical purchase agreement may give social media assets only cursory treatment or not explicitly cover them at all. This article outlines a set of representations and warranties that a purchaser may consider as ways to address a target company’s social media assets. Purchasers will need to determine in each case how comprehensive the representations and warranties should be, based on the particular circumstances of the transaction. The author’s list concludes with the following representation: “The contemplated transaction will not result in the loss or impairment of the target company’s ability to use, operate or maintain any social media account or social media account name, or in the breach of any terms of use, terms of service or other agreements or contracts applicable to such social media accounts.” The term “assets” in relation to a company’s social media pages and profiles is used advisedly, given that their legal status as property is tenuous at best. In almost all cases, they could be taken away by the third-party operators of the relevant social media platforms. But the issues addressed in the article have arisen repeatedly in reported cases.

In a case that was closely watched by Foreign Corrupt Practices Act practitioners, the U.S. Supreme Court denied certiorari in the matter of Esquenazi et al. v. United States. The Court’s decision was not surprising – only about one percent of cert petitions are granted. But interest had been high because FCPA cases are seldom litigated, as defendants usually plead guilty before contesting any issues or going to trial. As a result, courts have had few opportunities to comment on the statute’s most controversial provisions. The FCPA bar had hoped that Esquenazi would spur a ruling on what an “instrumentality” of a foreign government is. Bribing such an entity is illegal under the Act, but its definition is less clear cut than “officers, employees or departments” of foreign governments, whom the Act likewise prohibits bribing. Until another defendant challenges his/her/its prosecution and, more specifically, challenges the definition of an “instrumentality,” the issue will remain unresolved. That may occur with another case now winding through the courts. Shortly after the Supreme Court denied Esquenazi’s petition for certiorari, the former CEO of energy company PetroTiger, filed a motion to dismiss FCPA charges against him on grounds similar to those raised by Esquenazi. Sigelman is arguing to Judge Joseph Irenas of the U.S. District Court for the District of New Jersey that employees of the Colombian oil company Ecopetrol SA, who he is accused of bribing, are not instrumentalities of the Columbian government.

By John C. Maloney Jr. Day Pitney LLP

In most jurisdictions there are significant restrictions on what the defending lawyer can do with respect to objecting to questions, directing the witness not to answer or conferring with the witness after the deposition begins. The restrictions found in the Rules of Civil Procedure, local court rules or individual judge’s rules effectively require defense attorneys to maintain silence during depositions. As a result of these constraints, the deposition witnesses must largely be able to fend for themselves. This makes it essential for a witness to be thoroughly prepared by counsel. The lawyer has an ethical as well as a professional duty to prepare the client. Counsel may not help prepare false testimony. However, as long as the testimony is not false or perjured and is the witness’s own testimony, the lawyer has not crossed an ethical line. The lawyer can explain the law, and seek to persuade a witness that his/her initial version of a fact situation is not accurate. Counsel also can make the witness aware of how others have testified on the same subjects. But the lawyer may not influence the witness to alter testimony in a false or misleading way or put words in the witness’s mouth. The author suggests that counsel and witness meet twice, once shortly after receipt of the notice of deposition and again as close to the date of deposition as possible. This article includes a 10-point checklist for witness preparation.

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Feds Crack Down on Dealing With Russia

Law Department Spend Tilting In-House

By Harvey Cohen and Jerrad Howard Dinsmore & Shohl LLP

By Lauren M. Chung HBR Consulting

As a result of sanctions, Americans now have limited ability to do business with certain sectors of the Russian economy, which include Russia’s largest bank, Sberbank. With more than $1.2 billion dollars in civil penalties assessed in 2014, it’s clear the Department of Treasury’s Office of Foreign Assets Control takes these sanction programs seriously. President Obama initiated sanctions in retaliation for Russia’s involvement in Ukraine through Executive Orders that blocked (froze) property of persons who have taken certain actions that undermine Ukraine, and certain Russian government officials and individuals who operate in Russia’s arms or materiel sector. Executive Order 13662 grants the Secretary of the Treasury, in consultation with the Secretary of State, the right to block certain persons who operate in whole sectors of the Russian economy, including financial services, energy, metals and mining, engineering, and defense. President Obama expanded the sanctions related to the Ukrainian crisis in December of 2014 by issuing another executive order, extending sanctions to persons or companies doing business in Crimea. In addition to transactional prohibitions, the authority granted to the Secretary of State to name persons to the Specially Designated Nationals List is broad, and may result in a significant increase in the number of persons with whom U.S. persons cannot conduct business. Given the evolving nature of the sanctions, it is imperative that U.S. citizens, residents and companies conducting business internationally or with foreign nationals keep abreast of further developments.

According to the 2014 HBR Law Department Survey, total legal spending, which includes money spent on inside and outside counsel, increased by only two percent worldwide. This is a percent less than what was reported in the 2013 Survey and three percent less than in the 2012 Survey. But inside legal spending levels increased notably, by five percent worldwide. This is in line with a trend that began after the financial crisis in 2008. Law departments are becoming more internally focused, keeping more work in-house and in many cases growing the staff to support it. This year’s survey shows continued growth in general business/commercial lawyers. However, the results also point to the beginning of what could be an interesting staffing trend: handling more specialist work in-house. Twenty-eight percent of law departments reported an increase in the number of litigation attorneys, compared to 21 percent from last year’s survey. The survey results indicate that the top three methods employed to control costs are alternative fee arrangements (AFA), keeping more work in-house and establishing stricter internal guidelines for outside counsel spending. Of these, AFAs and keeping more work in-house yielded the most cost savings. For two years in a row, the survey revealed that AFAs make up 10 percent of total outside counsel spending. Fixed-fee-per- matter is once again the most widely utilized AFA. The savings realized through the use of AFAs inched slightly upwards compared to the 2013 results.

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Intellectual Property

today’s gener al counsel feb/ mar 2015

Intellectual Property

Inter Partes Review, Developments and Procedures By Thomas J. Wimbiscus, Troy A. Groetken and Scott P. McBride

nter partes review (IPR) is a streamlined U.S. Patent and Trademark Office procedure implemented by the America Invents Act. It allows a challenge to patents by a third party who is not the patent owner and has not previously filed a civil action challenging the validity of a claim. Below are some commonly asked questions regarding this procedure, from the perspective of both the petitioner (challenger) and the patent owner.

What are some strategic considerations in deciding whether to file a petition for IPR? IPRs have proven to be the best and most cost-effective way to invalidate a competitive patent. To date, the Patent Trial and Appeal Board (PTAB) has invalidated nearly 80 percent of challenged patent claims. There are a few reasons for this. First, the PTAB judges are knowledgeable about patent law and technology. Moreover, the burden of proof in an IPR is only a preponderance of evidence, instead of the “clear and convincing” standard for proving invalidity in a district court. Filing an IPR petition, however, does present significant risks, and one must assess whether an IPR is the appropriate vehicle in any given case. The most significant concern is statutory estoppel. The petitioner is prevented from raising invalidity defenses in another action (e.g., a district court infringement action) based on the subject prior art, and all other patents or printed publication prior art that could have been presented. Given the impact of an estoppel, one must carefully assess the likelihood of success, as well as the availability of other defenses in a collateral action filed against the petitioner for patent infringement.

For example, an IPR petition that rests upon “inherent” (i.e. not express) disclosure in a prior art reference can present serious concerns if experts submit competing testimony to the PTAB.

Are there any strategies regarding the timing of filing a petition for IPR? Subject to certain exceptions, an IPR petition must be filed within one year of service of a complaint for patent infringement. Courts have frequently stayed costly infringement litigation when an IPR has been instituted, where the petition is filed

What are some of the biggest challenges for a patent owner in opposing an IPR proceeding? The patent owner must efficiently assess both procedural and substantive arguments for defeating the asserted grounds for invalidity. For example, a victory may turn on deficiencies in the petition itself, deficiencies of the asserted prior art, the status of references as prior art, a failure of the petition to adequately address every limitation of the subject patent claims, or a failure to adequately set forth a basis for obviousness when combining multiple references.

IPRs have proven to be the best and most cost-effective way to invalidate a competitive patent. early in the case and it challenges all of the asserted patent claims. The petitioner may also wish to file early enough so that it can correct any deficiencies in its petition. Because the PTAB will rule on institution of the proceeding within six months, a petitioner who files within five months of service of the complaint will still have at least one month to file another petition to address any deficiencies identified by the petitioner or the PTAB. For that reason, a co-defendant may wish to await the PTAB’s institution decision to address any problems with the petition that are later identified in the PTAB’s institution ruling. There are also other rules and PTAB rulings associated with joinder of an earlier filed petition that may warrant consideration.

IPR counsel should be intimately familiar with the PTAB rules, practice and case law. While the petitioner has at least a year to prepare materials for the IPR, the patent owner has far less time and must address a multitude of needs, ranging from establishing positions on the merits, assessing whether to file a preliminary response, garnering experts, managing prosecution bar concerns, and coordinating with litigation and prosecution counsel.

What are some relevant considerations for filing an optional preliminary response on behalf of the patent owner? The patent owner has an option to file a preliminary response to the petition. Alternatively, the patent owner can await the PTAB’s ruling as to whether, and to what extent, a trial continued on page 21

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Intellectual Property

today’s gener al counsel feb/ mar 2015

Intellectual Property

Upcoming Supreme Court IP Cases Will Have Big Impact By Makan Delrahim and Cara Crowley-Weber

wo cases to be heard in coming months by the U.S. Supreme Court, one concerning induced patent infringement and the other regarding enforceability of a license requiring royalty payments after patent expiration, will have a significant impact on patent (and likely other intellectual property) owners and portfolio valuations. In the first, a certiorari petition was filed in January 2014 by CommilUSA. It requested the Supreme Court to grant certiorari in CommilUSA, LLC v. Cisco Systems, Inc. Commil owns a patent claiming a method of implementing wireless networks, filed in 2001. Commil filed a patent infringement suit in federal district court, alleging that Cisco Systems Inc., a manufacturer and seller of wireless networking equipment, infringed Commil’s patent. A jury found Cisco liable for direct infringement, but not for induced infringement. Commil requested and the district court granted a retrial on the indirect (induced) infringement issue. The jury in the retrial found Cisco liable for inducing infringement. The Court of Appeals for the Federal Circuit reversed and remanded on several grounds. Although Commil’s patent was held to be valid, the CAFC held that Cisco’s “good faith belief” that the patent was invalid was a defense to induced infringement. Additionally, the CAFC ruled that although Cisco had actual knowledge of Commil’s patent, retrial was required regarding intent under § 271(b) where the jury found Cisco had actual knowledge of the patent, and the jury was instructed that inducement cannot occur unintentionally. The CAFC denied Commil’s petition for rehearing en banc, and Commil subsequently

filed its petition for certiorari with the Supreme Court. The Supreme Court invited the Department of Justice Solicitor General to file an amicus curiae brief to express its views on whether to grant review. In October 2014, the DOJ filed an amicus brief urging the court to grant certiorari, which increased the likelihood that the Supreme Court would review the case. The DOJ also recommended denying certiorari to the cross-petition Cisco Systems, Inc. v. Commil USA, LLC, which asked whether a court is permitted under the Seventh Amendment to order a partial

The DOJ brief argued that the patent statute neither requires “knowledge of the patent’s validity” nor suggests that a “good-faith belief in invalidity” is a proper defense. The DOJ viewed the second question, whether a defendant could be held liable under § 271(b) if it “knew or should have known that its actions would induce actual infringement,” as unworthy of consideration by the court. Those who predicted that the court would grant certiorari had statistics on their side, given past cases where the DOJ recommends review after an invitation for its views by the Supreme Court. Thompson and

Parties with an interest in the issue should consider filing their own amicus briefs now that the court has granted review. retrial of induced patent infringement without also retrying the related question of patent invalidity. The DOJ brief recommended that the Supreme Court grant certiorari on the first question, whether a goodfaith belief that a patent is invalid is a defense to inducement liability under 35 U.S.C. § 271(b). The DOJ argued that the CAFC “erred in holding that a person who knowingly induces another to engage in infringing conduct may avoid liability under § 271(b) by demonstrating that it had a goodfaith belief that the infringed patent was invalid.” The government, in what should be a victory for patentholders, argued the CAFC standard undermines the ability to deter and remedy infringement.

