Today's General Counsel, V14 N6, Winter 2018 by Today's General Counsel

WINTER 2018 VOLUME 1 4 / NUMBER 6 TODAYSGENER ALCOUNSEL.COM

LITIGATION HAZARDS Think Like a Juror All about Protective Orders When in Rome: The FCPA Conundrum Filing Stronger Patents When Metadata Lets the Cat Out Of the Bag E-Discovery and Trade Secrets How Litigation Finance Changes the Equation Summary Disposition in Arbitration

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Editor’s Desk

Public access to legal records is an old and venerable tradition, but as Cristin Traylor points out in this issue of Today’s General Counsel, it started when litigants produced few documents and privacy wasn’t much of a consideration. Orders preventing disclosure were available but they weren’t used frequently until the 1980s, when hardball litigators began using overly broad discovery requests as a tactic. Now cases routinely yield hundreds of thousands of documents, all of them filed on searchable formats, and sifting through them to decide what should and should not be public is a big task. Read Traylor’s suggestion for a new way to address confidentiality that better balances the public interest and protection of a company’s private information. Problems with all those documents begin long before public access is an issue. In the course of litigation attorneys transmit documents to clients, courts, third parties and adversaries, and unless the transmitting party is technologically savvy those documents contain metadata that can have a big impact on litigation. Susan Usatine’s article has some suggestions about how to short circuit that issue. Felix Shafir and John Querio discuss some sharp divisions in appellate courts about two major, unresolved issues in class actions and the possibility that the Supreme Court may step in, and Nikiforos Iatrou and Anastasija Sumakova warn U.S. companies about a litigation peril in Canada concerning mandatory arbitration clauses, one that they don’t face here. Companies have to become more diligent when they file new patent applications, according to Curtis Vock and Douglas Link. Patents are running afoul of rigorous new standards in several important aspects of patent law. Matthew Lalli shares

his personal experiences as a takeover lawyer - that is, a trial lawyer who specializes in taking over a trial midway through a complicated piece of litigation. The takeover lawyer is likely to find prior counsel professional and helpful, he says, and will have one surprising advantage. Lacking the time to amass the kind of detail previous counsel did, he or she is more likely to be able to tell the kind of simple story a jury needs to hear.

Bob Nienhouse, Editor-In-Chief

bnienhouse@TodaysGC.com

Society of Corporate Compliance and Ethics

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winter 2018 today’s gener al counsel

Features

Transfer Pricing is Big Tax risk for MulTinaTionals

a Way for general counsel To Drive shareholDer value

MiTigaTing frauD risk in china

Q&a WiTh Mike koehler

a DifferenT kinD of Takeover

recenT DeveloPMenTs in class acTion laW

hiDDen legal risk of oPen source sofTWare

ManDaTory arBiTraTion isn’T alWays ManDaTory in canaDa

suMMary DisPosiTion in arBiTraTion

By Paul Sutton Make your inter-company agreements short and to the point.

By William P. Farrell, Jr. Turn a liability into an asset.

By Jesse Daves and Dawn Williford Due diligence at the local level.

Individual enforcement actions are declining.

By Matthew L. Lalli Changing lawyers will cost money, but not as much as you think.

By Felix Shafir and John Querio Appellate courts sharply divided over two big issues.

By Jeff Luszcz Most companies are not in compliance.

By Nikiforos Iatrou and Anastasija Sumakova Businesses could be dragged into consumer litigation.

By John Shope and Diana Tsutieva Include it in your engagement letter.

C o lu m n s

WorkPlace issues Three Ways Data can improve legal operations

The anTiTrusT liTigaTor Pricing algorithms, collusion and corporate compliance

Back Page fronT Burner can firms Build a Wall to Protect soft innovation?

By Scott Forman Tap into law firm data bases.

By Jeffery Cross Don’t let tacit collusion become explicit.

By Michael Bednarek Protecting 21st century innovation is hard in the current legal environment.

IdentIfy and MItIgate RIsk

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WINTER 2018 TODAY’S GENER AL COUNSEL

Departments Editor’s Desk

Executive Summaries

Page 56

E-DISCOVERY

16 Protective Orders in Litigation By Cristin K. Traylor Another way to approach confidentiality.

19 So, You Want to Search and Collect Records in Asia? By Kyle Reykalin FRONTEO A mistake can lead to sanctions. CYBERSECURIT Y

22 Don’t Push Send By Susan M. Usatine Remain technologically naive and delegate, or learn the drill.

INTELLEC TUAL PROPERT Y

24 Best Practices for Protecting Trade Secrets By Rachael Zichella You’ll need the cooperation of HR and IT.

26 Federal Circuit Tightens Patent Venue Rules By Jeff Fisher and Nadia Arid Delaware and California are the go-to venues now.

28 Your Patents May Not Be Safe By Curtis Vock and Douglas Link Rigorous standards threaten validity.

COMPLIANCE

30 FCC Poised To Open the Floodgates By Petrina Hall McDaniel and Keshia Williams Lipscomb Focus shifting from consumer protection to safeguarding business.

Be an Integral Part of the ConversatIon

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Editor-in-ChiEf Robert Nienhouse Managing Editor David Rubenstein

ExECutivE Editor Bruce Rubenstein

sEnior Editor Barbara Camm

ChiEf opErating offiCEr Amy L. Ceisel viCE prEsidEnt, EvEnts today’s gEnEral CounsEl institutE Jennifer Coniglio dirECtor, ConfErEnCEs & BusinEss dEvElopMEnt Jennifer McGovern-Alonzo

svp, Managing Editor of EvEnts today’s gEnEral CounsEl institutE Neil Signore

aCCount ExECutivE Frank Wolson

dataBasE ManagEr Matt Tortora

law firM BusinEss dEvElopMEnt ManagEr Scott Ziegler

digital Editor Catherine Lindsey Nienhouse

art dirECtion & photo illustration MPower Ideation, LLC ContriButing Editors and writErs

Nadia Arid Michael Bednarek Jeffery Cross Jesse Daves William P. Farrell, Jr. Jeff Fisher Scott Forman Nikiforos Iatrou Mike Koehler Matthew L. Lalli Douglas Link Jeff Luszcz Petrina Hall McDaniel

John Querio Kyle Reykalin Felix Shafir John Shope Anastasija Sumakova, Paul Sutton Cristin K Traylor Diana Tsutieva Susan M. Usatine Curtis Vock Keshia Williams Dawn Williford Rachael Zichella

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Editorial advisory Board Dennis Block GReeNBeRG TRAURIG, LLP

Dale Heist BAKeR HOSTeTLeR

Ron Myrick RONALD MyRICK & CO, LLC

Thomas Brunner

Joel Henning

WILey ReIN

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Robert Haig KeLLey DRye & WARReN

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Robert Townsend CRAVATH, SWAINe & MOORe

Robert Zahler PILLSBURy WINTHROP SHAW PITTMAN

HUNTON & WILLIAMS

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 quarterly by Nienhouse Media, Inc., 20 N. Wacker Drive, 40th floor, Chicago, Illinois 60606 Image source: iStockphoto | Printed by Quad Graphics | Copyright © 2018 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, 20 N. Wacker Drive, 40th floor, Chicago, Illinois 60606 Periodical postage paid at Oak Brook, Illinois, and additional mailing offices.

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Executive Summaries e-Discovery

cybersecurit y

intellec tual ProPert y

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Protective Orders in Litigation

Don’t Push Send

By Cristin K. Traylor McGuireWoods LLP

By Susan M. Usatine Cole Schotz P.C.

Best Practices for Protecting Trade Secrets

Public access to court documents is firmly rooted in U.S. history. However, this practice started back when litigants produced a minimal number of documents and privacy concerns were nonexistent. Today, parties to a case can produce hundreds of thousands of documents, all filed in searchable form for anyone to see. Protective orders preventing their disclosure have been around for a long time, but they began to be used more frequently in the 1980s as a result of aggressive litigators and overly broad discovery requests. Protective orders usually have either one or two levels of confidentiality. Protective orders with only a “confidential” level allow the parties to review and analyze all documents that are produced, but prohibit them from filing the documents publicly in court or providing them to third persons. Protective orders with two levels of confidentiality have the same confidentiality designation that protects the documents from outsiders, but add an extra layer of protection — the “highly confidential” designation, known as “attorneys’ eyes only” (AEO). The author argues for better balance between ensuring appropriate public access to court documents and protecting a company or individual’s private discussions. In cases with just one level of confidentiality, every document should be automatically designated confidential during discovery. In cases with a “highly confidential” level, every document would be considered confidential at a minimum. Then reviewers would need only look for material that would raise the designation to the higher level.

Every day, attorneys transmit spreadsheets, documents and PDFs to courts, adversaries, third parties and clients. They intend to transmit only after “scrubbing,” or else they don’t believe the document contains important hidden data. They often hear that “metadata is data about the data,” but most fail to appreciate the impact that sharing metadata can have. That’s because lawyers are prey to certain myths. They might believe that PDFs do not contain metadata. Wrong. PDFs contain “document properties” that provide the recipient with the name of the document’s author and the date it was created/last modified. They think metadata only matters in litigation, but it can have a huge impact on M&A or employment matters. They assume that, as lawyers, they can’t be expected to understand technical jargon; but they are expected to protect their clients’ confidential information, and that means understanding what information is contained in the documents they are handling, obvious or not. The options are to remain technologically naïve and delegate the sharing of client data to someone who understands the risks and available protections, or to proceed with caution and only select “Share” or push “Send” once you’ve: (1) viewed the document properties; (2) determined if metadata scrubbing is necessary and, if so, scrubbed the file; (3) confirmed that the scrubbed document will contain only the information that you intended to share. These steps don’t cover everything, but they are a good start towards safeguarding confidential client data.

By Rachael Zichella Taylor English

The threat of losing confidential information and trade secrets through targeted cyber-attacks is real, but a company’s own employees are more likely culprits. Fostering a culture of confidentiality is necessary to protect proprietary data, and it is key to demonstrating in court that data is entitled to legal protection. Human resources and information technology processes, procedures and electronic infrastructure provide avenues through which the company can monitor employee compliance with policies. HR and IT objectives should be integrated to carry out a common strategy of securing proprietary data through technological means, and through nondisclosure agreements and restricting access to secure areas. The company should include data security, technology usage and confidentiality policies in its employee handbook or compliance manual. These policies should expressly instruct employees not to disclose or utilize proprietary data for any purpose other than the company’s business. They should also emphasize the fact that employees must not disclose any proprietary data belonging to prior employers or third parties. Employees frequently misappropriate proprietary data shortly before or just after termination. Have a policy that requires employees to return all tangible and electronic information, and certify in writing that none has been retained. Prior to termination if the employee has provided notice, or immediately thereafter if the employee quits without notice, IT should disable all of the employee’s access to the company’s computer systems, including remote access and other platforms.