Wachtell, in their 2009 George Mason Law Review article, demonstrate that historically the DOJ’s recommendation to grant certiorari results in a substantially higher likelihood of grant. The Supreme Court granted certiorari on the first question of invalidity defense in December 2014, after denying the cross-petition. Whether the Supreme Court will agree with the DOJ’s position is an important issue for patent owners and patent portfolio valuations. We suggest that companies involved in negotiations concerning inducement issues consider the possibility of the Supreme Court’s reversal of the lower court’s standard. We also recommend parties with an interest

feb/ mar 2015 today’s gener al counsel

Intellectual Property in the issue consider filing their own amicus briefs now that the court has granted review. In the second case, Kimble v. Marvel Enterprises, Inc., Stephen Kimble filed a petition for certiorari in December 2013. Kimble is the inventor on and owner of a patent covering a glove that shoots a pressurized foam string from the palm, much like Spider Man. After disclosing the idea to Marvel’s predecessor, the predecessor company began selling Web Blaster, a toy similar to Kimble’s idea. Kimble sued for patent infringement, and breach of contract for failure to honor an oral promise by the com-

agreement failed to distinguish between non-patent rights and patent rights, Kimble filed the above-mentioned petition for writ of certiorari. Earlier this summer, the Supreme Court invited the Solicitor General to file an amicus curiae brief on the question of whether Brulotte, which held that a license agreement requiring royalty payments for use of a patented invention after the expiration of the patent term is unlawful per se, should be overturned. The DOJ filed its brief in October 2014, and recommended denying the petition. The DOJ’s brief contends that the Brulotte analysis relies on prin-

Supreme Court overturn Brulotte. It is plausible that to avoid drastic disruption, the Court could find that the lower courts misapplied Brulotte and failed to find the royalty payments due to the petitioners were not tied to the patent term, but rather were part of the settlement agreement dividing the payment into a lump sum and royalty payments. Intellectual property owners – whether copyright, patents or trademarks – and licensees alike should closely monitor and even consider filing amicus briefs in the case, given the potential consequences of the Court overturning Brulotte. ■

In the second case, the inventor and owner of a patent covering a glove that shoots a pressurized foam string from the palm, much like Spider Man, 20

disclosed his idea to Marvel’s predecessor. pany to pay for any use of his ideas. Kimble lost on summary judgment regarding patent infringement, but won on the breach of contract issue. The parties settled after appealing. The settlement agreement provided, in part, that the purchase price of the patent was a lump sum payment of $516,214, and three percent of net product sales for sales of product that would otherwise infringe the patent, and sales of the Web Blaster product that was the subject of the litigation. The settlement agreement has no end date, and the parties construe the agreement to require continued payment after the expiration of the patent term. Once the patent expired, Marvel stopped paying royalties and Kimble sued for breach of contract. After losing in the district court and losing at the court of appeals on the grounds that the courts were bound by Brulotte v. Thys Co., 379 U.S. 29 (1964), and that the settlement

ciples of patent law, not antitrust law as asserted by the petitioner. The DOJ mentions that antitrust law has moved away from the per se rules toward the rule of reason in analyzing restraints in intellectual property licensing arrangements. Finally, the DOJ argues that there is no special justification for overruling Brulotte, especially given that the case provides longstanding interpretation of the patent statutes unchanged by Congress over the last 50 years. The Supreme Court granted Kimble’s certiorari petition in December 2014. According to Thompson and Wachtell, even though the DOJ recommended denying certiorari, it is not unexpected that the court still granted it. The authors explain that it is possible that the same four justices who sent the case to the Solicitor General were predisposed to grant certiorari anyway, regardless of the DOJ’s recommendation. It certainly will be a big event for all IP-based businesses should the

Makan Delrahim is a shareholder at Brownstein Hyatt Farber Schreck. His practice focuses on antitrust, public policy, intellectual property and international trade, and he is a frequent commentator and author on competition law and intellectual property issues. He is a former Deputy Assistant Attorney General for the Department of Justice Antitrust Division. mdelrahim@bhfs.com

Cara Crowley-Weber is a shareholder at Brownstein Hyatt Farber Schreck. Her practice focuses on patent prosecution in biotechnology and chemicals. She counsels clients on intellectual property matters related to U.S. and foreign patent prosecution, freedom to operate opinions, infringement and validity opinions, licensing agreements and overall due diligence reviews. ccrowley-weber@bhfs.com

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Intellectual Property IPRs

continued from page 17 is to be instituted. A preliminary response may be particularly warranted to address fundamental flaws in the petitioner’s case. Examples of such fundamental flaws include the statute of limitations, status of references as prior art, compliance with the PTAB rules, and a failure to adequately address each limitation of the subject patent claims. Further, the patent owner may wish to express its views on the proper construction of patent claims. Otherwise it may be left to argue against a

unpatentable. Otherwise the court will be less likely to grant a stay. If a co-defendant files an IPR, the remaining defendants may wish to await the Board’s institution order, giving it a chance to cure any defects in the earlier-filed petition.

How is the PTAB handling motions to amend claims filed by the patent owner? What is the likelihood of success? The patent owner has the right to file a motion to amend its claims. The standard imposed by the PTAB, however, is particularly harsh. Because the claims are not subject to typical patent office examination, the patent owner has the

One must assess whether an IPR is the appropriate vehicle in any given case. The most significant concern is statutory estoppel. construction adopted by the PTAB in view of a one-sided view presented by the petitioner. Additionally, the patent owner may wish to avoid review on certain claims sets, to better the chance that the district court will deny a motion to stay a co-pending district court action.

How does your IPR strategy affect or impact your litigation strategy? One of the primary concerns in filing an IPR petition is the impact of the statutory estoppel on the petitioner. If a petition is warranted, an infringement defendant should generally seek to file its petition early in the litigation so as to enhance the likelihood that the court will grant a motion to stay the costly infringement suit. At the same time, the petitioner would like the litigation to have progressed enough to allow for an identification of the asserted patent claims. Counsel should first assess not only the merits of a petition for review, but whether it has grounds for rendering all of the pertinent claims

burden of proving that its amended claims are patentable. This has proven to be a nearly insurmountable burden. Virtually all such motions have been denied. The patent owner, however, may wish to consider continued examination where a co-pending application remains pending, or reissue practice if no such applications remain.

What is our view of the adequacy of the Board’s treatment of substantive patentability issues? As previously mentioned, the PTAB judges are experienced in patent law. We have found that complex technical arguments, and multiple combination obviousness positions, fare much better at the Board than in district court. The Board is adept at limiting grounds for trial, which is a disincentive for scattershot approaches by petitioners. What has been your experience with discovery in IPR cases? Discovery is very limited. “Routine discovery” is permitted with respect to cited documents, depositions of

declarants and information inconsistent with a position advanced during the IPR proceeding. Beyond these categories, discovery is virtually not available. This streamlining of the proceeding facilitates resolution of most cases within one year of institution of the proceeding. Discovery of additional matters, such as commercial success and other indicia of non-obviousness, is rare, although possible if one can articulate a reason why such evidence is in the opponent’s possession. ■

Thomas J. Wimbiscus is a shareholder at McAndrews, Held & Malloy, in Chicago. He has more than 25 years of experience, and has served as lead counsel in more than 50 IPR proceedings. twimbiscus@mcandrews-ip.com

Troy A. Groetken is a shareholder at McAndrews, Held & Malloy. He concentrates his practice on global patent office proceedings, advanced patent office matters such as IPR, and other transactional matters. tgroetken@mcandrews-ip.com

Scott P. McBride is a shareholder at McAndrews, Held & Malloy. He focuses on patent litigation and on patent disputes, including IPR proceedings, before the U.S. Patent Office, and he provides counsel regarding freedom to operate and due diligence. smcbride@mcandrews-ip.com

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E-Discovery

A Different Take on TAR By John Tredennick

nowledge about the effectiveness of technology assisted review (TAR) in e-discovery is increasing rapidly. Last summer a peerreviewed, scientific study showed that one particular method of TAR, continuous active learning, achieved more promising results. The study, by two experts in ediscovery, Maura R. Grossman and Gordon V. Cormack, compared the effectiveness of the leading TAR methods. They found that continuous active learning (CAL) was more effective than the standard methods used by most TAR products. Methods using CAL require less human review effort and yield generally superior results, Grossman and Cormack concluded. Even before their study came out, TAR had steadily been gaining wider acceptance among corporations and their counsel as a means of reducing the time and cost of document review in large cases. But the study highlighted the fact that TAR systems are not all alike. The technology continues to evolve and improve, resulting in approaches to TAR that differ in their effectiveness, efficiency and workflows. At our company the Grossman/ Cormack study provided independent validation of research and development in the area of TAR. Two months before that study was published, we had applied for a patent on our own version of CAL, one that we believe takes the principles of CAL a step further, to what our patent application calls “Reinforcement Learning Based Document Coding.” TAR PROTOCOLS

For the sake of shorthand, this article will refer to older TAR protocols as TAR 1 and to the more-advanced CAL protocols as TAR 2. They differ in their approach to ranking a set of documents.

TAR 1 begins with a random sample of documents from the collection. A senior lawyer who is expert in the subject matter reviews and tags this random sample to use as a control set for training. Once the training set is identified, the algorithm is applied to create a review set. Then a training process begins in which the expert reviews documents and tags them relevant or not. The TAR engine uses these judgments to build a ranking algorithm that will find other relevant documents. It

tests the algorithm against the already tagged control set to gauge its accuracy in identifying relevant documents. Depending on the testing results, the expert may be asked to do more training to improve the algorithm. This training and testing process continues until the classifier is “stable.” That means its search algorithm is no longer getting better at identifying relevant documents in the control set. The next step is for the TAR engine to run its algorithm to rank the entire continued on page 29

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E-Discovery

feb/ mar 20 15 toDay’s gEnEr al counsEl

E-Discovery

A Litigation Support Wish List for General Counsel By Kate Holmes and Ari Kaplan

ver about the last five years, many corporate legal departments have moved e-discovery in-house or become more involved in the process in partnership with outside counsel. To support their additional e-discovery work, the vast majority of Fortune 1000 legal departments have appointed internal e-discovery managers and/or litigation support teams, thus giving corporations their own first line of defense when e-discovery matters arise. These e-discovery profession-

als are the ones in the trenches, tasked with reporting to general counsel on cases and making recommendations on strategy, process and technology. In FTI Technology’s latest Advice From Counsel study, which was released in November, Ari Kaplan Advisors interviewed 25 of the most experienced law department administrators and ediscovery managers within the Fortune 1000. The results show us what’s really going on in corporate e-discovery today, and what the experts would like to see

general counsel help the team do differently to streamline processes and costs. As reported by a separate Advice from Counsel study earlier this year, corporate e-discovery costs are still expected to rise, with fifty-three percent of respondents indicating they expected them to do so over the next few years. These ongoing concerns over e-discovery costs spurred this study’s focus on how to simplify internal processes and reduce budgets across the EDRM [Electronic Discovery Refer-

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E-Discovery

ence Model]. Questions addressed every step of e-discovery, from collection through production. Findings highlight trends toward broader acceptance of advanced technologies, such as predictive coding; practical ways to address “big data”; and improvements in software deployment, training and workflows. The overall result is an extensive wish list from litigation support for what can be done differently to help ease the e-discovery burden on the entire organization. For corporations with advanced in-house e-discovery programs, these results can serve as a helpful benchmark. For those just beginning to bring the e-discovery process in-house, or just considering it, there is practical advice on what is working today and where there is room for improvement. The following outlines the top items on the wish list: • BYOD policies: With an increasingly mobile and “Bring Your Own Device” workforce, e-discovery teams are feeling the pain of collecting data from numerous sources across disparate devices. Twenty-four percent of respondents noted difficulties collecting from a variety of data sources, including smart phones, SharePoint and internal wikis. • Standardized collection: Litigation support teams are looking for a repeatable method for collection and elimination of the common problem of over-collecting. Many confirmed that companies often collect too much data because they are either concerned about the risk of failing to collect everything or they lack knowledge for how to reduce data volumes. “We have some people that ‘go rogue’ and do things their own way, which reduces the defensibility of the process,” said one respondent. Recommendations for achieving a standard collection process included relying on e-discovery repositories for reuse of previously reviewed data, better use of keywords, and better management of employee departures so teams aren’t left scrambling for a former employee’s data on future matters.

• Reduced data volumes and better management of data stores: Experts are seeking implementation of analytics tools to reduce the amount of data for processing. Better management of email archiving tools to avoid duplicate data was another move that could make an impact on processing efficiency as well as other phases of the EDRM. One person said, “Make sure your email archiving tool doesn’t create duplicate journal copies. That increases the data volumes and makes the subsequent de-duplication process unnecessarily complex.” Respondents also pointed out the importance of server strength for the processing phase, and recommended that when evaluating in-house software of outsourced services, server strength must be part of the discussion. • More autonomy from IT: One of the main complaints regarding the early case assessment (ECA) stage is that much of the software used in this step requires IT support to use and manage, making the legal team dependent upon IT’s availability. With 46 percent conducting ECA in-house (and an additional 25 percent taking a hybrid approach, with some of the work done in-house), and legal teams often pressed for time during this phase of e-discovery, reliance on the resources and time of other internal teams is a notable pain point. Respondents asked for more attention to training on software, thus providing autonomy from IT and faster ECA. Several noted that software is growing more advanced and providing greater potential cost savings, yet internal and external legal teams don’t know how to use emerging platforms. As a result, they can’t tap into the benefits of the advanced features. • Adoption of Analytics: Overwhelmingly, companies are handling review in-house only for small investigative matters, although they do play an important supervisory role in larger matters. This tends to be the most expensive stage of e-discovery: per matter, 20 percent spend between $100,000 and $500,000 on review and production, another 40 percent spend between $10,000 and $100,000, while 32 percent are unsure of the cost.

Again, data volumes were brought up as a primary pain point, and practitioners want wider adoption of predictive coding, concept search and other analytics as a solution. Respondents also want less reliance on manual methods and basic keyword searching. One participant noted, “Our inefficiencies are based on training of and technology acceptance by reviewing lawyers. We have too many ‘old school’ lawyers who are more comfortable reviewing paper.” All in all, what e-discovery managers really want is better control over the process, simpler approaches to collecting, processing and reviewing data, and budget predictability. If chief legal officers take note of these requests and other practical advice provided by their litigation support teams, their organizations are sure to see more streamlined e-discovery efforts – and even progress toward the seemingly unattainable e-discovery budget transparency everyone is seeking – in the coming year. ■

Kate Holmes is a managing director in the Technology Practice at FTI Consulting. She has more than 13 years of experience spanning public relations, analyst relations, thought leadership, competitive intelligence, market research and solutions marketing. kate.holmes@fticonsulting.com

Ari Kaplan is founder and principal at Ari Kaplan Advisors. After practicing law for nearly a decade at a number of firms, including McDermott, Will & Emery, he became a writer, speaker and analyst focusing on the impact of technology on corporate legal departments, e-discovery and professional services. He has been a keynote speaker at events in Australia, Canada, the UK and throughout the United States. ari@arikaplanadvisors.com

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Defensible Deletion after Information Theft is Discovered By Brendan Sullivan, Benjamin Fink and Neal Weinrich

mployee theft of proprietary company information is becoming more common. Advances in technology have made it easier for employees to take competitive information from their employers when they leave to join a competitor. Consider the following scenario. After many years of working at OldCo, Bill resigns to join a competitor, NewCo. When NewCo hires Bill, it specifically instructs him not to bring any information from OldCo. But Bill ignores this instruction and puts several customer lists on a jump drive. On his first day at NewCo, Bill loads the files onto his NewCo desktop computer and uses the information to contact his old customers. Bill’s supervisor discovers what he has done and notifies NewCo’s legal department. NewCo, an ethical company, has no interest in using or benefitting from this competitor’s sensitive information. To avoid liability and getting dragged into expensive litigation, NewCo would like to purge its systems immediately of all traces of Bill’s customer lists and any other OldCo information that Bill may have uploaded. How can NewCo purge this information from its systems so as to avoid exposure for having its competitor’s information, while also avoiding allegations of destroying evidence? One strategy is “defensible deletion.” PRE-LITIGATION DELETION