TODAY’S GENER AL COUNSEL WINTER 2018

Executive Summaries COMPLIANCE PAGE 26

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Federal Circuit Tightens Patent Venue Rules

Your Patents May Not Be Safe

FCC Poised To Open the Floodgates

By Jeff Fisher and Nadia Arid Farella Braun + Martel LLP

2017 has proven to be an important year in patent infringement litigation. One of the most noteworthy developments is the fundamental change to patent venue provisions that the Supreme Court introduced with its landmark decision in TC Heartland v. Kraft Food Group Brands LLC, and the subsequent Federal Circuit decision in In re Cray. Taken together, they have significantly narrowed the range of venues a plaintiff can choose from. Rather than leaving the application of TC Heartland largely to judge’s discretion, the Federal Circuit set forth its own three-part test for determining patent venue. First, it clarified that a defendant must have a physical presence in the district in which a patent suit is brought. Second, business must be carried on in the district at issue in a regular and not temporary basis. Third, the Federal Circuit explained that venue cannot be proper in a district that is solely the place of one of the defendant’s employees. The place of business must be that of the defendant. The Federal Circuit’s decision in In re Cray also reaffirms the shift in patent venue trends signaled by TC Heartland. It is almost certain that the number of patent infringement actions in the Eastern District of Texas will continue to plummet. Some estimates project a 23 percent increase in cases brought in the District of Delaware, and a nearly 300 percent increase in cases brought in the Northern District of California.

By Curtis Vock and Douglas Link Lathrop Gage LLP

Patents are running afoul of rigorous new U.S. standards on several important aspects of patent law. The trend started around 10 years ago when the U.S. Supreme Court made it much easier to label an invention “obvious,” and thus not patentable. The U.S. Patent Office sometimes uses “obviousness” arguments to deny applications, but a competitor can also make such arguments, either in court or at the Patent Trial and Appeal Board. Another relatively recent argument for invalidation is the question of “possession.” In 2010 the U.S. Court of Appeals for the Federal Circuit court issued a decision requiring patent descriptions to demonstrate “possession” of the invention claimed at the time of filing. A trio of U.S. Supreme Court cases beginning in 2012 (Mayo Collaborative Services v. Prometheus Laboratories, Inc., Association for Molecular Pathology v. Myriad Genetics, Inc., and Alice Corp. v. CLS Bank International) have made it much easier to label an invention “natural law,” and thus ineligible for patenting. They also made it easier to label a patent “abstract” — another ineligible category. Companies must become more diligent when filing new patent applications. The written description is the foundation for “fallback” positions (narrower patentable scope for your inventions than originally envisioned at filing) to counter challenges to validity based on anticipation, obviousness, indefiniteness or possession. Now is a good time for companies to examine their strategy for filing stronger and better patents.

By Petrina Hall McDaniel and Keshia Williams Lipscomb Dentons

The recent change in presidential administrations may bring about a corresponding change in the Telephone Consumer Protection Act (TCPA) regulations, which protect consumers from unsolicited advertisements through telephone calls, text messages or facsimile transmissions. With a Republican administration and a 3-2 Republican majority, companies have reason to be optimistic that the FCC will shift from rulemaking to protecting businesses from TCPA lawsuits, especially class actions. In Bais Yaakov of Spring Valley v. FCC, the DC Circuit rejected the FCC’s Solicited Fax Rule, which required businesses to include opt-out notices not only on unsolicited fax advertisements but also on solicited fax advertisements (i.e., faxes sent with the recipient’s “prior express invitation or permission”). The DC Circuit disagreed, reasoning that Congress had drawn a clear line in the TCPA text between unsolicited and solicited advertisements, and that the FCC could not cross that line. The FCC has authority to implement rules and regulations regarding unsolicited fax advertisements, the court reasoned, but not faxes sent with “prior express invitation or permission” (i.e., outside the scope of the TCPA). The changes in the FCC’s composition and the DC Circuit’s forthcoming ruling in ACA International v. FCC have created an uncertain landscape for the TCPA. The DC Circuit’s recent decision in Bais Yaakov may be only the first in a wave of decisions shifting the focus from the protection of consumers to the safeguarding of business interests.

winter 2018 today’S gEnEr al counSEl

Executive Summaries features

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Transfer Pricing Is Big Tax Risk for Multinationals

A Way for General Counsel to Drive Shareholder Value

A Different Kind of Takeover

By Paul Sutton LCN Legal

By William P. Farrell, Jr. Longford Capital

Transfer pricing is a complex area of tax risk affecting multinational groups. It is a major focus for local tax administrations and supranational bodies. Noncompliance can affect reputation and result in significant financial liabilities in the form of adverse transfer pricing adjustments, fines and penalties. “Transfer prices” are the prices at which an enterprise transfers goods and intangible property, or provides services or financial support, to associated enterprises. Transfer prices determine, in large part, the taxable profits of associated enterprises in different tax jurisdictions. Inter-company agreements (often referred to as ICAs) are legal agreements between related parties. They define the legal terms on which services, products and financial support are provided within a group. It is accepted that intercompany agreements are a fundamental part of transfer pricing compliance for multinationals. Inter-company agreements should be short and expressed in simple language. Avoid quoting statutes and regulations. The key commercial terms should be grouped in one place. Each intercompany agreement should be consistent with the legal relationships regarding the ownership and use of assets, the flow of supplies, related contractual relationships with third parties, and the allocation of risk in those relationships. The proposed inter-company agreements should be reviewed by all relevant stakeholders to ensure that the agreements reflect the needs of the whole group, as well as the reality of intra-group transactions.

Progressive general counsel have adopted the view that their goal is the same as that of the CEO or CMO: to drive shareholder value. This is not simply a new way of managing the law department, but also a new understanding of the value of legal matters. Legal claims have become corporate assets that, like physical or financial assets, must be cultivated and protected and can be financed and monetized. Litigation finance has given general counsel an option, allowing them to pursue strong legal claims without asking their organizations to absorb the entire cost and risk of litigation. By transferring the risk of a lawsuit to a financier that agrees to pay the costs of the lawsuit in exchange for a portion of any proceeds, general counsel can engage the lawyers of their choice and let them litigate without onerous billing constraints. They can choose which claims to pursue based on merit, and those claims will be decided on the strength of the claims — not on the parties’ financial wherewithal. We are experiencing a change in commercial litigation. Truths that were once universal in business — deep pockets win lawsuits and in-house law departments are a necessary cost center — are becoming antiquated. Forward-thinking general counsel are relying upon the legal system to protect corporate assets and to recover funds to which their organizations are legally entitled. Litigation finance provides innovative general counsel a tool for remaking their law departments as valuable contributors to the bottom line.

By Matthew L. Lalli Snell & Wilmer

Typically, clients are looking for the quickest and least expensive resolution of a case, and that frequently means an early settlement or dispositive motion. However, often the early settlement effort ends in an impasse and the motion is rejected. Sometimes the emotions or principles or dollar value on either side is too great to compromise, and a trial becomes inevitable. At that time, it is not uncommon for clients and lawyers to begin to consider a change in counsel. Changing lawyers will cost money, but not as much as you might think. In a significant case that will take two or three weeks to try, an experienced trial team can get into a position to continue discovery or perform pre-trial tasks within 100 hours or so. The transition almost always is smooth. Prior counsel are generally professional and can be helpful in providing important information about opposing counsel, judges, witnesses, key documents and trial strategy. One of the great advantages of taking over a case close to trial is that you will have the same perspective and orientation as the jurors. Often trial lawyers have command of so much detail that they let it get in the way of the simple story the jury needs to hear. With a takeover, you usually don’t have time to amass that level of detail. The takeover lawyer needs to learn to embrace the case on the same level as the jurors see it.

TODAY’S GENER AL COUNSEL WINTER 2018

Executive Summaries PAGE 50

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Recent Developments in Class Action Law

Hidden Legal Risk of Open Source Software

Mandatory Arbitration Isn’t Always Mandatory in Canada

by Felix Shafir and John Querio Horvitz & Levy LLP

By Jeff Luszcz Flexera Software LLC

By Nikiforos Iatrou and Anastasija Sumakova WeirFoulds LLP

The two most important unresolved issues in class actions are the standard by which plaintiffs must show an ascertainable class before a lawsuit can be certified for class treatment, and whether a class can be certified if it includes members who have suffered no injury. Federal appellate courts nationwide are sharply divided over these issues, and it remains to be seen whether SCOTUS will step in. Most federal appellate courts recognize that the existence of an ascertainable class is an essential requirement for the certification of damages in class actions. The Third Circuit held that this standard requires a reliable and administratively feasible method for deciding who falls within the class. The Fourth, Sixth and Eleventh appear generally aligned with the Third. Under the Constitution, federal courts lack jurisdiction to decide a case unless the plaintiff has standing, a requirement that can be satisfied only when the defendant’s conduct caused concrete injury. Federal appellate courts are divided over how to apply Article III when the class action will include uninjured class members. Does it preclude class certification when the potential class includes absent class members who lack standing because they suffered no injury? Because federal appellate courts nationwide are sharply divided over these issues, general counsel should encourage their legal teams to preserve the strongest arguments available for the defense on these issues today, and preserve winning arguments that may be available tomorrow if SCOTUS steps in.

As much as half the code used in all software is comprised of open source software (OSS). Open source components are, by definition, free and available for anyone to use; but there are limitations, including licensing obligations with which software developers must comply. Depending on the component, penalties for failure to comply can be severe. Development practices have outpaced internal processes to manage legal obligations; and most companies are, therefore, out of compliance. This disconnect is clear when a company building a software product is required to produce an independently verified disclosure of all the open source and commercial code it uses — a common request during mergers and acquisitions, and in working with original equipment manufacturers (OEMs) and large enterprise companies. Organizations are very surprised to see a difference of 20 times or more between what they think they are using and what they really are using; and they are typically out of compliance with each of those previously unknown components. By taking the lead, legal teams can reduce risk for their organizations. Even if there weren’t the power of copyright standing behind the open source licenses we use, the open source development ecosystem would depend on users to respect the philosophy of the licenses, and give back where possible as well. As more companies start to understand their true dependency on open source, we should expect more financial and technical support for compliance.

Consumer protection laws vary from province to province in Canada. They limit and, in some cases, void mandatory arbitration clauses in order to preserve a consumer’s right to have a claim decided by the courts, typically by class action. Recent appellate case law suggests that for companies offering services to both consumers and business users, there is a risk that if consumers bring a class action, business users may be able to come along for the ride. A recent decision of the Ontario Court of Appeal in Wellman v. TELUS Communications Company demonstrates the risk of dealing with consumers and business users under the same contractual terms. The Court of Appeal affirmed the finding that it would not be reasonable to separate the two types of claims. Since a key feature of class certification is the existence of “common elements” among the proposed claimants, the existence of separate contracts may make it more challenging to establish that consumers’ and business users’ claims have enough common elements to proceed as a class action. Alternatives to consider are to distinguish between business customers and consumers in offerings or terms of service, even if both are covered by the same contract. By expressly distinguishing the two, and stating that the arbitration clause would not apply to consumers but would apply to business users, a company starts to build its case that mandatory arbitration should actually be mandatory for some customers.

WINTER 2018 TODAY’S GENER AL COUNSEL

Executive Summaries FEATURES PAGE 60

Summary Disposition in Arbitration By John Shope and Diana Tsutieva Foley Hoag LLP

When we ask in-house counsel to explain why their companies don’t use arbitration clauses, the answer frequently includes the assertion that “you can’t get summary judgment in arbitration.” That has been true historically, but it is changing. Leading arbitration tribunals now expressly permit summary disposition; arbitration panels are issuing partial or total summary dispositions; courts are enforcing these awards; and parties are including provisions in their arbitration agreements to encourage summary disposition. Three major arbitral institutions have recently implemented rules on summary disposition. The International Chamber of Commerce (ICC) Rules for “expedited proceedings” provide that the tribunal may decide the case on documents only, without examination of witnesses or even a hearing. The latest revised Rules of the Arbitration Institute of the Stockholm Chamber of Commerce expressly permits summary procedure for issues of fact and law, and arguments that pleadings are legally insufficient. The latest Singapore International Arbitration Centre Rules provide for early dismissal of a claim or defense. In the United States, the AAA and JAMS now explicitly provide for summary disposition in their rules. The best way to preclude any issue of enforcement or arbitrator reluctance is to include a provision for summary disposition in the agreement to arbitrate. One Big Four accounting firm’s standard engagement letter, for example, provides that “the arbitrators may render early or summary disposition of some or all issues, after the parties have had a reasonable opportunity to make submissions on those issues.”

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winter 2018 todayâ&#x20AC;&#x2122;s gener al counsel

E-Discovery

Protective Orders in Litigation By Cristin K. Traylor

today’s gener al counsel winter 2018

E-Discovery

hat if all documents produced in litigation were considered confidential at the outset? Then, as parties prepared for trial, they could evaluate the specific exhibits to determine whether they should be released to the public. The standard would be whether some harm — including but not limited to physical, emotional, intangible and competitive harm — could come to the individual or corporation if the information were released. If the parties determine that the documents contain sensitive business information, then the courtroom would be closed during introduction of those exhibits. When parties fail to agree, the judge would decide what should remain confidential for the trial. Public access to court documents is firmly rooted in U.S. history. However, this practice started back when

amount of data being produced in discovery is still massive. Federal Rule of Civil Procedure 26(c)(1) provides that a court “may, for good cause, issue an order to protect a party or person from annoyance, embarrassment, oppression or undue burden or expense.” Apparently, good cause is easy to find. Protective orders are issued as a matter of course in almost every litigation matter. THE PURPOSE OF PROTECTIVE ORDERS

Modern day protective orders serve two main functions. One, they keep parties from providing their opponents’ documents to the media. Two, they can keep parties from learning trade secrets about their opponents. At least one court in Moore v. Ford Motor Co. has recognized that the point of protective orders “is to facilitate discovery during litigation

and experts. The parties themselves are not permitted to view the documents. This allows competitors to produce documents responsive to requests for production without the risk of the opposing party stealing their trade secrets or using them for their own competitive advantage. Two levels of confidentiality are most often used in cases involving manufacturing companies, energy companies and companies that sell products. Confidentiality language generally states that parties to litigation and third parties have the right to designate as “confidential” any information, documents or things that contain trade secrets or other confidential business information. It also covers private or confidential personal information, and information received in confidence from third parties. AEO protects information, documents, or things that contain highly sensitive

Highly confidential documents can be viewed only by the attorneys working on the matter or by their agents and experts.

litigants produced a minimal number of documents and privacy concerns were nonexistent. Today, parties to a case can produce hundreds of thousands of documents. The problem is that the entire world has easy access to sensitive personal and business documents filed with courts in searchable form. The solution for protecting documents produced in litigation is not new. Protective orders have been around for a long time. According to law professor Dustin Benham, author of “Dirty Secrets: The First Amendment in Protective-Order Litigation,” in the June 2014 issue of the Cardozo Law Review, protective orders began to be used more frequently in the 1980s, as a result of aggressive litigators and overly broad discovery requests. Although the enactment of the 2015 amendments to the Federal Rules of Civil Procedure tightened the reins on outlandish discovery requests, the

to allow parties to exchange potentially confidential material with confidence, without the Court having to litigate whether or not the material is actually confidential and entitled to protection.” Protective orders usually have either one or two levels of confidentiality. Protective orders with only a “confidential” level allow the parties to review and analyze all documents produced, but prohibit them from filing the documents publicly in court or providing them to third persons. Protective orders with two levels of confidentiality have the same confidentiality designation that protects the documents from outsiders, but add an extra layer of protection — the “highly confidential” designation, known as “attorneys’ eyes only” (AEO). Usually, highly confidential documents can be viewed only by the attorneys working on the matter or by their agents

business or personal information, the disclosure of which is highly likely to cause significant harm to an individual, or to the business or competitive position of the designating party. These rote definitions sound good in theory, but they are very difficult to apply. Under this framework, attorneys may be tasked with reviewing hundreds of thousands of documents and trying to designate each document as “not confidential,” “confidential” or “highly confidential.” For example, how should an email chain be designated when employees are discussing setting up a meeting to discuss an idea for a new car design? Should it be confidential because the fact that the company is designing a new car is not in the public realm? Should it be highly confidential since if the company’s competitors knew they were working on a new car design,

winter 2018 today’s gener al counsel

E-Discovery

they might change strategies or design a new car themselves? Or should it not be confidential since the email is just about setting up a meeting and the fact that they are designing a new car does not give away the design itself or even the type of new car? More often than not, these decisions are left to contract

that all the client’s inner workings can be revealed to the world. Is that what “public access to courts” intended? Those on the First Amendment side of the debate favor this view, but common sense dictates that the public should not automatically receive access to individual or corporate private and

AEO protects information, documents or things that contain highly sensitive business or personal information.

attorneys who are reviewing the documents to prepare them for production. In dealing with a protective order that sets forth a level of confidentiality, law firms and clients usually take one of three paths. The first is to automatically stamp everything with a “confidential” label. This method speeds up document review and ensures that everything is protected. If the other side challenges the designations, then the law firm deals with those documents on a caseby-case basis. Sometimes the other side has employed the same tactic with its document production, so neither side wants to challenge the other. This usually happens when the opposing parties are similarly situated — two large companies litigating against each other, for example. If, however, individual plaintiffs are on one side and a large corporation is on the other, the plaintiffs may challenge over-designation, since they have very few documents to produce and their burden is minimal. The second path, which is similar to the first, is to err on the side of marking the documents as “confidential” while producing publicly available documents with no confidentiality stamping. The third path is to take a narrow view of confidentiality — a document has to reveal a business secret or provide a competitive advantage to deserve this designation. However, this means

sensitive information. In Ross v. University of Tulsa, U.S. District Judge Terence Kern expressed no concern about the public’s right to pretrial discovery material since the public doesn’t have “unfettered right[s]” to those materials. BETTER SOLUTION NEEDED

We need to strike a better balance between ensuring appropriate public access to court documents and protecting a company or individual’s private discussions. It seems unfair to force a party to disclose its innermost secrets simply because it had the misfortune of being sued, or because it sued another party. Currently, employees communicate mostly by email, so their thoughts and strategies are preserved. In the past, even if someone wrote something in a letter, that could be construed as private. The only people to see it would be those who had gone to the courthouse and looked it up. Today, the internet affords ready access to any court document, and readers can disseminate this information broadly. In cases with just one level of confidentiality, every document should be automatically designated confidential during discovery. In cases with a “highly confidential” level, every document would be considered confidential at a minimum. Then reviewers would need only look for material that would raise the designation to the higher level, e.g.,

client lists, formulas, strategic plans, non-public financial records, suppliers and pricing. The only designations worth challenging during discovery would be documents marked “highly confidential” that the opposing party needs to show its witnesses to assist in the case. If a key document has been marked “highly confidential” and only the receiving party’s employee can put it in context, then counsel should challenge the designations in court if they fail to resolve the dispute in a meet-and-confer. Otherwise, it does not make sense to challenge any designations, unless there is a desire to embarrass the opponent by disseminating its documents. Only a fraction of the documents produced in a case become trial exhibits. Delaying confidentiality disputes until trial narrows the universe of documents for the parties to fight over. It also saves clients a lot of time and money trying to fit the documents in these unclear categories during the discovery phase. Parties should agree to blanket designations at the outset so they can delay challenges until they are absolutely necessary. The public would still get access to the documents at trial — excepting the documents that could cause substantial harm to the parties — thereby protecting public access to courts and at the same time facilitating more efficient discovery. ■

Cristin K. Traylor, counsel in the Richmond office of McGuireWoods LLP, focuses on discovery issues, representing clients in the preservation, collection, review and production of all types of documents. She is a member of the Class Action and Securities Enforcement teams, and has a background in white collar defense and government investigations. ctraylor@mcguirewoods.com

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ensure a defensible collection plan from the start of a project. • Historical attitudes towards litigation and electronic discovery

While some Asian countries (Hong Kong, Singapore and Malaysia) have a commonlaw system resembling that of the U.S., others have a civil law framework. This means that company executives and their

reasonable, but part of the data privacy framework. Many companies are not experienced in collecting data for the purposes of litigation, and their IT teams do not understand the necessity of collecting data in a forensically sound manner, or data preservation issues (for instance, metadata could be essential to the issues at hand). Though remote collection has risen in popularity in the U.S., receiving instructions in non-native languages

tHere are unique cHallenges in asian countries tHat can Make data collections particularly onerous.

employees are less familiar with the idea of disclosing documents in discovery. Additionally, Asian countries have tended to be less litigious than the U.S., and many companies don’t have the same level of knowledge of e-discovery as in the U.S. Litigation is seen as destabilizing, unpleasant and to be avoided when possible. Thus, it’s no surprise that preservation and collection are often viewed as an unnecessary cost — and done reluctantly at best. Having a forensics and legal team in-country that understands and can navigate local cultural sensitivities can go a long way in developing a plan that will hold up in court. • Multi-language data In cases where potentially responsive data resides in Asia, effective collections may require local resources to help with navigating logistics through cultural and linguistic capabilities. Documents containing double-byte characters, such as Chinese, Japanese and Korean (“CJK”) are fraught with technical encoding and processing issues. In these cases, experienced forensic examiners can help to ensure these types of data sets are properly collected and tested before they are processed for review. • data encryption Asian companies frequently encrypt their data. Encryption is deemed not only

compounds the difficulties. Even the most highly skilled IT personnel are thus relying on experienced in-country forensics experts to ensure admissibility. • prevalence of Messaging and cHat for business coMMunications

Many Asian companies use chat instead of email, a difference that is often overlooked in the scope of discoverable business communications. In China, chat applications such as WeChat, Facebook Messenger and WhatsApp are the preferred method of communication between friends, colleagues and business partners. In Japan, mobile carriers historically issued email accounts with cell phones, which were used instead of text messaging until the rise of LINE, the most widely used messaging service. In addition to messaging, cell phone email accounts may still be used by employees, yet overlooked by collection teams unfamiliar with the custom.