If NewCo removes OldCo’s information, it must do so in a way that meets

its obligations to preserve evidence. Otherwise, it runs the risk of facing sanctions for spoliation. This occurs when a party that could reasonably anticipate litigation has destroyed relevant evidence. When this happens, the court has wide discretion to impose harsh sanctions. In the scenario here, there is so far no direct threat of litigation against NewCo, but there is the possibility of litigation in light of Bill’s conduct. Suppose, however, that NewCo learned of Bill’s conduct through a cease-and-desist letter from OldCo. At this point, there would be a direct threat of litigation. Under either scenario, if NewCo is going to defensibly delete the misappropriated information, its obligations to preserve evidence must be considered. Defensible deletion involves the following basic steps: • First, a forensic expert images all devices, computers and servers where the offending information targeted for deletion is believed to be located. • Next the expert searches and locates all files on the images containing the offending information. • The expert then forensically copies the targeted files, for preservation purposes. • Next, the expert permanently removes the files identified in the search from the company’s devices. • Finally, the pre-deletion images of the devices are retained for preservation purposes. POST-LITIGATION DELETION

Defensible deletion is also a helpful strategy for competitors to resolve litigation over information theft. As part of a settlement, the parties may

agree that all traces of the misappropriated information will be purged from the new employer’s systems. At this stage, a deletion protocol should be drafted. Sometimes both parties will participate in drafting it. Other times, the party who will be deleting the information agrees to certify under oath once it has complied with the deletion obligations. This party may draft a protocol to govern its compliance with the settlement so the certification can be made. In either case, it is recommended to consult a forensic expert to advise on the technical process and achievable results. A DEFENSIBLE PROTOCOL

Preparing a defensible deletion protocol can be challenging. The wide range of types of electronically stored information within company environments must be considered. Today, ESI can be stored, duplicated, modified or hidden in many places, using a variety of methods. The amount of data generated and maintained increases the potential scope of intentional and unintentional possession of offending information. This makes it a challenging project. A protocol may be deficient if all information and file types targeted for deletion are not thoroughly considered. Employees’ electronic data is stored in computers, laptops, servers, backup servers, backup tapes, smart-phones, portable devices, flash drives, personal e-mail accounts, cloud-based storage services and other locations. A protocol must consider all potential locations where offending information might exist. The more ESI locations in a company environment, the more complicated it is to plan a protocol.

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E-Discovery

The time and costs to plan and implement a protocol vary based on how widely the offending information has been disseminated and the variety of formats in which it resides. To ensure that all formats are properly addressed, it is best to involve an expert with wide knowledge of data storage methodologies. DRAFTING AND EXECUTING THE PROTOCOL

The following steps are best practices for drafting and implementing a defensible deletion protocol, one that will successfully locate and and permanently delete the offending information: • Plan. Be sure to fully understand the goals of the project, the overall objectives and the targeted deletions. Grasping the big picture can avoid getting buried in a specific task to the detriment of overall goals.

• Act quickly to reduce the risk of data pollution growing organically over time. • Adhere to any applicable data preservation holds during the project. • Back-up. The first technical step is to make forensic copies of all source data depending on the media type. • Model before executing. Indexing, searching, and deleting should be modeled on the copies of the data before executing the process on the source data. • Visually exclude. Review the data population by visually excluding system folders that will not include target data. • Index the data population with a reputable indexing technology. Files may be hidden, extensions changed or data may be difficult to find through other means. Indexing the total data population is the only safe method to determine if targeted data is present. • Search for targeted information. The copied data population can be searched with a reputable search application to look for relevant targeted

data as identified in the protocol. The parties should evaluate what words or search terms might dig up a truly offending file or whether files generated by the search might not be damaging. Striking the right balance regarding appropriate search measures during a project can be challenging. • Narrow the search. Based on the results of the search and the scope of positive results, the search criteria may be modified and run in a number of ways to enable the investigator to gain a broader understanding of the pollution involved in the greater data population. • Agree on the data to be deleted. When satisfied that the level of pollution within the broader data population is understood, the owner of the storage medium or device should be consulted to gain an understanding of the findings and to agree to the first deletion of the original source data. • Delete the data. The data can be deleted according to the level specified in the protocol. Recall that ESI is not always permanently deleted by using typical deletion methods, such as right-clicking a file name and selecting delete or by emptying the recycle bin. To completely delete targeted ESI, files typically must be overwritten to render the information irretrievable. A best practice to ensure permanent deletion is to use recognized software conforming to United States Department of Defense deletion standards. Choose software that can also find earlier versions and links of the target files. Proper deletion of ESI on portable devices and remote locations must be handled on a case-by-case basis. • Complete the project. Upon completion, if provided for in the protocol, the copies of source data can also be deleted. Despite good intentions, defensible deletion projects can fail for a variety of reasons, but when done properly, they can help employers avoid or

minimize liability. They can also assist parties in resolving protracted litigation over information theft. ■

Brendan Sullivan is CEO of SullivanStrickler LLC, a company that advises and provides services regarding complex data problems. He has more than 30 years experience in storage media, with particular expertise in legacy data, including the planning and execution of legacy data remediation projects. He is a member of the New York chapter of ARMA International and the Technology Association of Georgia. bsullivan@sullivanstrickler.com

Benjamin Fink is a shareholder at Berman Fink Van Horn P.C. His practice focuses on business and commercial litigation with an emphasis on competition-related disputes, including non-competes and trade secrets. He is chair of the Atlanta Bar Association Labor & Employment Law Section and the American Intellectual Property Law Association Trade Secrets Legislative Sub-Committee. bfink@bfvlaw.com

Neal Weinrich is a principal at Berman Fink Van Horn P.C. His practice focuses on business and commercial litigation with an emphasis on competition-related disputes, including non-competes and trade secrets. He is vice chair of the American Intellectual Property Law Association, Trade Secrets Digital Forensics Sub-Committee. nweinrich@bfvlaw.com

toDay’s gEnEr al counsEl feb/ mar 2015

E-Discovery

Different take on TAR continued from page 22

document population. The expert can then review a random sample of ranked documents to determine how well the algorithm did. The sample will help the review administrator set a cutoff point of the number of documents to be reviewed to reach a particular recall rate. Documents with relevance scores higher than the cutoff point are reviewed; documents below the cutoff point can be discarded. Even though training is initially iterative, it is a finite process. Once your classifier has learned all it can about the 500-plus documents in the control set, that’s it. Then it’s turned loose to rank the larger population (which can take hours) and divide the documents into categories to review or not. Another TAR 1 method follows a similar path, but with key differences. Rather than start with random documents, it starts with relevant documents found through keyword searching or other means. From there, the computer presents additional documents designed to help train the algorithm. As with the random method, the training is finite. Once training is completed, the system’s learning ends. HOW CAL DIFFERS FROM TAR 1

CAL, the first of the TAR 2 methods, differs from these in that it is both active and continuous, enabling the system to continue to learn and improve results. With CAL, the process starts not with a random seed set, but with one actively selected through keyword search. The seed set is reviewed and coded and used to train the learning algorithm to score documents by their likely relevance. The highest-scoring documents that have not already been coded are reviewed and coded and then used to create the training set. Based on this training set, the highest-scoring documents are again coded and fed back into the system. The system uses that added input to refine its rankings. This process is repeated until the review is finished.

Thus, there are two aspects to CAL. The first is that the process is “continuous.” Training doesn’t stop until the review finishes. The second is that the training is “active.” That means the computer feeds documents to the review team with the goal of making the review as efficient as possible and thereby minimizing the total cost of review. REINFORCEMENT LEARNING

In 2010, our company hired a leading search scientist in the field of collaborative exploratory search to work with our head of R&D to develop new analytical tools that could achieve better and more cost-effective results. They invented the type of continuous learning that is the subject of the patent application and that underlies our TAR platform. Described in the patent application as “reinforcement learning based document coding,” this technology is able to continuously learn from actions taken by the review team throughout the review process. With reinforcement learning, the ongoing process of coding documents as responsive or not enables the system to continue to grow “smarter” in its ability to select relevant documents. Active learning systems are geared towards optimizing the quality of the classifier – the algorithm that labels documents as relevant or not. By contrast, reinforcement learning is designed to optimize for the goal the user seeks to achieve, which is generally to find as many relevant documents as quickly as possible. One key difference between our system and the CAL system described by Grossman and Cormack is in the actions available to fuel the continuous learning process. The CAL system they described feeds the reviewer the “best” document. After the reviewer codes that document, it is fed back into the system and a new “best” document is given to the reviewer. The system actively selects only from the documents that the system deems most relevant. With our system, users are fed a mix of documents, based on a process

called “contextual diversity sampling.” This process identifies uncoded clusters of documents in the collection and presents a representative sample to the reviewers. We believe this provides a safety check against the possibility of missing relevant documents. This method of reinforcement learning offers a number of advantages over older TAR 1 systems. It does not require training by a high-level attorney, an expensive and time-consuming approach. With reinforcement learning, the full review team can begin right away. As reviewers’ judgments are fed back into the system and new documents added, the system’s selection and ranking of relevant documents continuously improves. Another advantage is that it avoids the finite “one bite of the apple” approach of earlier TAR engines. It is able to use judgmental seeds and relevance feedback to continuously learn and rank throughout the review process, while avoiding problems of bias or incomplete coverage through its use of contextual diversity sampling. This allows the review to get started sooner and it accommodates rolling document uploads, which is the norm in document review. The technology of e-discovery is still evolving. This latest TAR iteration shows promise, and we are encouraged by its potential. We and others involved in e-discovery technology will continue to develop better and more efficient methods of reducing the time and cost of document review. ■

John Tredennick is the founder and CEO of Catalyst Repository Systems. A former trial lawyer and litigation partner with Holland & Hart, he has written books and articles on litigation and technology issues. He served as chair of the ABA Law Practice Management Section and editor-in-chief of its flagship magazine. jtredennick@catalystsecure.com

FEB/MAR 2015 TODAY’S GENER AL COUNSEL

Labor & Employment

Gun Rights in the Workplace vs Employer Property Rights By Mark R. Waterfill

ore and more states are enacting laws that prohibit employers from banning firearms on employer property. These laws are sometimes called “parking lot laws.” Some of them provide employers with immunity from liability if employees cause harm with firearms while on the property. Other proposed laws provide no such liability protection. In either case, the extent of employers’ liability and what they should do to minimize it is not clear. These laws pit an employer’s right to control its property and workplace

against the right, codified in many states, to own and bear firearms. Proponents of allowing firearms on employer property argue that people should have the right to protect themselves, or at least have the right to carry firearms in their vehicles, and generally that the right to bear arms trumps a property owner’s right to regulate the use of his property. They variously contend that it’s either the Second Amendment or a provision in a state constitution that gives them the right to possess firearms on the employer’s property.

In Bastible v. Weyerhauser Company, the Tenth Circuit in 2006 addressed the issue of whether the Oklahoma constitution provided a right to bear arms on an employer’s property even where that employer has banned employees from bringing firearms onto company property. The court affirmed the lower court’s finding that Oklahoma’s constitution does not provide a right to possess firearms that negates the right of a private property owner to regulate who and what is brought onto the property. Bastible may indicate a stopping point in how far employees’ rights

TODAY’S GENER AL COUNSEL FEB/ MAR 2015

Labor & Employment to possess firearms may go under similar constitutional provisions, which are found in most states and at the Federal level. Unfortunately, at least in Oklahoma, Bastible may be a muted victory for employers because the state then enacted a statute prohibiting employers from banning firearms that are in employees’ vehicles. (The law was enacted after the employee-firearm incident in Bastible, and so did not apply to the parties in that case.) There are no federal laws regulating weapons in the workplace. However, twenty-two states have enacted guns-at-work laws. Most are designed to apply only to an employer’s parking lot and an employee’s vehicle. Some, such as those in Texas, Tennessee and Georgia, offer immunity to the employer. Without such immunity, employers face additional potential liability, including claims based on unsafe work environments or OSHA safety violations. Employers may also face negligent hiring, retention, or supervision claims. Even with the immunity being considered in some proposed legislation, employers might be subject to a claim based on negligent hiring if an employee were to use his or her firearm in an incident of workplace violence against a fellow employee or customer. Because the laws are new and untested, the extent of potential liability will be unknown, and at a minimum there will be litigation costs and then perhaps the cost of settlement to avoid the unknowns of trial. Employers also could be vicariously liable for the wrongful acts of an employee under common law principles. Traditionally, an employer is liable for the wrongful acts of employees if the act is done in the course and scope of their employment. To protect against liability, employers should take several steps. First, announce clear policies with regard to the possession of firearms on company property, policies that comply with state laws, if any, protecting an employee’s right to possess firearms at the workplace. Second, make sure you

strictly enforce any safety and antiviolence policy. Strong polices, strictly enforced, may head off potential incidents before they rise to a violent level. Additionally, consider implementing anti-violence training. To further reduce liability risk, employers may wish to strengthen their screening processes during hiring. Negligent hiring claims are a major concern, and the hiring process will be carefully scrutinized in any litigation resulting from workplace gun violence. Employers may also consider offering their employees access to employee assistance programs intended to reduce violence. Finally, they should consider having a termination process with multiple managers and supervisors present, as well as security personnel to escort terminated employees off the premises. The risk of workplace gun violence from employees is low, but an employer’s liability for that one rare event is potentially very high. Employers can take concrete steps to reduce the potential for liability in the event a “parking lot law” is enacted in their state. Even in the absence of one of these laws, they will benefit by creating a safer and more efficient workplace and reduced potential for liability. ■

Mark R. Waterfi ll is a partner at Benesch Friedlander Coplan & Aronoff and a member of the firm’s Labor & Employment and Litigation Practice Groups. He has handled first-chair responsibility in a variety of complex litigation matters, ranging from class-action overtime and age discrimination cases to securities fraud, breach of contract and federal racketeering matters, and he has argued successfully before the Indiana Court of Appeals on non-compete and employment law issues. mwaterfill@beneschlaw.com

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Labor & Employment

Concealed Carry Laws and Liability By Stacy D. Fulco and Nicole D. Milos

wo people have an argument on the property of a private business. The exchange gets heated and a shot is fired. One person is injured. The shooter is quickly apprehended, and the police learn he was legally carrying a concealed handgun. The question is, how has the private business’s liability for this criminal act changed in light of the concealed carry laws around the country? Concealed weapons can legally be carried in each of the 50 states and Washington D.C. The liability implications of these laws on businesses open to the public and/or managers of those businesses is not yet clear. What is clear is that if a shooting happens on your property, the victim is going to look to you for damages. Now is the time – before a shooting takes place – to understand the concealed-carry laws and how they could impact your business. There are generally three types of concealed-carry laws. The first type is unrestricted, and to date there are only three states that have them. In unrestricted states, a permit is not required to carry a concealed gun. The second type is “shall-issue.” In shall-issue states, a permit is required. The criterion that must be met to obtain the permit is set out in the statute. No discretion is given to the authority that issues the permit. The third is “may-issue.” Mayissue states are the most restrictive. Permits are needed, granting them is partially at the discretion of the local authorities, and an applicant must show good cause to carry a concealed weapon. The level of restrictiveness in these states varies. The legal concept of liability for criminal acts of a third party focuses on reasonable foreseeability. Did the private business know, or should it have known, that this type of criminal event was likely to take place?