Western tools. In some cases, email files may have metadata that are non-Unicode compliant and would convert into garbled characters when processed. Experts in CJK collections are adept at identifying these differences and can ensure the data and metadata are collected accurately for search and review later. • don’t forget about paper Unlike in the U.S., many Asian companies still rely heavily on paper documents. This is often overlooked as a source of evidence, but can be within the scope of discovery. It’s important to note that paper sizing and hole punching is often different than U.S. legal size, and OCR may be unavailable for many languages. In Sum, PreParedneSS IS the BeSt PolIcy

These are just some of the challenges legal teams face when collecting data from Asia. However, lawyers involved in cross-border cases do not have to become experts in data collection and preservation. With the help of experienced experts in Asia discovery, stakeholders can develop and implement a reasonable and defensible (e.g., efficient and cost-effective) litigation response plan. The investment in understanding the challenges and developing a properly designed process far outweighs the lost time and potential for failure of going it alone.

Kyle reyKalIn is director of review services at FRONTEO in tokyo, where he manages large-scale ediscovery review projects and specializes particularly in Japan-u.s. crossborder litigation, including civil and criminal antitrust matters, fcpa investigations, and other u.s. government investigations.

• unique eMail systeMs Becky and Thunderbird are examples of unique email platforms prevalent in Asia. Collection teams need to be prepared to collect emails from these multilingual software platforms that generate different metadata fields than standard Westernized platforms and contain unusual file types that are not often recognized by

kyle_reykalin@fronteo.com

CMY

winter 2018 today’s gener al counsel

Cybersecurity

Don’t Push Send By Susan M. Usatine

very day, attorneys transmit spreadsheets, Microsoft Word documents and PDFs to courts, adversaries, third parties and clients. When they are ready to share the document, the common practice is to rightclick, and select “Attach to email” or “Upload to shareyourfile.com” without considering if hidden or non-obvious information is contained in the file. They intend to transmit/upload the document only after “scrubbing” it, or else they don’t believe the document contains any important hidden data. But there is another possibility. Maybe they don’t understand hidden or non-obvious data, what it can reveal or that it is their responsibility to consider its impact before transmitting the document. Attorneys often hear that “metadata is data about the data,” but most fail to appreciate the impact that decisions about sharing metadata can have. That’s because they are prey to certain myths.

Myth #1 PDFs Do Not Contain Metadata PDFs contain “document properties” that provide the recipient with the name of the document’s author and the date it was created/last modified. Imagine the following scenario: Your client, Bigtime, LLC creates a PDF from a Microsoft Word document in May 2017 and emails it to you. In August, you forward the PDF to opposing counsel who receives the “Employee Headcount 2017” PDF and views its document properties. They indicate that the author of the document is Bigtime, LLC, and the PDF was created and last modified in May 2017. Opposing counsel calls you to request more current information. You wonder how opposing counsel knew the year-to-date overview did not include June or July employee headcount data. In many instances, the information contained in a PDF’s document properties is innocuous; however, if counsel is unaware that the PDF file contains

author, creation and modify information, counsel lacks a potentially critical piece of information, which can be embarrassing, damaging or both. Myth #2 Metadata Only Matters in Litigation Imagine the following scenario. You are working on closing a deal. You have steadfastly protected the identity of an interested third party, Readyornot. net, with whom your client is working. Readyornot.net provides you with a Microsoft Word document that you edit and forward to the seller. The seller approaches you shortly thereafter and indicates that it knows your client is working with Readyornot.net, and is no longer interested in selling at the previously discussed price. When you ask the seller’s attorney how they discovered that Readyornot. net was the silent investor, she responds that the metadata of the Microsoft Word document you provided was

today’s gener al counsel winter 2018

Cybersecurity

created and edited by Readyornot.net’s director. You ponder how to break this news to your client. Consider another common scenario: Your client gives you a complex spreadsheet full of details about the last three years’ revenues to provide to a possible joint venture partner. Unbeknownst to your client, the spreadsheet contains revenue information for 10 additional years in “hidden” columns that were easily discovered by selecting “Unhide” after opening the spreadsheet. The potential joint venture partner’s interest cools after receiving the spreadsheet. Myth #3 Lawyers Can’t Be Expected to Understand Technical Jargon Wrong. Lawyers are expected to protect their clients’ confidential information. Today that means understanding what non-obvious information is contained in documents they are handling. SELECT THE RIGHT OPTION

Here are questions and answers for counsel to consider when transmitting Microsoft Word documents, spreadsheets or PDFs: • How does scrubbing work? Many lawyers and law departments have metadata scrubbing linked to their email platform. These programs are effective if the user knows how to select the option that accomplishes their goals. Here are some concerns: How does the metadata scrubber interact with track changes? Do the changes persist after the document is scrubbed? If so, is the author of the change still discoverable, or the date and time the change was made? Knowing how the program operates is critical. • I will be uploading the document to a data room or e-filing it with the court and, as a result, the record will not be scrubbed by our email metadata scrubber. How do I assess the record’s metadata and take necessary next steps? Users can analyze the record’s metadata from within Microsoft Word, Excel or Adobe by “inspecting” the document from within the record (“File,” “Properties” or “Info,” “Check for Issues” and

“Inspect Document”) before uploading it or e-filing it. Users have a “Remove All” option within the document inspector. The record should be saved before it is transmitted. • Doesn’t password protecting a document scrub the document? Does compressing/zipping an oversize file scrub the document? No. Password protected documents are usually not scrubbed by an email scrubbing system, nor are oversize files that have been compressed/zipped for transmission. If the file requires security or compression, the file should be scrubbed within Microsoft Word, Excel or Adobe, by “inspecting” the document from within the record (“File,” “Info,” “Check for Issues” and “Inspect Document”) before it is attached to an email or otherwise shared. Large groups of files that must be compressed for transmission or sharing should be scrubbed by a batch scrubbing software. • Will my metadata scrubber work if I forward a document from my phone? Maybe, but it is not safe for counsel to assume so. Transmitting from a mobile device may not provide client data with an adequate level of protection that would be available if the email was transmitted from a networked computer that provides metadata scrubbing, secure send and so forth. • Should discovery documents be scrubbed? Litigators should consider if records, data or documents must be “native” (un-scrubbed) in order to respond properly to a request. Assuming the requesting party has requested standard metadata/data in its native form, data should not be scrubbed before it is produced. It is critical that counsel review metadata with the client prior to production, and again at the deposition preparation stage, to make sure neither counsel nor client are caught off guard. REASONABLE CARE

Nineteen states’ ethics committees have weighed in on lawyers’ responsibilities in this area. A common theme has emerged

— namely, that attorneys must demonstrate reasonable care when handling documents that may contain metadata. In some states, counsel has a duty to notify the sender when they receive a document that contains hidden data, if there is reason to believe the transmission of that data was inadvertent. As an example of the general standard of care, the New York State Bar Association’s Committee on Professional Ethics notes that a lawyer who uses technology to communicate with clients must use reasonable care, which includes assessing the risks of betraying secrets and confidences before deciding if the mode of transmission is appropriate. In general, the options are to remain technologically naïve and delegate the sharing of client data to someone who understands the risks and available protections, or to proceed with caution and only select “Share” or push “Send” once you’ve: (1) viewed the document properties; (2) determined if metadata scrubbing is necessary and, if so, scrubbed the file; (3) confirmed that the scrubbed document will contain only the information that you intended to share. These steps do not cover every possibility, but they are a good start towards safeguarding confidential client data. ■

Susan M. Usatine is a member of the Litigation Department and co-chair of the Discovery Services Practice Group at Cole Schotz P.C. She represents domestic and international businesses in litigation in federal and state courts, mediation and arbitration proceedings, in addition to serving as counsel to high-level entrepreneurs, private equity firms, and financial and accounting service professionals. susatine@coleschotz.com

winter 2018 today’s gener al counsel

Intellectual Property

Best Practices for Protecting Trade Secrets By Rachael Zichella

argeted cyber-attacks resulting in the loss of consumers’ protected personal information have dominated the national headlines over the last few years amid growing concerns of identity theft. This is surely a serious threat; but less discussed and just as significant is the threat of loss of a company’s confidential information and trade secrets through targeted attacks by bad actors. In some cases, these bad actors take the murky form of hackers eager to sell company secrets to foreign competitors on the dark web. More often, however, they look like the person at the water cooler grousing about the cost of college tuition and changes to the company’s compensation plan. When it comes to loss of proprietary information, a company’s employees are likely culprits. Fostering a “culture of confidentiality” is necessary to protect proprietary data. In the event of legal action, it is key to demonstrating in court that the data is entitled to legal protection as either confidential information or a trade secret.

There are a number of common-sense and cost-effective steps general counsel can take to help achieve these objectives. CLOSE RELATIONSHIP BETWEEN HR AND IT

Human resources and information technology processes, procedures and electronic infrastructure provide the avenues through which the company may monitor employee compliance with policies. HR and IT must not work in silos or at cross-purposes. Their objectives should be integrated to carry out a common strategy of securing proprietary data through technological means — password requirements, email encryption, database access restrictions, monitoring user activity — and non-technological means such as non-disclosure agreements and restricting access to secure areas. The first opportunity to stress a company’s commitment to confidentiality and security arises during the interview and hiring process. HR should explain orally and in writing the company’s com-

mitment to protecting its own proprietary data and respecting that of others. It should require candidates to disclose in writing the existence of contractual obligations to current or prior employers, and produce copies of such agreements. Because restrictive covenants designed to protect proprietary data may be present in a variety of employment-related agreements, companies should ask for them all. They may include equity and stock option agreements, restrictive covenants, intellectual property agreements and loan repayment agreements, just to name the most obvious. It is appropriate for an offer letter to state that the candidate should not disclose or use in any way the confidential information or trade secrets of prior employers or other third parties. The offer letter should explain that if the company discovers the candidate has breached a contractual obligation to a prior employer or failed to disclose prior contractual obligations (e.g., through a demand letter from the former employer), that may constitute grounds for immediate termination. HR should reiterate this orally to all candidates, especially candidates for sales, engineering or design positions. If a candidate discloses a contract that contains post-employment covenants not to compete, outside counsel should review the contract (preferably before the company extends an offer) to determine if it can be enforced, and whether restrictions on the employee’s work and access to information make employment feasible. The company should carefully evaluate the scope of prohibited activities under the prior agreement, any geographic restrictions and the duration of the covenant. Areas of potential overlap between the new position and the prior employment should be discussed, including the likelihood of inadvertent disclosure of proprietary information of the prior employer, the line of business/type of industry previously serviced, specific job duties

today’s gener al counsel winter 2018

Intellectual Property performed, and the intended customer base or territory for the new position. NON-DISCLOSURE AND OTHER COVENANTS

If an employee’s job requires access to proprietary information, it is essential that the company require an explicit non-disclosure agreement. Where state law allows, companies should also consider including narrowly tailored covenants restricting solicitation, recruitment and competition. The company should include data security, technology usage and confidentiality policies in its employee handbook or compliance manual. The policies should expressly instruct employees not to disclose or use proprietary data for any purpose other than the company’s business. They should also remind employees not to disclose any proprietary data of prior employers or third parties. Training programs regarding treatment of proprietary data should be part of an on-boarding process, and should go hand in hand with standard training programs concerning ethics, use of computer systems and equal employment opportunity. HR and department managers should regularly review the company’s confidentiality and other policies at scheduled training meetings, through web-based training programs, and casually at sales or other meetings. Regularly reinforcing confidentiality as a “core value” will help ingrain it in the culture. It is especially important for employees in sales, engineering or design positions who typically have the most access to customers and proprietary data. Many companies have Bring Your Own Device (BYOD) policies for employees. A company implementing a BYOD policy may save money, but it relinquishes a great deal of control over company information. Allowing unfettered access to proprietary data on personal devices may invite a challenge to the reasonableness of the company’s attempts to ensure the data’s confidentiality. If the company does not carefully consider and properly manage employee access and the systems themselves, it may be subject to a legal determination that

such information was not adequately protected, and therefore is not entitled to protection as a trade secret or confidential information. The obvious way to minimize the risk of employee theft of proprietary information is to implement and enforce IT and HR policies that prevent employees from accessing company systems, or performing company work on devices other than those issued by the company. Such policies should also discourage employees from conducting personal business on company machines or systems. Indeed, preventing employees from accessing the company’s systems through personal devices may also make the company less vulnerable to cyberattacks and other malicious behavior from third parties. The technical savvy of the management team can play a major role in making a confidentiality initiative effective. Managers should receive training from IT and HR that is consistent with the technical aspects of the company’s systems, and that provides them with the understanding and tools to enforce the company’s data security, technology usage and confidentiality policies. Likewise, training managers to be observant of employees’ habits and providing corrective training consistent with these policies may help minimize breaches of company policy. Managers should review employee presentation and other materials to ensure that no proprietary information has been disclosed and that the materials did not come from a prior employer or third party. They should be alert to employee possession or use of flash drives, hard drives, removable storage devices or other media that may be used to misappropriate data. Employee email accounts should be monitored for suspicious activity. Monitor employees who have restrictive covenants from a prior employer to make sure they are working within its restrictions. An informed and observant manager may be able to detect a potential problem before it arises. GET YOUR STUFF BACK

Employees frequently misappropriate proprietary data shortly before or just

after termination. Sloppy management of the process provides the departing employee with opportunities for malfeasance that should not be available. Misappropriation may not be discovered until long after the former employee has absconded with valuable company information, and had ample time to unfairly compete, solicit customers and raid employees in violation of contractual obligations. There are simple precautions employers can take to prevent such behavior. Have a policy that requires employees to return all tangible and electronic information, and certify in writing that he or she has not retained any company property. Include similar return of property requirements in employment and separation agreements. At termination, management should review the return of property obligations with the departing employee, make a detailed record of all tangible and electronic property returned and obtain a certification that all property has been returned. Finally, and most importantly, prior to termination if the employee has provided notice, or immediately thereafter if the employee quits without notice, IT should disable all of the employee’s access to the company’s computer systems, including remote access and other platforms. ■

Rachael Lee Zichella, a partner at Taylor English, practices commercial litigation, and labor and employment law. She regularly appears in federal and state courts and in arbitration, and litigates matters through trial. She also works on preventive strategies for compliance with federal and state employment laws. rzichella@taylorenglish.com

WINTER 2018 TODAY’S GENER AL COUNSEL

Intellectual Property

Federal Circuit Tightens Patent Venue Rules By Jeff Fisher and Nadia Arid

017 has proven to be an important year in patent infringement litigation. One of the most noteworthy developments is the fundamental change to patent venue provisions that the Supreme Court introduced with its landmark decision in TC Heartland v. Kraft Food Group Brands LLC, and the subsequent Federal Circuit decision in In re Cray. The Federal Circuit’s decision is providing much needed guidance on how to apply the new venue rules established in TC Heartland. Taken together, they have significantly narrowed the range of venues that a plaintiff can choose from when bringing a new patent infringement action, and have already had a profound impact on forum shopping practices. In May 2017, the Supreme Court issued a unanimous decision in TC Heartland, limiting venue selection in patent infringement cases and reaffirming that patent venue is subject to specific and heightened requirements. In its decision, the Supreme Court overturned the Federal Circuit’s 1990 decision in

VE Holding, which held that the specific patent venue statute (28 U.S.C. §1400) was defined by and incorporated the general venue provisions that applied in non-patent cases (28 U.S.C. §1391). In TC Heartland, the Supreme Court flatly rejected the Federal Circuit’s approach and held that §1400 was the “sole and exclusive provision controlling venue in patent infringement actions,” and should not be supplanted by general statutory provisions regarding venue. TC Heartland confirmed that venue in patent infringement actions is only proper either (a) where the corporation resides, which the Supreme Court interpreted as referring to the state of incorporation, or (b) where the defendant has committed acts of infringement and has a regular and established place of business. PLAINTIFF-FRIENDLY ENVIRONMENT

The TC Heartland decision sent shockwaves through the patent litigation world, and has shifted patent litigation trends and strategies. Because the Federal

Circuit’s 1990 decision had expanded patent venue to apply to any district in which a defendant would be subject to personal jurisdiction, it left in its wake an environment that was decidedly favorable towards patent plaintiffs. They were able to bring their suits in districts such as the Eastern District of Texas, which were not necessarily the most convenient for both parties, but were considered “plaintiff-friendly.” In January 2017, just before TC Heartland was decided, the percentage of new patent cases that were filed in the Eastern District of Texas was a whopping 54 percent of all cases nationwide. By July 2017 following the decision, the percentage had plummeted to 19 percent. With TC Heartland narrowing what is considered appropriate venue, patent infringement plaintiffs have been forced to bring more suits in the District of Delaware and the Northern District of California — districts where companies tend to be incorporated or to have their headquarters. Although the Supreme Court had finally clarified the interaction between general venue provisions and the specific patent venue provisions, and had clearly scaled back the meaning of venue, fundamental questions still remained over how to properly apply §1400(b) and how to determine the scope of venue under the statute. The TC Heartland decision revived the second part of the test in §1400(b) — whether the defendant has committed acts of infringement and has a regular and established place of business in the district. The meaning of a “regular and established place of business” was still unclear in the wake of TC Heartland. The ambiguity over the meaning of §1400(b) and how it was meant to be applied led to inconsistent results among district courts across the nation, which

today’s gener al counsel winter 2018

Intellectual Property were faced with the task of applying TC Heartland to more than 350 motions to transfer and motions to dismiss for improper venue that were filed immediately following the decision. Judge Rodney Gilstrap of the Eastern District of Texas, for example, continued the district’s trend of denying motions to transfer by creating and applying his own four-factor test for determining whether venue was proper. Under this test, a physical presence in the district was a persuasive factor but was not required for a finding of venue, and the court could consider other factors as demonstrating that venue was proper. THREE-PART TEST

In September 2017, the Federal Circuit weighed in forcefully on the question of how to interpret §1400(b) in its decision in the case of In re Cray, expressly rejecting Judge Gilstrap’s four-factor test for not being “sufficiently tethered” to the text of the patent venue statute. Rather than leaving the application of TC Heartland largely to judge’s discretion, the Federal Circuit set forth its own three-part test for determining patent venue, all three requirements of which must be satisfied.

in a district that is solely the place of one of the defendant’s employees. The place of business must be that of the defendant. In order for a place to be “of the defendant,” the defendant must conduct actual business from the location. If a small business operates from a home, that can satisfy the §1400(b) requirement, but advertising a place of business or setting up an office is not sufficient. For plaintiffs, the decisions in TC Heartland and In re Cray have narrowed the districts in which a new patent infringement action can be brought. In deciding which forum to choose for a new patent case, plaintiffs should be careful to choose a venue that complies with In re Cray’s new test. Otherwise, the complaint will be vulnerable to an early motion to transfer, or motion to dismiss for improper venue. While In re Cray did help clarify the confines of §1400(b) and what constitutes a “regular and established place of business,” the districts containing a company’s headquarters and/or its place of incorporation are still the most straightforward options for proper venue, and should be at least given consideration by prospective plaintiffs.