To establish reasonable foreseeability, courts generally look at what the business knew about crime in the area, and on the property and crime statistics for the area. Courts also focus on crimes similar to the one at issue because one type of crime may be reasonably foreseeable while another is not. The single aspect of concealed carry laws that has the largest impact on potential liability to businesses is the no-gun sign. Applying the principles of general trespass laws, any private business may post such a sign, advising the public that guns,

Once a business takes the affirmative action of posting a no-gun sign on its property, it does have two strategic advantages. First, it receives the benefit and protection of trespass law. Second, it is in a good position to further the notice and foreseeability arguments applicable when seeking summary judgment based on the precedent law that a business cannot be held liable for the criminal acts of a third party. Prior to concealed carry laws, especially in those jurisdictions where gun ownership was illegal, the only way a gun could be present on the

If a shooting happens on your property, the victim is going to look to you for damages. whether open or concealed, may not be brought onto the property. In some states, there is a specific statute addressing no-gun signs as well. The difference is that where there is a statutory right to post a no-gun sign, people who violate the sign can be criminally prosecuted. There is very little case law analyzing a business’s liability for criminal acts of third parties in which a legally concealed weapon is involved. We can assume such case law will be developed, but until then we can only theorize on how liability will be imposed. One thing that is certain is that no-gun signs will be a primary issue. NO-GUN SIGNS aNd LIaBILITY

There are two conflicting points of view on how no-gun signs will impact liability. The first, which is likely the view most held by civil defense attorneys, is that posting a no-gun sign decreases civil liability.

property was if a criminal brought it. Now, law abiding citizens are being granted permits to carry concealed weapons. Unless a business specifically excludes weapons (by posting no-gun signs), it must assume that people who have concealed-carry permits are their patrons and they are carrying weapons. For this reason alone, there are now several additional factors that may impact a dispositive motion based on the fact that the business owes no duty to protect against the unforeseeable criminal acts of third parties. The court may consider the number of concealed carry permits that are issued within a given county, the legal gun sales in the area, and the number of Firearm Owners Identification cards issued to people in the area. The court may also consider the proximity of the property to businesses that cater to gun owners, such as gun stores and firing ranges.

feb/mar 2015 today’s gEnEr aL counsEL

Labor & Employment By using a no-gun sign, a business can argue it has taken affirmative steps to keep concealed weapons off the property. Following an incident, it can argue it lacked the requisite notice to anticipate that a person would break the law and bring a weapon onto the premises. However, the sign alone is not sufficient. If a business is unable to offer evidence of policies and procedures that were utilized at the time of the incident to enforce the no-gun policy, the sign will not be worth much as a defense. THE PRO-GUN VIEW

Pro-gun groups often argue that nogun signs actually increase civil liability. The basic premise is that they give the public a false sense of safety. While the average gun owner is likely to comply with the sign, criminals will not. If the business failed to provide the safe environment it advertised (by posting the sign), it may have opened itself up to

how (or if) all open and concealed weapons were being kept off the property. If no such policies exist, or if the policies were not being enforced, civil liability could be imposed. The enforcement of the no-gun sign could create real problems for businesses if courts decide to take a hard line on it. Whether reasonable enforcement of the policy requires a security guard at the door is something that must be addressed and analyzed. It’s a requirement that seems excessive, but until there is case law on the issue it is a possibility. Another argument being raised by the pro-gun groups is that the use of no-gun signs increases the likelihood of criminal acts because criminals assume the business is an easy target. They know there won’t be customers with concealed weapons in their way. Analysis of the criminal act-of-thirdparties law throughout the country seems to indicate that posting of

One argument is that if no-gun signs are posted and a shooting takes place, the store failed to enforce its policy. civil liability. Licensed concealed carry gun owners can argue that they are left unprotected from criminals. One example of how this argument could be used is a case where a shooting takes place and the customer who is injured was a concealed carry permit holder. That customer could argue that the store required him to leave his gun in his car, causing him to be unable to protect himself, and then the store failed to provide a safe environment. Another likely argument on this side is that if no-gun signs are posted and a shooting takes place, the store failed to enforce its policy. Plaintiffs will evaluate the company’s internal policies and procedures to evaluate

no-gun signs would arguably give the defense a stronger position because the company purposefully and intentionally decided guns should not be on its property. This, in turn, seems to put a much heavier burden on the plaintiffs to prove their cases. CIVIL IMMUNITY

As of now, ten states have civil immunity statutes. The general assumption is that a property holder has immunity from liability when a shooting happens involving a legally concealed weapon, but the statutes vary and may affect immunity differently. The Wisconsin statute seems to read as if the immunity is only for those companies that choose not to post no-gun signs. The Ohio stat-

ute reads as if a company can post signs or not, without affecting immunity. No one knows what the courts will actually do in these or other states when faced with a decision about liability.With this amount of uncertainty in the law, it is difficult for companies to know the best route to take to ensure the most protection. The best defense is a clear, concise and wellimplemented policy. Make an informed decision on whether to post no-gun signs and re-evaluate it on a regular basis, taking into consideration relevant case law around the country. ■

Stacy D. Fulco is a partner at the Chicago law firm of Cremer, Spina, Shaughnessy, Jansen & Siegert, LLC. She specializes in the representation of companies in the retail, restaurant and hospitality industries and writes a blog regarding legal issues facing those industries. She also counsels companies and gives presentations nation-wide on concealed-carry liability issues, how companies can address gun laws, and how they might help to create a national policy. sfulco@cremerspina.com

Nicole D. Milos is a partner at the Chicago law firm of Cremer, Spina, Shaughnessy, Jansen & Siegert, LLC. She represents companies within the retail, restaurant, hospitality and property management industries. She also counsels companies and gives presentations nation-wide on concealed-carry liability issues, how companies can address gun laws, and how they might help to create a national policy. nmilos@cremerspina.com

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feb/mar 2015 today’s gEnEr aL counsEL

Labor & Employment

National Limitations on Work Hours Complicate Multinational Projects By Salvador Simão

ultinational corporations face many challenges in ensuring compliance with the laws of the various jurisdictions in which they have employees. For example, jurisdictional variations on allowable worker hours can make it difficult to plan for mltinational projects. U.S. employers may be unfamiliar with the strict restrictions placed on worker hours in other countries because the U.S. laws restrict only hours worked by minors and for safety reasons in certain highly hazardous occupations. In contrast, several European nations limit the number of hours employees may work and are considering additional restrictions. U.S. employers need to consider these more stringent restrictions when staffing or creating timelines for overseas projects. For time-sensitive projects, employers may need to hire more people or be willing to extend the project deadlines to comply with other countries’ laws. FRANCE

In France, all employees are limited to working an average of 35 hours per week, calculated over a one-year period. Hours exceeding this threshold are limited and must be paid at an increased rate and/or give rise to a special rest period. However, there are numerous ways of introducing flexibility to working time. For example, if a company has a fluctuating need for a certain activity, with highs and lows during the year, working time can be organized on an annual basis, with different working time each week as long as a certain number of hours is reached over the year. In most cases, introducing flexibility to working time requires reaching an agreement with a union or employee representative body.

today’s gEnEr aL counsEL feb/ mar 2015

Labor & Employment In France the 35-hour work week was introduced in 2000, to reduce unemployment. Before then, and since 1936, employees had been limited to a 40-hour workweek. As part of the 2000 reform, a specific scheme applicable to executive employees was introduced. Executives have great autonomy in the way they want to organize their working time (the “forfait-jours”). Their working time can be calculated in days over the

Therefore, for both blue and white collar employees, the internal processes must allow a close examination of the working time of each employee to ensure that working time limits are not exceeded. More generally, the processes must allow evaluation of the actual workload of each employee and an opportunity for the employee to “sound the alarm” if the workload is excessive. A recent collective bargaining agreement in the digital and consultancy

For time-sensitive projects, employers may need to hire more people or be willing to extend the project deadlines to comply with other countries’ laws. year, rather than hours over the week. Executives must work a set number of days over a year, usually around 218 days per year. In theory, executives organize their work as they please as long as they reach 218 working days a year and perform their jobs. Overtime hours do not exist under this scheme. However, the executive must comply with certain working time limits over the day or over the week. Additionally, the French government recently lowered the limit on part-time contracts to a weekly working time of at least 24 hours. However, numerous exceptions to this rule exist. Due to the complexity of French legislation on working time, it is hard to implement global working time policies in France. Furthermore, it often is not possible for an employer to unilaterally implement a working time policy, because the cooperation of an employee representative body and/or union representatives is indispensable in bigger companies, as working time is often the result of negotiations. The protection of the health and safety of employees has also become a major concern in France, and this impacts how working time is managed. In parallel, many employees tend to make claims of unpaid overtime hours following termination.

sectors bans the use of professional electronic devices during executives’ rest hours. These rest hours are “only” the 11 hours between two days of work and the 35 hours between two weeks of work. From an employer standpoint, this can be seen as an opportunity. Employees will have more difficulty proving that they had to work beyond the bounds of the working week. SWEDEN

The Swedish Working Hours Act is based on the Working Time Directive of the EU (directive 2003/88/EG). The SWHA contains several limits on working time for employees, but many of the rules can be modified in collective bargaining agreements. Regular working hours may not exceed 40 hours per week. Where the nature of work or working conditions so demand, working hours may reach 160 hours over a period of four weeks, with an average of 40 working hours per week. This provides the employer with some flexibility in organizing the work. However, many collective bargaining agreements stipulate a workweek of 37.5 to 40 hours per week. On-call time is when an employee is at the workplace and at the employer’s disposal to carry out work if necessary. If the employee carries out work, the

time is not considered as on-call time. On-call hours may be worked at a rate of not more than 48 hours per employee over a period of four weeks, or 50 hours over a calendar month. Overtime comprises working hours in excess of regular and on-call hours. Employees may work overtime to the same extent as they may work on-call hours, but the total amount of overtime during one calendar year may not exceed 200 hours. In emergency situations, a worker may be allowed to work additional overtime. An experiment of reduced working time, 30 hours per week, has been made for the staff at the city council of Gothenburg. However, there is no known plan to change the time limit per-week permanently. The Swedish Left Party has been debating the issue of reducing the work week to 30 hours for many years. UNITED KINGDOM

UK legislation on work time derives from European Law, implemented into UK law by the Working Time Regulations (WTR). The key aspects of WTR provide the following for most employees: • Rest breaks (11 hours of uninterrupted rest per day, 24 hours per week, and a 20 minute break when working more than six hours per day). • Paid annual leave of at least 5.6 weeks. For a full time employee, this amounts to 28 days, inclusive of eight public holidays. • Maximum average weekly working time of 48 hours. However, in the UK, workers can opt out. • Special protections (e.g., free health assessments) for night workers and those aged 16-18. There is limited ability to modify these rights by way of collective agreements with trade unions or individual employment contracts. Most common is the opt-out from the 48-hour working week, which many UK employers expect their employees to agree to as part of their employment contract (although they cannot be forced to agree).

feb/mar 2015 today’s gEnEr aL counsEL

Labor & Employment Although rarely imposed, there can be criminal sanctions for employers that fail to comply (fines, and imprisonment for company directors in case of noncompliance with enforcement notices issued by the Health and Safety Executive or local authority inspectors). Individual workers can also claim compensation. Specifically in relation to the work week, the government has taken a pro-employer approach. The UK has come under some pressure to abandon the 48-hour opt out (which is available to workers at any level, not simply senior/management level employees), but there is no current initiative to do this or reduce working hours at a government level. Employers may seek to adopt more restrictive policies in working time, but we are not aware of this being widespread in the UK. The government,

The U.S. wage and hour laws provide various exemptions to paying employees overtime premiums. Most are based on the duties the employees perform. The most common category of these exemptions are the white collar exemptions. There are also industrybased and other exemptions to U.S. wage and hour laws. The U.S. model is designed to encourage employers to hire more employees. For example, if a U.S. employer hires two employees to each work 30 hours per week for a total of 60 working hours, it will pay less in wages than if it pays one employee to work 60 hours per week. This is because one employee who works 60 hours in a week must be paid at a rate of one and one half times his regular rate of pay for all hours worked over 40 in a week.

In France, a recent collective bargaining 38

agreement in the digital and consultancy sectors bans the use of professional electronic devices during executives’ rest hours. however, extended the right to request flexible working (including part-time working) to all employees, not just parents, as of June 30, 2014. UNITED STATES

In contrast to the European approach, U.S. law restricts hours worked only for minors and for safety reasons in certain professions, such as air traffic control, interstate truck drivers, and nuclear reactor operators. U.S. laws do discourage employers from requiring employees to work more than 40 hours in a week by imposing an overtime premium on the additional work. Under the federal Fair Labor Standards Act (FLSA), employers must pay most workers an overtime premium of one and one-half times their regular pay rate for all hours worked over 40 in a week. State laws may impose additional requirements, such as a daily overtime premium.