The Federal Circuit’s 1990 decision left in its wake an environment that was decidedly favorable towards patent plaintiffs. First, it clarified that a defendant must have a physical presence in the district in which a patent suit is brought, directly contradicting and overturning the Eastern District of Texas’s holding. A virtual space or the exchange of electronic communications between individuals is no longer enough to satisfy the patent venue statute. Second, business must be carried on in the district at issue in a regular and not temporary basis. Sporadic activity and single acts related to a business are not sufficient. Third, the Federal Circuit explained that venue cannot be proper

For defendants, In re Cray provides clear guidance on how to avoid being dragged into court in unfavorable or inconvenient districts. In a pre-TC Heartland world, it would have been a fruitless exercise for a company to attempt to conduct its business in a way that avoided being hauled into court in certain venues. Any district in which goods were sold would have constituted proper venue. Now, that strategy is feasible. The Federal Circuit’s decision in In re Cray also reaffirms the significant

shift in patent venue trends signaled by TC Heartland, and ensures that the trends that emerged immediately postTC Heartland are here to stay. With the interpretation of §1400(b) articulated by the Federal Circuit in In re Cray, it is almost certain that the number of new patent infringement actions in the Eastern District of Texas will continue to plummet. Some estimates project up to a 23 percent increase in cases brought in the District of Delaware and a nearly 300 percent increase in cases brought in the Northern District of California. It is unclear how these districts will weather the storm of such a massive influx of potentially time-consuming patent cases, but with TC Heartland and In re Cray driving venue selection, corporate defendants have been given a new weapon in their battle against patent plaintiffs. ■

Jeffrey M. Fisher is a partner at Farella Braun + Martel LLP’s San Francisco office. His practice includes intellectual property and technology disputes, including patent, trade secret, trademark and copyright infringement, as well as antitrust and unfair competition cases. He serves as chair of Farella’s Intellectual Property Litigation Department. jfisher@fbm.com

Nadia C. Arid is an associate with Farella Braun + Martel LLP in San Francisco. She is a member of the firm’s Intellectual Property Litigation and Business Litigation Groups and has represented clients in cases involving patent infringement actions, antitrust litigation, trade secret disputes and unfair competition claims. narid@fbm.com

winter 2018 today’s gener al counsel

Intellectual Property

Your Patents May Not Be Safe By Curtis Vock and Douglas Link

n 2005 Quad/Tech received a patent (U.S. Patent 6,867,423) for a visual inspection system that uses a CMOS detector to inspect images on a substrate illuminated by LEDs. Unfortunately, because this patent failed to illustrate both the LEDs and the substrate in a single drawing, a federal appeals court found some of the patent’s claims invalid in 2014. That same year a similar fate befell TSI, which owned U.S. Patent 6,831,279 for a laser diode that illuminates biomolecules with radiation above a certain wavelength. In this patent, the illumination causes the molecules to fluoresce; a photon counter senses this fluorescence; and a microprocessor evaluates the signal’s validity. Nonetheless, because it was

not practical to obtain diode emission wavelengths at the time the patent was filed, an Arizona district court found the patent invalid. A third case concerned U.S. Patent 6,799,864, which was issued in 2004 for a spot module illuminator that controls thermal loading by employing a thermal spreader and an elongated thermally conductive core connected to heat-dissipating fins. Because “elongated” is a term of degree and the patent did not sufficiently differentiate “elongated” from “non-elongated” cores, a federal circuit court found the patent invalid in 2015. Although these three cases revolve around photonics and optics technologies, we are seeing similar situations

across a whole range of hi-tech industries. The most important common thread between these three cases is not their link to photonics; it is that their patents ran afoul of rigorous new U.S. standards on several important aspects of patent law. YOUR PATENT IS OBVIOUS

The trend started around 10 years ago when the U.S. Supreme Court made it much easier to label an invention “obvious” and thus not patentable. According to the decision in KSR International v. Teleflex, Inc. (2007), an invention is “obvious” when prior art — that is, anything publicly disclosed and available in journal articles, Internet postings, patents or even products — can be reasonably

today’s gener al counsel winter 2018

Intellectual Property combined into something that is the same as your invention by a person “skilled in the art.” Here, the term “skilled in the art” denotes a hypothetical person with skills in the relevant industry; for a photonics invention, a physicist may easily qualify as someone skilled in the art. So if this hypothetical person could argue, for example, that the synthesis of two (or more) pieces of prior art is the same as your invention, then your invention

argue against obviousness, and thus the combination of prior art references invalidated Crossroads’ patent. POSSESSING THE INVENTION

In 2010 another court made a similarly far-reaching decision. In Ariad Pharmaceuticals, Inc. v. Eli Lilly and Co., the U.S. Court of Appeals for the Federal Circuit required patent descriptions to demonstrate that the inventor had

a “plurality of openings” on the upper and lower surfaces to promote bone growth when implanted in the spine. In a lawsuit filed by a competing company, Spinal Kinetics, this patent was found to be invalid because the term “openings” was not reasonably supported by the figure in Synthes’s patent, which showed only narrower mechanical grooves. Spinal Kinetics’ rival spinal implant product did not employ grooves

The problem occurs when the text and drawings do not sufficiently support the words in the claims.

is obvious and you are not entitled to a patent. The U.S. Patent Office (USPTO) sometimes uses “obviousness” arguments to deny patent applications; but a competitor can also make such arguments, either in court or at the USPTO — even after the patent is issued. For example, a patent (U.S. Patent 7,934,041) assigned to Crossroads Systems was invalidated under KSR on a petition by Cisco Systems to the U.S. Patent Trial and Appeal Board because evidence of non-obviousness was not commensurate in scope with the invention. In this case, the patent described a storage router including a controller that provided virtual local storage between multiple devices of different protocols by connecting remote small computer system interface devices with fibre channel devices. In an attempt to avoid prior art cited by Cisco, Crossroads stated that its invention was nonobvious because it resolved the long-felt problem of “bottlenecks in network file system performance.” The appeal board was not persuaded, however, because Crossroads’ arguments did not establish how the invention (for example, the constraints of the controller) resolved these problems. In other words, the invention was not sufficiently tied to the reasons that Crossroads used to

“possession” of the invention claimed at the time of filing. Unlike most federal circuit decisions, this one was made en banc by all of the circuit’s judges, so it carried a lot of weight. Following Ariad, many other federal court decisions have invalidated patents on similar bases. The question is, what does the term “possession” mean in this context? The en banc judges in Ariad stated that the written description of a patent must demonstrate reasonable “structure-function” correlation for the claims it makes. The claims of a patent are sentences that describe the scope of the invention (for example, “I claim a new widget that creates noise”), while the specification refers to the text and figures describing those claims (for example, describing and showing the claimed widget and how it creates the noise). The problem occurs when the text and drawings do not sufficiently support the words in the claims. When that occurs, the patent is invalid. Sometimes this failure is characterized as failing the “written description” requirement of a patent. A real example of an invalid patent that did not demonstrate possession concerned a prosthetic disc implant used to replace a spinal intervertebral disc. U.S. Patent 7,429,270 was assigned to a company called Synthes, and the description of this implant mentioned

but instead used trapezoidal and circular slots. Following the precedent set in Ariad, the court determined that Synthes had not shown possession of the broad “openings.” Instead, it only possessed intervertebral implants having narrower “grooves.” INELIGIBLE SUBJECT MATTER

A third series of decisions concerns a topic dear to the hearts of many physicists: natural law. Calculating how long it takes an apple to reach the ground after it falls from a tree is not really an invention at all, and patent law recognizes this. However, a trio of U.S. Supreme Court cases beginning in 2012 (Mayo Collaborative Services v. Prometheus Laboratories, Inc., Association for Molecular Pathology v. Myriad Genetics, Inc., and Alice Corp. v. CLS Bank International) have made it much easier to label an invention “natural law” and thus ineligible for patenting. They also made it easier to label a patent “abstract” — another ineligible category. Although there is no clear definition of an abstract idea, representative examples might include such things as fundamental financial/economic business practices; processes that can be implemented in the human mind; mathematical algorithms not tied to a specific machine; continued on page 33

winter 2018 today’s gener al counsel

Compliance

FCC Poised To Open the Floodgates By Petrina Hall McDaniel and Keshia Williams Lipscomb

he recent change in administration may bring about a corresponding change in the Telephone Consumer Protection Act (TCPA) regulations, which protect consumers from unsolicited advertisements, whether through telephone calls, text messages or facsimile transmissions. With FCC Commissioner Ajit Pai selected as FCC chairman in January 2017, and two new FCC commissioners confirmed by

the Senate in August, it remains to be seen how the reconstituted FCC will affect policy under the TCPA. One thing is certain. With a Republican administration and a 3-2 Republican majority on the FCC, companies have reason to be optimistic that TCPA policy, and its implementation of rules and regulations, will take an increasingly pro-business stance. The industry’s hope is that the FCC will shift from

rulemaking to protecting businesses from TCPA lawsuits, especially class actions. Such a change would be especially welcomed by businesses whose efforts to defend themselves have been hamstrung by the TCPA’s strict liability standard. In June 2015, the FCC issued an Omnibus Order addressing numerous outstanding issues under the TCPA, including the need to define “automatic telephone dialing system,” reduce the

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Compliance

number of robocalls made to reassigned telephone numbers, establish ground rules for revocation of consent and give a thumbs up or down to robocall-blocking technology. Within hours of the Omnibus Order’s release, ACA International, a trade association that represents consumer credit and accounts receivable management professionals, filed a petition for review of the Order to the Federal Circuit Court of Appeals for the DC Circuit. The appeal, which is still pending, represents

Inc., a pharmaceutical company, had been sued in a TCPA class action in 2008 and faced potential damages of approximately $150 million. Though many of the class plaintiffs admitted to giving their prior express permission to receive its fax advertisements, Anda’s liability hinged on the absence of an opt-out notice on those faxes. Anda joined with other businesses facing similar actions to seek clarification of the FCC’s authority regarding solicited fax advertisements, generally not protected under the TCPA.

FCC’s authority in contravention of the express language of the TCPA, the DC Circuit signaled that it is no rubber stamp. OTHER COURTS CONSIDER CONSENT

One issue awaiting decision in ACA International involves a challenge to an FCC ruling that a consumer “may revoke consent at any time and through any reasonable means.” The U.S. Court of Appeals for the Second Circuit, in an opinion issued in June 2017, rejected

The industry’s hope is that the FCC will shift from rulemaking to protecting businesses from TCPA lawsuits.

a consolidation of cases challenging the FCC’s rulemaking authority and the expanded reach of the TCPA. The petitioners question whether certain rules and regulations in the Omnibus Order are consistent with the plain language of the TCPA. With briefing completed in February 2016 and oral argument heard in October 2016, the court is expected to rule on the case any day now. DC CIRCUIT CURBS FCC

Meanwhile, in an opinion issued in March 2017, in Bais Yaakov of Spring Valley v. FCC, the DC Circuit dealt a blow to the agency’s rulemaking authority, and provided a glimpse into how it might interpret the TCPA in the ACA International v. FCC case. In Bais Yaakov, the court rejected the FCC’s Solicited Fax Rule, which required businesses to include opt-out notices not only on unsolicited fax advertisements but also on solicited fax advertisements (i.e., faxes sent with the recipient’s “prior express invitation or permission”). In 2010, the petitioners in Bais Yaakov sought a ruling from the FCC challenging its authority to issue a rule requiring opt-out notices on fax advertisements sent with the recipient’s prior express permission. One petitioner, Anda,