While there have been recent efforts to increase employee pay by expanding the pool of employees eligible for overtime, the ultimate result of such efforts may be that employers simply hire more workers. This could actually decrease employee pay, especially if the employer hires two part-time employees instead of one full-time employee. Only minors and workers in certain hazardous occupations are subject to restrictions on the number of hours they can legally work. Federal law restricts the hours minors may work based on their age, generally by three subcategories: 16 to 18 year olds, 14 to 16 year olds and minors under 14. Younger employees are subject to the most stringent limits. State child labor laws may be more restrictive than the federal laws. Some state laws place limitations on working times, but do not restrict

the number of hours worked in a work week. For example, some states and local jurisdictions require that certain businesses remain closed on Sundays. Other states do not require businesses to close on a particular day, but require employees be given one day of rest per week. State laws may also require mandatory meal or rest breaks after an employee works a set number of hours. These laws vary greatly, and employers should check state law to determine whether there are any applicable meal or rest break requirements. Finally, the number of hours an employee works either weekly or annually may qualify the employee for benefits, leave, or other employer-paid expenses. In a fast-paced global economy, the time frame in which a company can complete a task or project may mean the difference between success and failure. Thus wherever they are, to successfully plan and complete multinational projects, employers must have a detailed understanding of the restrictions placed on the hours their employees may work. ■

Salvador Simão is a partner at FordHarrison and manager of the firm’s New Jersey office. He also co-chairs the International Practice Group for Discrimination of Ius Laboris, an international alliance of labor and employment firms. His litigation experience includes defending employers in matters of discrimination, pay equity, whistle blowing, wage and hour class actions, non-compete claims, trade secrets and retaliation. He also advises Fortune 500 companies on dayto-day employment law issues. ssimao@fordharrison.com Additional European commentary for this article was supplied by Ius Laboris attorneys in member firms: Anna Sella of Lewis Silkin in the UK, Jean-Baptiste Chavialle of Capstan in France and Ulrika Runelöv of the Swedish member firm Elmzell Advokatbyrå AB.

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feb/ mar 2015 today’s gener al Counsel

Cybersecurity

Survey Highlights Cybersecurity Risk for Board Corporate boards face increasing threats from cybersecurity risk, according to a Thomson Reuters governance survey released late last year. Boards continue to communicate through insecure means, and they have minimal measures in place to prevent a breach.

he survey respondents represented firms from financial services, manufacturing, government, education, life sciences, energy and other highly-regulated industries, located in Europe, the Americas, Australia, Asia, Africa and the Middle East. More than half of organizations indicated they had been in a situation where board members had left sensitive documents in public places or had heard of such instances. Two thirds of corporate boards are very concerned about cybersecurity risk. At the same time, only 44 percent said they actually make decisions on the topic. Cybersecurity information is the type of information least frequently requested by the board, with only about one-third of board members frequently or very frequently requesting such information. “It’s alarming that so many organizations don’t have structures in place to safeguard their information from cybersecurity threats, and disheartening that information on cybersecurity remains the least frequently requested information by corporate boards,” says Phil Cotter, managing director, head of risk, Thomson Reuters. “Those findings leave significant uncertainty around their ability to effectively oversee security management.” There has, however, been an increase of eight percent in the number of organizations that always encrypt board communications since the last survey. Yet 60 percent of organizations never or “only occasionally” encrypt their board communications, and only a quarter indicated that they always do so.

Our Board is Very Concerned About Cybersecurity Risk

Our Board is Very Involved in Making Decisions on Cybersecurity Risk

Strongly Agree

Agree

8% 41%

26%

Neither Agree nor Disagree Disagree

41%

Agree

12%

32%

15%

Neither Agree nor Disagree

38%

Strongly Disagree

Our Board Communications are Encrypted

25% Always

39%

Regularly

Occasionally

15%

Never

21%

Disagree

today’s gener al Counsel feb/ mar 2015

Cybersecurity

Do You Provide All Your Board Members with Secure Computing Devices Solely for the Purpose of Board Communications? 2014

Percent of Respondents

An increasing proportion of respondents, and 60 percent of organizations, are not confident board members destroy sensitive printed board documents. Private computing devices are used by most board members for board communications, but only a third of those devices are provided by the company. There has been an increase in the frequency with which those devices are stolen or lost. Ten percent of organizations report they have had a board member to whom this has happened, and five percent said they have had sensitive board materials left in a public place. Many organizations continue to use non-secure commercial email accounts to send information to board members. ■

2013

2012

2011

Yes

I Don’t Know

41 Have Your Board Members Reported That They Have Lost and/or Had Their Computing Device Stolen?

100

2014

90 80

2013

2012 60 50

2013

Percent of Respondents

2011

40 30

60 50

2012

2011

40 30 20

Yes

I Don’t Know

We have been in the situation where board members have left sensitive documents in public places

Although it hasn’t happened to us, I have heard of instances where sensitive board packs have been left in public places

I have never heard of Boards leaving sensitive documents in public places

feb/ mar 2015 today’s gener al Counsel

Cybersecurity

Special Litigation Committees Good Defense Against Derivative Lawsuits By Craig A. Newman and Daniel C. Zinman

f you’ve read the news in the last year, you know that corporations are under assault by data thieves. Practically on a weekly basis, a Target, Home Depot or Adobe has suffered a breach of its network, resulting in the theft of tens of millions of credit cards or other consumer records. In response, many companies are moving aggressively to enhance their data security, as they should. But as general counsel know, the assault they face is no longer just a front-line battle against information thieves. Every instance of data theft also raises the possibility of a second assault in the form of litigation, including shareholder derivative lawsuits. And just as companies are building up their defenses on the front end, their legal departments should be planning their responses on the back end against derivative suits. For those who are unfamiliar with a shareholder derivative action, it is a

special creature of the legal system, in which an individual shareholder files a lawsuit on behalf of the entire corporation. Generally speaking, a corporation’s leadership – its management and board of directors – makes its own decisions with respect to litigation, including which lawsuits to bring. The law recognizes, however, that corporate leaders are unlikely to pursue claims against themselves, even when they are legitimate and could return significant value to shareholders. Thus, under these conditions, the law allows individual shareholders to stand in for the corporation as plaintiff. Data breach incidents are proving fertile soil for shareholder derivative suits, spawning legal claims that corporate officers and boards of directors have breached their fiduciary duties to their companies by failing to implement reasonable safeguards against cyber-theft. In the suit that has gained the most attention to date,

Target shareholders are claiming that the board “failed to take reasonable steps to maintain its customers’ personal and financial information,” that it failed to “implement any internal controls ... designed to detect and prevent” a breach of the type that occurred, and that it aggravated the damage done by “failing to provide prompt and adequate notice to customers and by releasing numerous statements meant to create a false sense of security.” For plaintiffs’ attorneys seeking to capitalize on data breaches, derivative suits offer at least one major advantage to the alternative of a consumer class action. In consumer class actions following data breaches, some plaintiffs have struggled, and failed, to make the necessary showing that they have suffered damages from the breach. (It should be noted that plaintiffs’ theories in such cases are evolving, and in one Florida case against the health insurer

today’s gener al Counsel feb/ mar 2015

Cybersecurity

AvMed, a court approved a $3 million settlement in the absence of proof that the plaintiffs suffered actual losses from the exposure of health records). In a derivative action, the shareholder does not have to prove harm to consumers, but rather to the corporation, and in most data breach incidents the harm to the company is obvious. One important and often overlooked tool in the arsenal of any corporation facing a shareholder derivative action is the special litigation committee. Under current law, before bringing a derivative suit in court, shareholders must first make what is known as a “derivative demand” – a formal request specifying the legal claim and demanding that the corporation, of its own volition, take action. It is at this point in the process where special litigation committees can come into play and offer significant advantages in controlling the derivative litigation. A corporation has choices when faced with a shareholder derivative demand: It can ignore the demand, have the full board evaluate the demand, or form a special litigation committee to evaluate the demand. If the board ignores the demand, the case will go forward. Even when the full board has evaluated and denied a shareholder demand, there is significant possibility that it will be exposed to shareholder litigation. In such instances, the plaintiff will attempt to circumvent the board’s rejection, and get its day in court, by arguing that the decision was made in bad faith by biased board members, was based on an unreasonable investigation, or otherwise qualifies under relevant state law as something that should be disregarded by the court. In the hands of skilled plaintiffs’ attorneys, any conflicts of interest among board members can prove useful in clearing this hurdle and subjecting the company to costly shareholder litigation. Alternatively, a corporation’s board can form a special litigation committee to investigate the allegations made in the shareholder derivative demand. A special litigation committee is generally

a subcommittee composed of independent and disinterested board members who have no conflict of interest relating to the proposed legal action. In the context of a derivative demand based on a data breach incident, a special litigation committee would, for instance, contain outside directors who had no involvement in approving or implementing the company’s cyber-security governance or response protocols. The absence of conflicts for a special litigation committee is critical if its conclusions are to be deemed independent and given deference by a court. There are several advantages of using special litigation committees, including their ability to form long term solutions to legitimate corporate problems and to place independent board members, as opposed to aggressive plaintiffs’ counsel, in charge of litigation. Regardless of the misconduct alleged in a derivative demand, in many instances both the corporation and its shareholders would be best served by a solution that remedies misconduct without subjecting themselves to attorneys’ fees, and disruption of corporate activity that comes with defending lawsuits. Special litigation committees are well positioned, well qualified, and mandated by the law to identify and implement the corporate reforms and governance changes necessary to address any valid issues underlying a derivative demand. Remedies that can be fashioned by the special litigation committee will often be the most efficient and effective response, far better than years of litigation. While special litigation committees are often an excellent response to shareholder derivative demands, corporations should proceed with caution. Much of their value stems from their ability to withstand intense scrutiny by the courts. While there is not a uniform standard for determining independence and disinterestedness of board members, if challenged, the burden in many states is on the special litigation committee to establish its own independence by the same standard set by Caesar for his wife: a claim to being “above reproach.”

It is therefore important that corporations remember the rationale behind special litigation committees, and ensure that members of these committees are selected with care and meet the requirements of state law. When faced with a derivative demand, a special litigation committee is a powerful arrow in any company’s quiver. The disinterested nature of special litigation committees allows corporations to maintain control of the litigation process, to fend off frivolous claims, and to implement focused reform in cases where the shareholder has raised legitimate issues. General counsel can benefit themselves and their companies by standing ready to deploy special litigation committees in the event of a data breach incident or other derivative demand that places their business under assault. ■

Craig A. Newman is managing partner at Richards Kibbe & Orbe LLP and a member of the firm’s executive committee. He advises Fortune 500 companies, financial institutions, investment funds, and their leadership teams and boards on a wide range of litigation matters, including corporate governance, transactions, internal investigations, regulatory matters and cybersecurity/data privacy. cnewman@rkollp.com

Daniel C. Zinman is a partner at Richards Kibbe & Orbe LLP and a member of its executive committee. His practice is focused on commercial litigation, regulatory proceedings, internal investigations and white collar criminal defense matters. dzinman@rkollp.com

feb/ mar 2015 Today’S Gener al CounSel

TGC Surveys

Law Department Staffing Trends A Today’s General Counsel survey, conducted in November and December 2014, captured information about corporate legal department staffing trends for the upcoming year. About one-third of respondents came from departments of six to 24 lawyers, another third from departments of five or less and a fourth from departments with 26 or more lawyers.

In Which Practice Areas Does Your Department Have An Ongoing Need For Skilled Lawyers?

he larger departments expect to do some hiring. Only a small percentage of respondents reported planning layoffs for 2015, and most of those were in smaller organizations or departments. “I think there will be some growth this year,” says Richards Gordon, Boston-based partner in the Major, Lindsey & Africa search firm and leader of the In-House Practice Group. “How much growth? An example I use is a major law firm that laid off 15 lawyers when the recession came, and as things started to turn around they hired, but they didn’t hire 15 lawyers. They became more careful and made sure they could justify every decision to bring someone on. The same thing is happening in-house. Hiring is back, but staffing decisions are carefully measured.”

14% 13%

13%

12%

9% 8% 7%

4% 3%

3% 2%

General Corporate Law

Commercial Transactions

Regulatory/ Compliance

Litigation

Labor & Employment

Finance

Real Estate

M&A

Privacy

Misc

International Law

Healthcare

How Many Lawyers Will Be Hired? Average = 2 0 1 Lawyer Department 2 to 5 Lawyer Departments 6 to 24 Lawyer Departments 25 or more Lawyer Departments 1 to 99 Employee Companies 100 to 499 Employee Companies 500 to 4999 Employee Companies 5000 or more Employee Companies

Today’S Gener al CounSel feb/ mar 2015

TGC Surveys

What Percentage Of New Hires Are Laterals? Not hiring 8%

Less than half are laterals 4% More than half are laterals 5%

All new hires are laterals 59%

None are laterals 24%

Is Your Legal Department Planning Layoffs In 2015?