The FCC held fast to its interpretation, and expressed its intent to enforce the Solicited Fax Rule moving forward. On appeal, the DC Circuit disagreed with the FCC. It reasoned that Congress had drawn a clear line in the TCPA text between unsolicited and solicited advertisements, and the FCC could not cross that line. The FCC has authority to implement rules and regulations regarding unsolicited fax advertisements, the court said, but not faxes sent with “prior express invitation or permission” (i.e., outside the scope of the TCPA). In June 2017, the DC Circuit denied a petition for a hearing in Bais Yaakov, indicating that its current ruling is here to stay. The bottom line is: The petitioners in Bais Yaakov, and other businesses facing similar TCPA actions across the country, are off the hook for millions of dollars in potential liability for transmitting solicited faxes without an opt-out notice for now. The DC Circuit seemed particularly concerned with the inequities encouraged by the Solicited Fax Rule. Recognizing, for instance, that petitioner Anda could be liable for $150 million in damages for sending faxes with prior express permission, the court mused: “Let that soak in for a minute.” Further, by refusing to expand the

such a blanket rule. However, less than two months later, on August 10, the Eleventh Circuit held partial revocation of consent permissible under the statute. In the Second Circuit case, Reyes, Jr. v. Lincoln Automotive Financial Services, the appellate court held that “the TCPA does not permit a consumer to revoke its consent to be called when that consent forms part of a bargained-for exchange.” The defendant in Reyes made calls to the plaintiff after the plaintiff stopped making payments on a lease agreement that included a provision requiring plaintiff’s express consent to receive telephone calls from the defendant, including “contact by manual calling methods, prerecorded or artificial voice messages, text messages, emails and/or automatic telephone dialing systems” made to “any telephone number” provided by the plaintiff. Though the plaintiff claimed he revoked that consent in a letter, the defendant denied receiving it. The Second Circuit drew a distinction between revocable and irrevocable consent, reasoning that the plaintiff in Reyes could not unilaterally revoke a bargained-for provision of a legally binding contract: “It is black-letter law that one party may not alter a bilateral

winter 2018 today’s gener al counsel

Compliance

contract by revoking a term without the consent of a counterparty.” However, the decision in Reyes appears to be in direct conflict with the Omnibus Order, which promulgated an “any reasonable means” standard for revocation under the TCPA, and made no distinction for consent provided by contract. Moreover, Reyes exposes a potential conflict between consent under the TCPA and consent under other consumer privacy statutes. For example, under the Federal Debt Collection Practices Act, a party’s consent to calls from its creditor also constitutes its consent to calls from the creditor’s agents for related debt collection activities. However, consent in such cases is revocable. Thus, despite the potential loosening of the consent standard under the TCPA, businesses must be mindful of other privacy statutes and continue to recognize revocation of consent — even if that consent was part of a bargainedfor exchange. The Eleventh Circuit’s recent decision adds to the confusion swirling around the consent issue. In Schweitzer v. Comenity Bank, the court held that a consumer can partially revoke consent. Reversing a grant of summary judgment

the TCPA allows a consumer to provide limited, i.e., restricted, consent for the receipt of automated calls” and “that unlimited consent, once given, can also be partially revoked as to future automated calls.” The court left open whether the specific facts in Schweitzer rose to the level of a partial revocation. There are likely limits to Schweitzer. On the one hand, it may prove helpful to plaintiffs in individual TCPA cases. On the other, it may provide class action defendants ammunition in opposing class certification. As the Eleventh Circuit acknowledged, determining partial revocation is a fact-based consideration. Such an individualized inquiry would thwart class certification on typicality grounds, making the issue of consent more harmful than helpful to class plaintiffs. The changes in the FCC’s composition and the DC Circuit’s forthcoming ruling in ACA International have created an uncertain landscape for the TCPA. The DC Circuit’s recent decision in Bais Yaakov may be only the first in a wave of decisions curbing the FCC’s rulemaking in TCPA matters, and shifting the focus of statutory interpretation and fact finding from the protection of consumers to

The DC Circuit seemed particularly concerned with the inequities encouraged by the Solicited Fax Rule.

in favor of the defendant, the court found an issue of material fact regarding the plaintiff’s revocation of consent. The plaintiff had begun receiving phone calls from the defendant after she stopped making payments on a credit card account. During one such call, the plaintiff requested that the defendant stop calling “in the morning and during the work day.” The court held that, pursuant to the TCPA, a consumer may partially revoke his or her consent to receive calls, stating, “that

the safeguarding of business interests. For example, on the day of the Bais Yaakov decision, new FCC Chairman Pai issued a statement applauding the DC Circuit’s analysis (and noting his own dissent from the original FCC decision). After the conclusion of oral arguments in ACA International in October 2016, all eyes turned to the DC Circuit. Then, with Bais Yaakov in March 2017, the DC Circuit made a strong ruling in favor of industry and against FCC

overreach. Now, just a few months later, companies are eagerly awaiting what is expected to be a watershed decision in ACA International. Why such anticipation? Because the court’s sternly worded opinion in Bais Yaakov signaled that the court in ACA International may apply the same level of scrutiny to the Omnibus Order, which may turn the tide of litigation in industry’s favor. ■

Petrina Hall McDaniel is a partner in Dentons’ Litigation and Dispute Resolution practice and a member of the firm’s U.S. Privacy and Data Security team. She is a commercial litigator and Certified Information Privacy Professional whose practice blends complex litigation, regulatory compliance and privacy counseling. petrina.mcdaniel@dentons.com

Keshia Williams Lipscomb is a member of Dentons’ Litigation and Dispute Resolution practice. Her practice focuses on providing insurance coverage advice to domestic and international insurers, primarily regarding homeowners, commercial property and commercial general liability claims, as well as representing insurers in coverage litigation for both first-party and third-party claims. Keshia.Lipscomb@dentons.com

today’s gener al counsel winter 2018

Intellectual Property Safety of Patents

data) and thus the claims were ineligible for patent protection.

or the mere collection, display and manipulation of data. This series of important cases immediately called into question all types of medical diagnostic and software inventions, even hardware inventions employing off-the-shelf components

INDEFINITENESS

continued from page 29

In 2014 the U.S. Supreme Court clarified the circumstances in which a patent is invalid because its claims are “indefinite.” The Nautilus, Inc. v. Biosig Instruments, Inc., case centered on Biosig’s patent (U.S. Patent 5,337,753) for a heartrate monitor. The description of this patent mentions a hollow cylindrical In 2014 the U.S. Supreme Court bar that a user grips both hands, clarified the circumstances in which with such that each hand comes in contact a patent is invalid because its with two electrodes (one “live”, one claims are “indefinite.” “common”) that are “in a spaced relationship.” After an appeal questioned stitched together by algorithmic or whether the phrase “in a spaced relationproprietary logic. As an example, conship” was indefinite, the Supreme Court sider a software patent assigned to an decided that a patent is indefinite (and intellectual-property firm, Intellectual thus invalid) if the claims, read in light Ventures. This particular patent (U.S. of the patent text as well as prosecution Patent 7,984,081) related to systems history, fail to inform with reasonable and methods for dynamically managcertainty those skilled in the art about the ing extensible markup language (XML) scope of the invention. data, and it included behind-the-scenes One patent that fell afoul of this decisoftware that manipulated XML docusion concerned a multiple-sclerosis drug ments in different XML formats. This developed by Teva Pharmaceuticals. The software meant that the user could patent (U.S. Patent 5,800,008) described view and update the multi-format the drug as including “copolymer-1 XML documents without a need for having a molecular weight of about 5 programming skills. to 9 kilodaltons.” Following Nautilus The USPTO granted this patent in precedent, the court found that since July 2011; but in March 2017, the there are multiple ways of determining federal circuit court invalidated it on molecular weight, and the patent did the grounds that modifying XML was not clarify how “molecular weight” merely an abstract idea of collecting, was measured, the invention was indisplaying and manipulating data — definite and the patent is invalid. that is, collecting data from different These cases (plus many others we XML formats, manipulating it into a could mention) place many existing consolidated XML format and displaypatents at risk, but that is far from ing it according to the user’s modificatheir only impact. Such rulings may tions. In particular, the court invalidated also prove fatal to future patents if the patent under Alice because it found applications are not properly drafted or that claims limited to a particular type of argued with the USPTO. The solution computer document (XML), while using is for inventors and companies to enconventional hardware, did not differdeavor to become much more diligent entiate the claims from an abstract idea when filing new patent applications. (collecting, displaying and manipulating The written description is the founda-

tion for “fallback” positions (that is, narrower patentable scope for your inventions than originally envisioned at filing) to counter challenges to validity based on anticipation (essentially, the exact invention is disclosed in a single piece of prior art), obviousness, indefiniteness or possession. Hence, applicants need to consider including more and better examples, as well as fuller descriptions that delineate the scope of the inventions. Before filing, inventors may wish to contemplate and describe not only current commercial implementations but also foreseeable ones in as much detail as possible. In short, now is a good time for companies to think about revisiting their patent portfolio and examining their strategy for filing stronger and better patents. ■

Curtis Vock is a partner at Lathrop Gage LLP, in charge of the Boulder, CO office. His practice involves IP strategy, intellectual property prosecution and litigation, and licensing and corporate counseling.

Doug Link is an associate at Lathrop Gage LLP. He is a registered patent attorney with a focus on patent prosecution. His experience includes drafting and prosecuting U.S., international and PCT patents. This article was originally published in the June 2017 issue of Physics World Focus on Optics and Photronics (physicsworld.com).

WINTER 20 18 TODAY’S GENER AL COUNSEL

WORK PL ACE ISSUES

Three Ways Data Can Improve Legal Operations By Scott Forman

n an October 2017 study that was part of Thomson Reuters’ Legal Department 2025 Series, only 14 percent of respondents believed their corporate legal departments are effectively using big data to deliver legal services. In addition, just 29 percent said their legal departments are effectively using extracted data from contracts to develop business strategy and minimize risk. This shows that we are at a point where large legal departments, in particular, have amassed a great deal of data and recognize the value of leveraging it. However, many don’t have the time or resources to draw out actionable insights and guide decision-making. Moreover, legal departments only have access to their own company’s data, creating limitations in comparing their performance with that of other legal departments. One way for corporate legal departments to take greater advantage of the big data revolution is to tap into law firms with the technological capabilities to provide data analytics services and access to aggregated, anonymized data from similar companies. As legal departments increasingly seek data-driven

Scott Forman is a shareholder with Littler Mendelson and founder of Littler CaseSmart. As co-chair of Littler’s Innovation Council, he focuses exclusively on developing technology platforms that re-engineer the delivery of legal services and enhance collaboration with clients and within the firm. sforman@littler.com

intelligence and metrics that can improve legal operations and outcomes, benchmarking, trendspotting and predictive modeling are three important areas of focus. • Benchmarking. Harnessing data and measuring against other legal departments isn’t easy. Our firm has been able to aggregate and de-identify data from a host of clients on employment matters to provide benchmarking information to our clients. A platform I designed in 2010 to better manage employment matters through technology, alternative staffing and legal project management provides

benchmarking information. A dashboard allows clients to see how their administrative agency charges compare to other employers in such areas as settlement amount and transitionto-litigation rate. In-house counsel can leverage this data to guide litigation strategy and decision-making. For instance, data recently revealed that a client was spending less to settle charges than the median for its industry. Although this seems positive on its face, it turned out that the company also had more matters ending up in litigation compared to its peers. Armed with this information, the company