Yes 4%

Don’t Know 16%

No 80%

Respondents said their departments needed lawyers with skills in a variety of practice areas. Commercial transactions, general corporate law and regulatory/compliance were the areas mentioned by the greatest number of respondents. Networking was reported to be the most popular method for recruiting new lawyers. Respondents from larger departments and organizations indicated that they used more methods for recruiting than did smaller departments and organizations. More than one-third of respondents said they used a legal recruiting firm. The most frequentlymentioned was Major, Lindsay & Africa, followed by Robert Half and Prescott Legal. Two-thirds of respondents said that where someone went to law school is either highly or somewhat important. There was no difference in how respondents answered this question based on the size of department or organization. Several respondents commented on the law school question anonymously. “I have a 911 Carrera S and an 11 year old station wagon,”said one. “Both vehicles fulfill their roles for me. I view law school backgrounds a bit the same. If I am hiring a top lawyer I will pay close attention to background training including what law school they went to. If I am hiring a general commercial lawyer, it’s not that important. My old wagon can get me to the next city just as well as a Porsche can. Brand is important, but its not everything.” Another commented that law schools are a useful criterion for hiring when the hire is right out of school, but “as time goes on, the name of the law school becomes less important than past work history, and after about five years the law school is insignificant.” “I’d rather have the person who was in the top ten percent of her class at UC Irvine and served on the law review than the person who was in the bottom 20 percent of the class at Harvard,” said another. “I imagine many hiring attorneys share my views on this.” ■

feb/ mar 2015 today’s gener al counsel

T h e A n T i T r u s T L i T i g AT o r

Consider a Dry Run By Jeffery M. cross

n mergers or acquisitions where I think the government is likely to request additional information or documentary material relevant to the proposed transaction, I recommend that the client consider conducting a “dry run.” There are substantial benefits to doing so. If a transaction meets certain dollar thresholds, it must be reported to the Department of Justice and the FTC pursuant to the Hart Scott Rodino Act. Also under HSR, the parties are required to wait for a prescribed period before closing. This initial waiting period is typically 30 days. In the case of a cash tender offer it is 15 days. Toward the end of this waiting period, the government agency investigating the transaction has two choices: to let the transaction proceed or request additional information or documentary material. The latter is commonly known as a “Second Request.” The effect is to suspend the running of the waiting period until the request has been substantially complied with. Responding to a Second Request can be burdensome, time consuming and expensive. It often requires production of a substantial number of documents and volumes of data. In addition, the

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

request can require responses to interrogatories, and unlike discovery under the Federal Rules, these cannot merely refer to the documents produced. If the parties to the transaction have global operations, responding to a Second Request may require searching throughout the world. In one transaction in which I was involved, responding to the Second Request would have required searching for documents at a client facility north of the Arctic Circle. In a survey of practitioners complying with Second Requests between 2011 and 2013, the median time from the issuance of the Second Request until the investigation either was closed or other action was taken was 5.9 months. The median data production totaled 28.8 gigabytes. The median estimated cost of compliance was $4.3 million, with a range of $2 million to $9 million. The most significant benefit of conducting a dry run is reducing the time and expense of complying with the Second Request. The government agencies are willing to, and indeed expect to negotiate modifications to the Second Request in order to reduce the burden and expense of responding. In the merger where the Second Request called for a review of documents at the facility above the Arctic Circle, we were able to negotiate a significant

modification of that requirement. A dry run facilitates this kind of negotiation. It provides counsel with concrete knowledge of the problems and burdens that are likely to be encountered in responding, as well as knowledge of possible alternative responses that the government might accept. The staff at each of the antitrust agencies has flexibility in tailoring a Second Request, but they are unlikely to respond to only generalized complaints about burden and expense. In addition, although they are willing to modify the Second Request, they also want to be assured that they are receiving the information they need to make an informed decision about the transaction. I recommend to clients that the dry run in fact use a mock Second Request. The agencies have prepared a model

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the documents will be forwarded to a Second Request that is available online, interviews of personnel of the merging central site or reviewed on-site. Counsel which I recommend tailoring to the parties to develop the issues. All of the transaction. foregoing steps should allow counsel to can also begin to think about whether prepare a mock Second Request that is adequate support systems are available By the time counsel comes to the 116 HUNTINGTON AVENUE, BOSTON MA 02116 ♦ www.anknerlevy.com so quality control can be undertaken conclusion that a Second Request is using existing personnel, or if an outlikely, he or she should have a good side service will have to be engaged. idea of the potential concerns of the XPERIENCED antitrust agency. Counsel should have Many transactions are time-sensiA dry run reduces time tive. Indeed, if the merging parties are undertaken a preliminary review of the ESPONSIVE public corporations that are required transaction and identified them. and expense by the SEC to announce the transacIf the concerns are such that it is NDUSTRY OCUSED tion, delays in closing the deal risk the likely that a Second Request will issue, of a Second Request. loss of customers and key personnel. counsel has probably reached out to FFICIENT Many of the issues that need to be the agency likely to be involved even considered could wait until the actual before the HSR notification is filed. In OST FFECTIVE Second Request is received. However, the survey mentioned above, 13 percent tailored to the specific transaction. undertaking a dry run using a mock In addition to preparing for negotiaof the respondents had contacted the LIANNE SALLY KAPLAN Second Request allows counsel and agency before the HSR filing. tions with the government regarding ANKNER LEVY the client to hit the ground running in After the HSR filing, the agencies the scope of the Second Request, unkla@anknerlevy.com respect to negotiating with the governencourageslevy@anknerlevy.com early consultations. Furtherdertaking a dry run allows counsel and ment, thereby reducing the burden and the client to think through the logistics more, the agencyBoston may have asked the Boston Magazine Magazine and process of the review. The issues expense of responding and expediting parties to provide information volun“Super Lawyer” since 2007 “Super Lawyer” since 2004 the response time. ■ that can be considered include whether tarily and may even have requested

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63 47

Billion Dollar Failures By Jeff Golman 48

014 was an active year for the M&A market largely due to low interest rates and readily available capital. In fact, it saw the highest level of successful M&A activity since the financial crisis, hitting volumes of $2.77 trillion as of November. But not all deals have been successful, and big M&A busts made headlines too. Chiquita, Hillshire, and AbbiVie were just a few of the big-name companies to back out of deals in light of poor shareholder value propositions. They certainly won’t be the last. This year’s string of failures, although failures come with any robust M&A market, are ultimately consequences of 2014’s perfect storm of new inversion regulations, sky-high valuations and activist investors shaping the deal landscape. INVERSION REGULATION In September 2014, the U.S. Department of Treasury modified corporate tax rules so that firms would not only pay more to merge with or acquire foreign companies, they would also face considerably more red tape acquiring deal financing. As a result, some of the country’s largest pending deals collapsed, and firms across the country paid out millions in termination fees. One example is AbbVie and Shire’s proposed merger. It was valued at more than $54 billion, but it was nixed within weeks of the ruling, and AbbVie

fulfilled Shire’s $1.635 billion termination fee. In an October 20th press release, AbbVie representatives remarked that the Obama administration had “reinterpreted longstanding tax principles in a uniquely selective manner designed specifically to destroy the financial benefits of these types of transactions.” Put simply, when large, multinational companies like AbbVie are willing to spend billions to back out of deals, we can infer that the impacts of the new tax inversion regulations are widespread and long-lasting. Another consequence of a thriving deal market is that record valuations have leveled the playing field for higher stakes transactions. As many firms are courting multiple suitors, shareholders and boards have become more inclined to hold out for higher valuations or more attractive deal terms. Three years ago, a food manufacturer like Hillshire would likely struggle to find an offer as attractive as Tyson’s. In the same vein, following an October 24th special voting session, Chiquita shareholders rejected a revised merger proposal from Irish fruit importer Fyffes, and then three days later announced a definitive merger agreement with Brazil’s Cutrale-Safra group. THE ACTIVIST INVESTOR ERA Activist investors – those who aim to make major changes in a company – were the chief characteristic of the 2014 deal landscape. Although

TODAY’S GENER AL COUNSEL FEB/ MAR 2015

some of these investors do have interests that align with those of long-term shareholders, others encourage risky transactions for short-term gains. In September, Reuters reported that Dollar Tree’s surprise takeover of Family Dollar, for example, was spearheaded primarily by activist investor Carl Icahn, despite mixed feelings from shareholders. Following the transaction, Icahn sold his entire stake and collected a $200 million profit on the initial investment. More recently, activist investor Bill Ackman’s Pershing Square Capital led a failed takeover of Allergan by Canada-based Valeant Pharmaceuticals. Following the deal’s collapse, a New York Times investigation found that Ackman still walked away with close to $2.6 billion in profit. An M&A environment that offers immense rewards for both successful and unsuccessful transactions will undoubtedly incentivize activist investors to continue pushing for new and potentially risky deals. LOOKING AHEAD Investors should not be surprised to see record transaction levels through 2015. The momentum generated in today’s M&A market will be

difficult to wind down, and many large firms facing anemic top line growth will see acquisitions as a means to quick profits. Food & beverage and consumer industries will be hot in 2015. The cereal heavyweights, in particular, are well-suited to buy smaller, high-margin firms in the snacks and beverage spaces. Similarly, consumer staple companies will be looking to streamline business channels and unload less profitable product lines. Proctor & Gamble, for instance, noted in August 2014 it would aim to divest close to half its brands, among them Cheer detergents, Clearblue pregnancy tests and Metamucil fiber supplements. 2014’s dealmakers demonstrated a new confidence in the American economy, and, as we continue to see a wide range of industries reach pre-crisis growth levels, we should expect equally strong performance in the M&A market. However, as boards and management play an increasingly large role in transactions, we could very well see new levels of caution for blockbuster deals and an acute awareness of potential threats from activist investors. ■

Jeff Golman is Vice Chairman and Head of Investment Banking for Mesirow Financial. His corporate finance experience includes the origination and/ or execution of more than 250 domestic and cross-border transactions aggregating more than $100 billion. He is a graduate of Northwestern University School of Law. jgolman@ mesirowfinancial.com

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feb/ mar 2015 today’s gener al counsel

SociAl MediA ASSetS in M&A trAnSActionS By Aaron Rubin

company’s social media pages and profiles, and associated followers, friends and other connections, may constitute valuable business assets. However, social media assets often receive little attention in M&A transactions. Purchasers in such transactions generally require sellers to make robust representations and warranties regarding the target company’s assets, but a purchase agreement may give social media assets only cursory treatment or not explicitly cover social media assets at all. It should though, and this article outlines a set of representations and warranties that a purchaser may consider, vis a vis a target company’s social media assets.

today’s gener al counsel feb/ mar 2015

It’s first necessary to define the category of assets at issue – call it “social media accounts” for convenience. A purchaser may wish to capture a broad swath of online assets not limited to just a company’s pages and profiles on the major social networks. So the category would include all accounts, profiles, pages, feeds, registrations and other presences on or in connection with any: • social media or social networking website or online service blog or microblog • mobile application • photo, video or other content-sharing website • virtual game world or virtual social world • rating and review website • wiki or similar collaborative content website • message board, bulletin board or similar forum Given such a broad definition, getting a comprehensive set of social media representations and warranties requires the seller to provide a list of all social media accounts that the target company uses, operates, or maintains – and to identify, for each social media account, user names, nicknames, display names, handles and other identifiers registered, used or held for use by the target company. We can refer to these collectively as “social media account names.” The purchaser may then ask the seller to make some or all of the following representations and warranties with respect to social media accounts and social media account names: • None of the social media account names infringes or otherwise violates any trademark rights or other intellectual property rights of any third party. • All use of the social media accounts complies with and has complied with (1) all terms and conditions, terms of use, terms of service and other agreements and contracts applicable to such social media accounts, and (2) applicable law and regulation. • The target company has implemented and enforces an employee social media policy that: Ŋ Provides that the company, and not any company employee or contractor, owns and controls the social media accounts and social media account names including all associated information and content, all relationships, interactions and communications with fans, followers, visitors, commenters,

users and customers, and all associated good will and opportunities. Ŋ Requires all employees and contractors to relinquish to the company all social media account names, passwords, and other log-in information upon termination of employment, or engagement, or at any other time upon company’s request. Ŋ Includes appropriate guidelines and restrictions regarding the use of the social media accounts, and personal social media accounts, including, in each case, with respect to endorsements, attribution, disclosure of proprietary information and violation of intellectual property rights. Ŋ Complies with applicable law and regulation. • Each of the target company’s employees and contractors has agreed in his or her company employment agreement to comply with such social media policy. • The contemplated transaction will not result in the loss or impairment of the target company’s ability to use, operate or maintain any social media account or social media account name, or in the breach of any terms of use, terms of service or other agreements or contracts applicable to such social media accounts. It should be noted that a set of representations and warranties incorporating all of the points above may be more than is practical or necessary for many transactions. Purchasers will need to determine in each case how robust the social media representations and warranties should be, based on the particular circumstances of the transaction, including the nature of the target company’s business, the extent of the target company’s use of social media and the relative negotiating positions of each party. One last caveat: The term “assets” in relation to a company’s social media pages and profiles is used advisedly, given that their legal status as property is tenuous at best. In almost all cases, these “assets” could be taken away by the third-party operators of the relevant social media platforms. But the issues addressed above have arisen repeatedly in reported cases, so this article should be helpful in thinking through some of the points that a purchaser should consider when acquiring a target company that uses social media in its business.

Aaron Rubin is a partner in the San Francisco office of Morrison & Foerster and a member of the firm’s Technology Transactions Group. His practice focuses on transactions and counseling involving intellectual property and technology. ARubin@mofo.com

STILL WAITING FOR AN FCPA SUPER BOWL By Glen Kopp and Kedar Bhatia

ost in the news of the Supreme Court’s latest moves on high-profile cases involving same-sex marriage and the Affordable Care Act was the Court’s important decision not to hear an appeal in a rare Foreign Corrupt Practices Act case. To the very dedicated FCPA bar, the denial was a noteworthy if unsurprising result. The case itself, Esquenazi et al. v. United States, was a rarity, an appellate case centering on the anti-bribery statute. FCPA cases are seldom litigated because defendants, both individual and corporate, usually plead guilty before contesting any issues or going to trial. As a result, courts have had few opportunities to comment on the statute’s most controversial provisions, including several that govern the scope and breadth of the statute. The absence of judicial intervention means the government’s interpretation of the FCPA, for better or worse, continues to drive the resolution of prosecutions. But here, for once, there was a trial and contested legal issues that were ruled on by the trial court and then a federal appellate court. And with the hopes of every FCPA practitioner and academic

pinned to the defendants’ certiorari petition, there was a slim chance that the Supreme Court would weigh in. But after the Office of the Solicitor General waived its right to respond to the certiorari petition, and the Court declined to request a response, the case was dead on arrival at the justices’ September 29 conference. It’s as if the FCPA Super Bowl just ended in a tie. The Court’s ultimate decision not to grant the petition for merits review is hardly surprising in light of the long odds against any party seeking certiorari – the Court grants around one percent of all cert petitions that come before it – and the complete absence of any circuit split in the lower courts on the question raised here. The case was remarkable precisely because it was one of the first federal appellate decisions on the FCPA, not because of any circuit split. Esquenazi et al. v. United States came to the Supreme Court on appeal from the U.S. Court of Appeals for the Eleventh Circuit. In simplest terms, the FCPA prohibits bribes to foreign officials to gain a business advantage. Joel Esquenazi and Carlos Rodriguez, former executives at Terra Telecommunications

TODAY’S GENER AL COUNSEL FEB/ MAR 2015

Corp., were convicted of violating the FCPA and sentenced to 15 years in prison (Esquenazi) and 7 years in prison (Rodriguez). A “foreign official” under the statute is defined as “any officer or employee of a foreign government or any department, agency or instrumentality thereof.” The issue for Esquenazi and Rodriguez was how to define “instrumentality.” The defendants were found

the parties before federal courts. Until another defendant challenges his/her/its prosecution and, more specifically, challenges the definition of an “instrumentality” of a foreign government, the issue will remain unresolved, from the perspective of the defense bar. But hope is not lost for those FCPA wonks looking for clarity on the definition of a “foreign official.” Just weeks after the Supreme Court

UNTIL ANOTHER DEFENDANT CHALLENGES HIS/HER/ITS PROSECUTION AND, MORE SPECIFICALLY, CHALLENGES THE DEFINITION OF AN “INSTRUMENTALITY” OF A FOREIGN GOVERNMENT, THE ISSUE WILL REMAIN UNRESOLVED, FROM THE PERSPECTIVE OF THE DEFENSE BAR. to have bribed members of Haiti’s Teleco in order to lower Terra’s debts to Teleco. Teleco had ties to the Haitian government, including having been given a monopoly over telecommunications services in the 1960s, and later having all of its board members appointed by the Haitian president. Nonetheless, the defendants argued that Teleco was not an instrumentality of the Haitian government and advocated for a definition of “instrumentality” that supported their position, that “instrumentality” should be limited to entities that perform traditional government functions. The trial court and Eleventh Circuit adopted the government’s broad reading of the term to include Teleco. Putting aside the substance of the defendants’ arguments, one of the most notable features of the appeal was one of the defendants’ arguments for granting certiorari in the absence of a circuit split: There is not likely to be a circuit split any time soon, which in their view weighed in favor of deciding this case now. With the specter of an indictment or felony conviction hanging over corporate defendants (who make up the bulk of FCPA targets), dispositions short of trial are the norm. As such, nitty-gritty details like “what the words of the statute mean” are typically not tested by

denied Esquenazi’s petition for certiorari, Joseph Sigelman, the indicted former CEO of energy company PetroTiger, filed a motion to dismiss FCPA charges against him on grounds similar to those raised by Esquenazi. Sigelman is arguing to Judge Joseph Irenas of the U.S. District Court for the District of New Jersey that employees of the Colombian oil company Ecopetrol SA, whom he is accused of bribing, are not instrumentalities of the Columbian government. Relying on the ruling in Esquenazi and the government’s position in that case, Sigelman argues that Ecopetrol is not an instrumentality because it did not perform any government functions at the time he allegedly bribed employees of the company. Sigelman has asked Judge Irenas to interpret the “government functions” test more narrowly than his counterparts at the Eleventh Circuit and more narrowly than government prosecutors would prefer. Time will tell whether Judge Irenas or the Judges of the U.S. Court of Appeals for the Third Circuit agree with Sigelman or follow the precedent set in the Eleventh Circuit. Either way, Sigelman’s case is another rare opportunity for courts to rule on this key provision of an important federal law and perhaps give defendants and the government another shot at the FCPA Super Bowl. ■

Glen Kopp is a partner in Bracewell & Giuliani’s white collar, internal investigations and regulatory enforcement practice in New York. His a former Assistant United States Attorney in the Southern District of New York. glen.kopp@bgllp.com

Kedar Bhatia is an associate at Bracewell & Giuliani, New York. He focuses his practice on civil litigation and white collar defense. kedar.bhatia @ bgllp.com

feb/ mar 2015 todayâ&#x20AC;&#x2122;s gener al counsel

Ten CommandmenTs for PreParing The dePosiTion WiTness By John C. Maloney Jr.

epositions are the principal and preferred discovery tool in civil litigation. They provide opportunities for adverse party counsel to find out the facts of the case, and to assess the credibility of and obtain admissions from the deponent. To perform well at a deposition, a witness must be thoroughly prepared by counsel. Indeed, the lawyer has an ethical as well as a professional duty to prepare the client for deposition. However, in most jurisdictions there are significant restrictions on what the defending lawyer can do at the deposition itself with respect to objecting to questions, directing the witness not to answer or conferring with the witness after the deposition begins. The restrictions found in the Rules of Civil Procedure, local court rules or individual judge rules effectively make the defending lawyer a

today’s gener al counsel feb/ mar 2015

“potted plant” during the deposition. In fact, a recent decision in a federal court in Iowa, to make it unmistakably clear that the defending lawyer is expected to remain as silent as possible during the deposition, sanctioned a major national firm because it found that counsel’s persistent, unspecified form objections to the examiner’s questions constituted witness coaching and excessive interruptions. As a result of these constraints on defense counsel, the deposition witnesses must largely be able to fend for themselves. This means counsel best defends the witness by preparation in advance of the deposition. The skills necessary to succeed at deposition can be learned, but it takes significant time, effort and planning by counsel during the preparation sessions. Counsel and witness should plan to meet at least twice, once shortly after receipt of the notice of deposition or subpoena, and a second time as close to the date of the deposition as possible. At the first session, counsel should assess the witness to determine how much preparation will be necessary, explain the basics of what occurs at a deposition – including who is entitled to be present from the other side – and discuss the specific roles and responsibilities of the witness and defense counsel at the deposition. Subsequent preparation sessions will require an intensive review of the pleadings, key interrogatories and critical documents relevant to the lawsuit. A chronology, list of key participants and identification of trial themes will help to provide the needed context. A significant amount of time, however, must be spent in practicing answering questions and working together on both the content and vocabulary used in the answers. Effective use of time spent in rehearsal and “woodshedding” the witness, or “sandpapering” the witness testimony, is critical to success in deposition testimony. The lawyer preparing the witness confronts certain ethical constraints. Counsel may not help prepare testimony that counsel knows or ought to know is false. But so long as the testimony is not false or perjured and is the witness’s own testimony, the lawyer has not crossed an ethical line. The lawyer can explain the law in a given situation and can seek to persuade a witness, even aggressively, that the witness’s initial version of a certain fact situation is not complete or accurate. Counsel also can make the witness aware of how other witnesses have testified on the same

subjects. The lawyer may not, however, influence the witness to alter testimony in a false or misleading way or put words in the witness’s mouth. In the preparation sessions, the lawyer must know how far it’s possible to go without crossing the ethical line. The lawyer also must make sure the witness buys into the learning process and the refinement of testimony. After practicing questions and answers, the witness must agree that the testimony, as refined and rehearsed, is truthful and is not misleading in any way. Finally, having experienced the toughest and most complete cross examination in the lawyer’s preparation sessions, the witness will be ready to perform at the deposition with self-confidence and the conviction that the complete truth is on her side.

The defense lawyer is expecTed To remain as silenT as possible during The deposiTion. The following checklist of ten commandments will assist counsel in preparing the deposition witness both effectively and ethically: 1. Tell the truth. • First, last and always. • You are entitled to a fair, understandable question, and the examiner is entitled to a complete and accurate answer. 2. Try to wait at least three seconds before responding to the question. • Give your attorney time to make an objection. • Think before you begin to speak.

• • • •

3. Listen carefully to the question, and to your attorney’s objection. Make sure you understand the question that was asked. Are you sure of the time period? Are you sure of the context? Do not hesitate to ask that the question be read back by the court reporter. continued on page 61

Feds Crack Down On Dealing With Russia Billion-Plus in Penalties for Violating Sanctions Last Year By Harvey Cohen and Jerrad Howard

merican companies doing business internationally have been required to step up their compliance efforts, as the U.S. government has implemented a number of new sanction directives. Many of these programs have been geared toward punishing Russia for its alleged role in attempting to destabilize the Ukrainian government and the downing of Malaysian Airlines Flight 17. As a result of these sanctions, Americans are now limited in their ability to do business with certain sectors of the Russian economy, including Russia’s largest bank, Sberbank. With more than $1.2 billion dollars in civil penalties assessed in 2014, it’s clear the Department of Treasury’s Office of Foreign Assets Control (OFAC) takes these sanction programs seriously. Despite chatter in the Fall of 2014 about a potential reduction of the sanctions, President Obama and other world leaders made clear at the 2014 G-20 Conference that sanctions will continue and the West will consider additional sanctions if Russia continues to violate Ukraine’s sovereignty. Given that the Ukrainian crisis is currently at a geopolitical stalemate, it is imperative that U.S. citizens, residents, and businesses that conduct operations with foreign nationals be aware of both the scope and impact of OFAC’s sanction programs. “SPECIALLY DESIGNATED NATIONALS” President Obama initiated sanctions in retaliation for Russia’s involvement in Ukraine through Executive Orders 13660, 13661, and 13662. Executive Order 13660 blocked property of persons who have taken actions that undermine Ukraine’s democratic process, who threaten the peace or sovereignty of Ukraine, who misappropriate Ukrainian state assets, or who have materially assisted those undermining Ukraine’s democratic process or violating Ukraine’s sovereignty. Executive Order 13661 expanded the scope of Executive Order 13660 by blocking property of certain Russian government officials and individuals who operate in Russia’s arms or materiel sector. ((When property is blocked under U.S. sanctions, it may not be transferred or dealt with in any manner except pursuant to a license from OFAC.)

Persons who engage in the prohibited conduct described in Executive Orders 13660 or 13661 can be designated as a “Specially Designated National” on OFAC’s Specially Designated Nationals (SDN) List. All U.S. persons are effectively prohibited from conducting business with the persons on that list. In addition, any property owned by an SDN that comes within the possession of any U.S. person is immediately blocked and the U.S. person must report the property immediately to OFAC. Failure to freeze the property or continuing to conduct business with an SDN may result in an enforcement action by OFAC, which could culminate in stiff penalties. THE SECTORAL SANCTIONS LIST Executive Order 13662 is a bit different than the other two orders because it grants the Secretary of the Treasury, in consultation with the Secretary of State, the right to block certain persons who operate in whole sectors of the Russian economy. This includes financial services, energy, metals and mining, engineering and defense. It also includes persons who have materially assisted those who (a) operate in those sectors and (b) are blocked by Executive Order 13662. Executive Order 13662 provides a special set of sanctions applicable to Russia – the “Sectoral Sanctions.” Persons whom the Secretary of Treasury has determined should be “blocked” according to Executive Order 13662 are set forth on the Sectoral Sanctions Identifications (SSI) List, which is wholly separate from the SDN List. The Secretary of the Treasury has since issued four directives under the authority of Executive Order 13662: • Directive 1 prohibits U.S. persons from engaging in dealings with certain designated persons in the financial services sector of the Russian economy involving (a) equity or (b) new debt that has a maturity longer than 30 days. • Directive 2 prohibits U.S. persons from dealing with certain designated persons in the energy sector of the Russian economy involving new debt that has a maturity longer than 90 days.

today’s gener al counsel feb/ mar 2015

Harvey Jay Cohen

• Directive 3 prohibits U.S. persons from dealing with certain designated persons in the defense and related materiel sectors of the Russian economy involving new debt that has a maturity longer than 30 days. • Directive 4 prohibits U.S. persons from engaging in dealings with certain designated persons in the energy sector which engage in the provision, exportation, or re-exportation of goods, services, or technology in support of certain oil production projects in Russia. These Directives have targeted a variety of Russian individuals and entities, including Sberbank, Russia’s largest financial institution. It is important to note, however, that the restrictions imposed by the Sectoral Sanctions under Executive Order 13662 and Directives 1-4 are very different from OFAC’s ordinary sanction programs. While there is a total prohibition from conducting business with persons on the SDN List, the same does not currently apply to those on the SSI List. The restrictions imposed on U.S. persons by the Sectoral Sanctions are much more specific than other restrictions enforced by the Office of Foreign Assets Control. However, the restricted application does not eliminate, or even minimize, the need for U.S. persons conducting business internationally to adopt a robust compliance policy. ORDER 13685 President Obama expanded the sanctions related to the Ukrainian crisis in December of 2014 by issuing Executive Order 13685. It prohibits all U.S. persons from (a) investing in Crimea, (b) importing any goods, services, or technology from Crimea into the United States, (c) exporting, selling, or supplying any goods, services, or technology to Crimea

from the United States or by any U.S. person or (d) approving, financing, facilitating, or guaranteeing a transaction by a foreign person that would be prohibited if the transaction were performed by a U.S. person or within the United States. Executive Order 13685 also authorizes the Secretary of State to add the following persons to the SDN List: (a) those operating in Crimea, (b) leaders of entities operating in Crimea, (c) those owned or controlled by, or acting on behalf of, any person whose property is blocked pursuant to Executive Order 13685, and (d) those who have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property is blocked pursuant to Executive Order 13685. Executive Order 13685 reflects a significant increase in the scope of the sanctions imposed by the U.S. government related to the Ukrainian crisis and has already caused both Visa and MasterCard to suspend all product and service offerings in Crimea. In addition to the expansive transactional prohibitions imposed by Executive Order 13685, the authority granted to the Secretary of State to name persons to the SDN List is quite broad and may result in a significant increase in those with whom U.S. persons cannot conduct business. Given the evolving nature of the sanctions against Russia, it is imperative that U.S. citizens, residents and companies conducting business internationally or with foreign nationals keep abreast of further developments, and consult with experienced counsel to verify their compliance with OFAC’s sanction programs. To the tune of $1.2 billion dollars a year, the Office of Foreign Assets Control is definitely serious in its efforts to patrol and enforce those programs. ■

is a partner at Dinsmore & Shohl LLP, where he chairs the International Business Practice Group. He is also Co-Chair Emeritus of the International Law Practice Group at ALFA® International and an officer of the governing council in the International Bar Association. He frequently lectures in the U.S. and abroad on high technology, domestic and international joint ventures, mergers and acquisitions and other transactions. harvey.cohen@ dinsmore.com

Jerrad T. Howard is an associate at Dinsmore & Shohl LLP. He advises public and private companies, financial institutions, and public utilities on a variety of transactions and compliance matters, both domestic and international. He counsels clients in the high-tech industry, with particular emphasis on data breaches and privacy matters. jerrad.howard@ dinsmore.com

Law Department Spend Tilting In-House The 2014 HBR Law Department Survey By Lauren M. Chung

TODAY’S GENER AL COUNSEL FEB/ MAR 2015

s the saying goes, you reap what you sow. After years of effort to tighten controls on spending and drive operational efficiencies, law departments are now reaping the benefits. According to the 2014 HBR Law Department Survey, total legal spending, which includes money spent on inside and outside counsel, increased by only two percent worldwide. This is a percent less than what was reported in the 2013 Survey and three percent less than in the 2012 Survey. But at the same time, inside legal spending levels increased notably compared to the prior year, by five percent worldwide. This is in line with a trend that began after the height of the financial crisis in 2008. Law departments are working smarter by becoming more internally focused – that is, by thoughtfully keeping more work in-house and in many cases growing the in-house staff to support it. More law departments also reported a growth in legal staff. Worldwide, 55 percent of participants had an increase in the total number of lawyers between 2012 and 2013. This is up from the 52 percent of participants that reported growth between 2011 and 2012. For total legal staff, which includes lawyers and non-lawyers, 61 percent of the companies had an increase, according to the 2014 Survey, up from 57 percent in the last year’s survey. Traditionally, the growth in in-house legal staff has been for the support of core business/commercial areas, as opposed to specialist functions such as litigation and intellectual property. This year’s survey shows continued growth in general business/commercial lawyers, with this area having the greatest increase in the numbers. However, results

also point to the beginning of what could be an interesting in-house staffing trend – handling more specialist work in-house. Twenty-eight percent of law departments reported an increase in the number of litigation attorneys, compared to 21 percent from last year’s survey. Results also point to a greater role for inside counsel as primary service provider for specialty litigation – e.g., patent, trademark and securities. In each of these areas there was a doubling in the percentage of law departments utilizing inside counsel as the primary service provider. While there will continue to be a need for outside counsel in highly specialized areas, the survey findings demonstrate an ongoing shift in how law departments leverage internal resources and manage costs.

The results point to the beginning of what could be an interesting in-house staffing trend: handling more specialist work in-house.

THE ROLE OF COMPENSATION As law departments continue to look inward to meet increased demand, the ability to recruit and retain legal talent becomes more critical. The 2014 Survey results show that law departments are working smarter by focusing on rewarding performance through competitive compensation levels.

Compensation for All Levels of In-House Counsel $350,000

$316,636

$300,000

$254,369

$250,000 $200,000

$188,758

$266,994 $230,547

$181,191

$150,000 $100,000

$67,014

$49,679

$50,000 $0 Base Salary

Cash Bonus Average

Total Cash Compensation Median

Total Compensation

FEB/ MAR 2015 TODAYâ&#x20AC;&#x2122;S GENER AL COUNSEL

Law departments are becoming smarter about how and when they engage outside counsel.

Lauren M. Chung is a senior director in the Law Department Consulting Practice of HBR Consulting and editor of HBR Consultingâ&#x20AC;&#x2122;s Law Department Survey. She works with law departments on strategy and planning, process, operational management, and benchmarking and best practices. She has expertise in organizational assessments, resource optimization, cost management, performance metrics and management, and outside counsel management. chung@ hbrconsulting.com

Cash compensation and benefits make up the largest proportion (85 percent) of inside legal spending, and increased spending in this area is having the most impact on overall inside legal spending. The drivers of spending on cash compensation and benefits are staffing increases and growing in-house staff compensation levels. According to the 2014 Survey, salaries for in-house lawyers grew at a modest pace over the last year. Base salaries increased by an average of 3.3 percent (median: 2.9 percent), producing an average base salary for all in-house counsel of $188,758 (median: $181,191). Cash bonuses were up by an average of 21.8 percent (median: 9.7 percent), resulting in an average bonus of $67,014 (median: $49,679). The rise in both base salaries and cash bonus is contributing to the overall growth in total cash compensation, which increased at an average of 4.6 percent (median: 4.2 percent) to $254,369 (median: $230,547). While total cash compensation levels grew at a steady pace, the rate of increase in total compensation, which includes the value of long-term incentives, surpassed the results from the 2013 Survey. The data suggests that long-term incentives are having a meaningful impact on overall compensation levels. Total compensation grew by an average of 6.4 percent (median: 5.0 percent), compared to an average of 4.3 percent (median: 3.8 percent) in 2013. Total compensation averaged $316,636 (median: $266,994) in 2014. THE IMPACT ON OUTSIDE COUNSEL SPENDING Cost control measures taken by law departments are translating to a reduction in the spend on outside counsel. It showed a two percent decrease worldwide, compared to a two percent increase reported in the 2013 survey. Law departments are becoming smarter about

how and when they engage outside counsel and making adjustments accordingly. The 2014 Survey results indicate that alternative fee arrangements (AFA), keeping more work in-house and stricter internal guidelines for outside counsel spending are the top three methods employed by law departments to control costs. Of these methods, survey participants reported that AFAs and keeping more work in-house yielded the most cost savings. It appears that these approaches have had the most impact on reducing non-litigation (excluding IP) outside counsel spending. Non-litigation spending, which accounts for roughly 37 percent of total outside counsel spending, decreased by three percent. The use and impact of AFAs continue to be a controversial topic, but the 2014 Survey shows some resolution. For two years in a row, the survey revealed that AFAs make up 10 percent of total outside counsel spending. Fixedfee-per-matter is once again the most widely utilized AFA. The savings realized through the use of AFAs inched slightly upwards, to seven percent, a one percent increase from the 2013 Survey results. LESSON FOR THE FUTURE In the face of increasing legal demand, law departments have successfully contained legal costs. They have been stretched to be more thoughtful in how they optimize the use of internal and external resources. They have proved that working harder but smarter translates into direct cost savings. The law departments that lead in this path to continuous improvement will be those that push innovation internally and externally, looking for ways to leverage internal staff more effectively and efficiently, and challenge their outside counsel to be partners. â&#x2013;

today’s gener al counsel feb/ mar 2015

Deposition Witness continued from page 55

• • • •

4. Do not hesitate to say you do not understand the question or to ask the examiner to rephrase the question or to be more specific (as to time period or context). Be polite and civil, but wary. Remember the examiner is not your friend. Despite the comfortable surroundings in the conference room, this is an interrogation, not a conversation. Watch any “off the record” chit chat.

5. Answer only the question that was asked. This is harder than you think. • Do not volunteer unnecessary information (you will need to practice this). • The examiner should follow up and get further details if he/she wants them.

• • • • •

6. Take the time to review every page of every document you are asked to look at or identify before responding to any question. As you review the document, ask yourself: Have I seen this before? (Maybe I saw it only during witness prep.) How am I linked to this document? Did I write it? Did I receive it (as addressee, “cc,” or because it is a type of material that likely crossed my desk)? Is the document complete?

7. Recognize and be aware of the differences between responding “I do not know,” “I do not remember” and “I do not recall.” • “I do not remember” presumes you knew at one time and the examiner is entitled to try to refresh your recollection. • Be careful when responding with “I do not know,” since it is difficult to say later that you do know.

• • •

•

8. Be vigilant, and do not allow the examiner to put words into your mouth. Very few questions can be answered completely and accurately with a “yes” or “no” response. Do not be afraid to say you cannot answer. Do not accept examiner’s characterization, descriptions or underlying assumptions if you are uncomfortable with them or any part of them. Before responding, you may need to break any question down into manageable sub-

EffEctivE usE of timE spEnt in rEhEarsal and “woodshEdding” thE witnEss, or “sandpapEring” thE tEstimony, is critical to succEss in dEposition tEstimony. parts (as in “that is not completely true,” or “that happened frequently, but not in this case…”) • When asked leading questions such as “would it be true to state,” “is it correct that” or “isn’t it a fact that,” do not hesitate to respond by saying “it would not be entirely true,” or “it would not be totally correct” or “it is not entirely true,” if those are accurate responses. You are entitled to and should push back against the examiner, to resist total agreement or to refuse to provide requested “sound bites” if what follows the leading question is not entirely true or accurate. 9. Be wary of stating absolutes in your responses (as in “never” or “always”) unless you are certain. You may need wiggle room later, so be modest in your recollection of events. • This event happened “a long time ago,” or “more than five years ago,” or “I do not remember exactly, but…” or “there were a lot of documents involved.” 10. Protect the attorney-client privilege and attorney work product doctrine. • This is an exception to the general rule of “no conferences while a question is pending.” • Do not hesitate to ask to confer with your counsel before responding if you reasonably believe, or have some confusion about, whether your response may involve communication with your attorney. ■

John C. Maloney Jr. is a partner at Day Pitney LLP in Parsippany, New Jersey, and a member of the firm’s complex tort litigation practice group. His practice includes qui tam actions, complex commercial disputes, business torts, pharmaceutical litigation, products liability, toxic tort law, and real estate matters in the New York and New Jersey state and federal courts. He has tried cases in the state and federal courts in New Jersey, New York, Pennsylvania and Arizona. maloney@ daypitney.com

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HIRING LITIGATORS WITHOUT REAL TRIAL EXPERIENCE. Much to my surprise, in-house counsel often hire lawyers without any real trial experience. There is a difference between a litigator and a trial lawyer. Good litigators excel at written advocacy and legal strategy. They can even be effective in short hearings before a judge. But trial lawyers possess an additional skill set. The ability to examine and cross examine live witnesses effectively, to think quickly on their feet, to convert complex and technical issues into terms jurors can understand, to connect with lay folks, read their signals, and react instinctively on the fly, to understand the process, the written and unwritten rules of the game— these are among the skills of a real trial lawyer. Clients hire counsel knowing that most cases settle before trial and presume therefore that trial experience is irrelevant. But settlement values invariably reflect the parties’ expectations of how they will fare at trial. And those that hire lawyers without a credible trial threat can expect to pay more on average in any settlement. Once your opponent realizes your lawyer is unable or unwilling to go to trial, you’re significantly disadvantaged, at any stage of the case. Wise clients hire lawyers who excel as both litigators and trial lawyers.

BEGUILED BY “THE LAW OF THE INSTRUMENT.” As Abraham Maslow said in The Psychology of Science, “if all you have is a hammer, everything tends to look like a nail.” Whereas in-house counsel tend to hire lawyers they know— through personal or professional experience—the lawyers they know are not always the best for the job. Clearly, clients must be able to trust their lawyers and work well with them. When selecting the best person for the job, however, an over reliance on familiarity often

leads to poor choices. Lawsuits are sui generis. No two are alike. The best lawyer for one case is not going to be the best lawyer for every case. Yet, sophisticated clients too often go back to the same lawyer over and over again to represent them in court, withTIMMONS out properly assessing whether he or she is in fact the best choice for each unique assignment. Factors that should be considered include the fit between the lawyer and the venue, the lawyer’s expertise in the subject matter, the temperament of the court, the lawyer’s reputation, strategic vision for the case, litigation style, and ability to work effectively with witnesses and opposing counsel. Clients who go back to the same litigation counsel for every case in every locale will eventually pay the price.

HIRING LAWYERS, NOT LAW FIRMS. In response to the big law excesses of the 80’s, in-house counsel in the 90’s became fond of saying “we hire lawyers, not law firms.” This reflected the clients’ view that the skill and qualification of a given lawyer was more meaningful than the institutional attributes of the firm they worked for. Most still repeat that mantra today. The truth, however, is that clients hire both the lawyer and the law firm. Yet even the most sophisticated in-house clients struggle to understand the factors that differentiate one big firm from another in ways that might be relevant for a litigation engagement. Does the firm’s compensation system reward collaboration or incent competition between its partners? Does the firm’s fee system allow for the firm to share in the client’s expected risk and reward for a given matter? How are cases staffed? What are the unforced attrition rates and how is turnover addressed? Does the firm train associates in ways other than at the expense of the client? How does the firm manage inefficiency, cost expectations, and outcome probabilities? Clients should understand that lawyers come into any new engagement with the baggage of their firm. Some good and some not so good. Clients that understand this and can differentiate between firms will be happier in the end. R. Brian Timmons is a Partner at Quinn Emanuel, based in Los Angeles, briantimmons@quinnemanuel.com

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R . BRIAn tImmOnS R. Brian Timmons is an experienced trial lawyer with a national litigation practice. He has tried many cases to verdict in multiple locations throughout the United States, including New York, Delaware, and California. In general terms, he specializes in legal disputes that involve finance, accounting, or corporate governance. His expertise and experience include securities and commodities litigation, creditors’ rights, avoidance and other bankruptcy-related litigation, fund advisor and ’40 Act matters, cases alleging market manipulation, unfair competition and anti-trust, complex financial product litigation, and general commercial disputes. He regularly represents managed funds (private equity funds, hedge funds, mutual funds) and their advisors, bondholders, financial institutions, corporations (both foreign and domestic), creditors’ committees, litigation trusts, audit committees, boards of directors, and high net worth individuals. In addition, part of Mr. Timmons’ practice over the past decade has been representing clients in large cases against global accounting firms. He has helped our clients recover hundreds of millions of dollars, has been on the leading edge of legal developments governing the liability of accountants and auditors, and has obtained some 9-figure settlements—a rare occurrence against these firms. His success in this area can be attributed in part to the fact that he spent the earlier part of his career defending many of the same global accounting firms. Before joining Quinn Emanuel, Mr. Timmons worked at Latham & Watkins, where he was elected to be a full equity partner just seven years out of law school. As a young lawyer, he also gained invaluable courtroom experience by serving in a federal indigent defense counsel program. Notwithstanding his success in representing plaintiffs, Mr. Timmons primarily represents defendants in a wide variety of cases. In his more than 20 years as a lawyer, he has represented clients in real estate litigation, class actions, internal investigations, products liability cases, general business disputes, employment litigation and white collar criminal matters. When representing defendants, he has helped clients avoid billions of dollars in potential losses. Clients praise him for his brilliance, judgment, and skill in the courtroom. He has been named one of Southern California’s “Super Lawyers” every year from 2006 to the present in Los Angeles Magazine. Mr. Timmons was born and raised in rural Idaho and attended Duke University on a football scholarship. He believes his humble upbringing is largely responsible for his intuition and his ability to explain

complex legal issues in simple terms that judges and juries can understand. He graduated from Duke in the top 2% of his class, participated in a graduate studies program in finance and economics at the London School of Economics, was a Teaching Fellow at Harvard College, and graduated from Harvard Law School with honors, where he also served as the Managing Editor of a scholarly law journal. The author of several articles, he has been published in The Wall Street Journal and Newsweek Magazine.

R. BRIAN TIMMONS Partner Los Angeles Office Tel: +1 (213) 443-3000 Fax: +1 (213) 443-3100 briantimmons@quinnemanuel.com

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