TODAY’S GENER AL COUNSEL WINTER 20 18

could opt to adjust its settlement strategy for charges to reduce litigation, a move that might not have occurred to the legal department had not access to benchmarking data painted a larger picture. In addition to helping manage litigation, benchmarking data provides valuable metrics for in-house departments to report to corporate management. With the C-suite increasingly looking to legal departments to show

actions such as increasing training or changing employment policies. • Predictive Modeling. Although benchmarking and trendspotting are valuable tools for corporate legal departments, predictive modeling is the next frontier. It provides insight from the inception of a matter on how likely it is to progress and its eventual outcome. Predictive modeling will allow legal departments and

Benchmarking, trendspotting and predictive modeling are three important areas of focus.

their effectiveness beyond the amount of legal spend, this type of data is a compelling way to communicate with corporate leaders. • Trendspotting. Not too long ago, legal teams relied largely on the historical knowledge of outside counsel to guide the strategy for individual litigation matters and for insight on the opposing counsel, presiding judge and other key players in a case. Although these assessments are important, they are subjective and may be incomplete. Our platform has allowed us to capture extremely granular data on employment matters, combine attorney intuition with objective insights gleaned from aggregated data to identify trends and guide the approach to defending litigation matters. Aggregated data can also help in-house attorneys manage risk within their organizations, keeping expensive litigation from happening in the first place. As an example, a legal department reviewing data from a group of employment matters may find that a certain policy or manager is more often involved in lawsuits than others are. Based on these trends, the legal department may decide to take simple

their law firms to predict the likely length, costs and outcomes of lawsuits, and what they might see in the discovery and deposition process. As a result, in-house counsel can make more informed judgments about how to proceed with particular matters based on the anticipated hard costs (i.e., settlement/award amounts and legal fees) and soft costs (i.e., brand damage and impact on personnel). The term “inflection point” gets thrown around a lot in discussions of business and legal strategy. It is not an appropriate term for where we are in legal services. The legal industry has already been fundamentally reshaped by data analytics, machine learning and artificial intelligence. The key to success in the coming years will be for law firms and legal departments to partner together to leverage technology, streamline legal operations and enhance legal outcomes. ■

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T H E A N T I T R U S T L I T I G AT O R

Pricing Algorithms, Collusion and Corporate Compliance By Jeffery M. cross

I 36

belong to a compliance chat group that regularly exchanges emails on compliance topics. Recently, the group has engaged in a spirited discussion regarding pricing algorithms, whether they can facilitate tacit collusion, and what the challenges are for a corporate antitrust compliance program in light of such pricing algorithms. An algorithm is a set of operations applied systematically to inputs resulting in an output. Algorithms do not need to be computer programs, but today they are most commonly run by computers. Pricing algorithms are commonly used by sellers to set prices to maximize profits. Routine examples today are airlinepricing algorithms. Such programs use cost, supply and demand data, and can take into account competitors’ prices. The concern is that such pricing mechanisms can facilitate both explicit and tacit collusion. Some people question whether the antitrust laws regarding tacit collusion should be revised.

EXPLICIT COLLUSION

In the United States, an agreement among

Jeffery 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.

two or more independent economic actors is a prerequisite for a violation of Section 1 of the Sherman Act. There are generally two categories of agreements, explicit and tacit. An explicit agreement can be expressed in words. A good example is the agreement reached in the lysine price-fixing conspiracy. Because of an informant, the FBI was able to videotape the cartel meetings. The participants were heard making offers about setting price and output, and accepting those offers. There was a classic quid pro quo: “If you price lysine at $2 a ton, I will too.” An express exchange of words is not the only way to establish an explicit agreement. It can be inferred by circum-

stantial evidence, such as conduct. A classic example is a stack of newspapers at a newsstand. A customer who picks up a paper agrees to pay the posted price, even though no words are spoken. TACIT COLLUSION

A tacit agreement usually occurs in an oligopoly, a market structure with few sellers. In an atomistic market with many sellers, one seller does not care how another is pricing. That pricing conduct will have little impact upon the sales of any of the others. However, in an oligopoly, each seller takes into account the prices of others because such prices can have a significant

TODAY’S GENER AL COUNSEL WINTER 20 18

impact on their sales. Take four gas stations, each on a corner of an intersection. If each station sells the same product, it will compete only on price. Each has a large sign where it can observe each other’s prices. If one lowers the price significantly compared to the others, consumers will switch to that station, affecting the market share of competitors. But they can quickly change their prices, and reverse declining sales. Suppose one dealer decides to raise her price. The others observe the increase. If each dealer independently decides to

missions. For similar reasons, parallel pricing is not by itself unlawful. Indeed, in a perfectly competitive market with many sellers, prices will be the same. ALGORITHMS RAISE THE ANTE

The fear is that pricing algorithms will facilitate tacit collusion. For example, suppose a university professor were to create a pricing algorithm for our four gas stations using cost, supply and demand factors, and competitors’ prices, and then publish it in a journal. If each station owner were to independently adopt the algorithm, he or she will have reached a An agreement among two or more tacitly price that could be above competitive independent economic actors is levels. However, coma prerequisite for a violation of petition is rarely as simple as our gas Section 1 of the Sherman Act. station example. Let us suppose that one of the gas stations has a convenience store and the margins follow that increase, she will have tacitly on soft drinks and snacks are much agreed to a price above competitive greater than on gasoline. This dealer may levels. This is tacit collusion. be using the price of gas as a loss leader Tacit collusion is not unlawful under to attract customers to the convenience the U.S. antitrust laws, in part because store. The station will not want to of the difficulty of fashioning a remedy increase prices. Suppose that another for such conduct. If a dealer were forowner uses his family to run the station, bidden to take into account the pricing resulting in low labor costs. Let’s also of his competitors, the court would be assume that yet another owner prorequired to consider whether the prices vides discounts to employees of a major were set appropriately above cost, innearby employer. Add that gasoline is cluding an amount for a normal return not fungible and that each station sells on investment. This would turn courts gasoline with different additives. The into regulatory bodies like utility com-

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result will be that tacit collusion — detecting cheating on the consensus price or punishing cheaters — is much more difficult. If each dealer in the above revised hypothetical were to use a pricing algorithm, it is not likely that a uniform price would be reached unless there were some negotiation and assurances on the price, cheating and punishment. Such negotiation and assurances turn a tacit agreement into an explicit agreement. The U.S. antitrust law requires that there be something more than parallel pricing to find an express agreement, which are called—“plus factors.” Plus factors can include frequent meetings among competitors, the exchange of information, and uniform pricing that involves complex and historically unprecedented changes in pricing structure made at the same time by multiple competitors, for no discernible reason. What is the challenge for the compliance officer with pricing algorithms? The compliance officer should identify situations in the industry where tacit agreement could become explicit agreement through circumstantial evidence. My recommendation is to identify the factors in both the market structure and the parties’ conduct that create the risk of an inference, and move to avoid those risks. This may be as simple as making sure the company uses its own pricing algorithm, which it can justify, and making sure that the company’s executives are not communicating with competitors as to the components of the program. ■

Transfer Pricing is Big Tax Risk for Multinationals By Paul Sutton

f you are reading this, you probably already have an unenviably broad role. You are expected to have a general understanding of the commercial, regulatory and legal issues affecting your organization across multiple jurisdictions. You probably provide strategic advice to parent and subsidiary boards and business units. You may well manage numerous team members and adviser relationships, and are under constant pressure to achieve more from static or even shrinking budgets.

You may be forgiven for not placing intragroup arrangements high on your list of priorities. Isn’t it all purely internal? • What is transfer pricing, and why is it a major risk for international groups? Transfer pricing is widely regarded as one of the most significant and complex areas of tax risk affecting multinational groups. It is also a major focus for local tax administrations and supranational bodies. Non-compliance is not just a reputation issue for corporations — as demonstrated by the controversy surrounding the tax affairs of Google, Amazon, Starbucks and Airbnb — but it can also result in significant financial liabilities in the form of adverse transfer pricing adjustments, fines and penalties. The numbers involved are significant. In the UK alone, Her Majesty’s Revenue and Customs (HMRC) has reported that in the years from 2011/12 to 2016/17, it secured $7.8 billion in additional tax by challenging the transfer pricing arrangements of multinationals. The Australian Tax Office has reported that it is currently

today’s gener al counsel winter 2018

involved in $3.1 billion worth of disputes, mostly transfer pricing cases, including its current $800 million dispute with BHP Billiton over its Singapore marketing hub. “Transfer prices” are the prices at which an enterprise transfers physical goods and intangible property or provides services or financial support to associated enterprises. Transfer prices are significant because they determine, in large part, the taxable profits of associated enterprises in different tax jurisdictions. The OECD has adopted the arm’s length principle as an international standard for determining transfer prices for tax purposes. The arm’s length principle allows tax authorities to review the transfer prices between associated enterprises, and tax an enterprise on the profits it would have made based on prices negotiated between independent enterprises. This applies both to ongoing supplies and to one-off transactions, not just to legal entities but also to branches or “permanent establishments” for tax purposes. This creates a risk of double taxation because any adjustment of transfer prices in one tax jurisdiction implies that a corresponding change should be made in another jurisdiction. If the tax administration in that other jurisdiction does not agree to make the corresponding adjustment, the group may be taxed twice on the same income. • How transfer pricing is affected by a group’s legal structure: As with many areas of tax, transfer pricing is closely related to legal structures and the contractual terms upon which intra-group transactions are conducted. The linkage is underlined by the OECD’s Transfer Pricing Guidelines, as updated in 2017. These guidelines recognize that inter-company agreements between associated entities have a central role in defining transactions between associated enterprises and the allocation of risk. This is key to the tax analysis carried out by tax authorities around the world. The application of the arm’s length principle requires a functional analysis to be carried out to identify the economically significant activities, the assets used or contributed, and the risks and obligations assumed in transactions between related enterprises. The legal ownership of assets, the legal characteristics of the underlying assets and risks, and the legal relationship between the parties form an important part of this functional analysis. Although those legal factors are not definitive (because they may not reflect the actual conduct of the parties or the economic character-

istics of the transaction), they provide the starting point for the transfer pricing analysis and create the context for any discussions with local tax administrations. • The critical role of inter-company agreements in transfer pricing compliance: Inter-company agreements (often referred to as ICAs) are legal agreements between related parties. They define the legal terms on which services, products and financial support are provided within a group. Inter-company agreements typically cover matters Transfer pricing such as head office and back is widely regarded office services (e.g., finance, as one of the most tax, legal and HR services), marketing significant and services, intellectual propcomplex areas of erty licenses, tax risk affecting IT services and support, revenue sharing, cost multinationals. sharing, R&D services, contract manufacturing, sale of goods, sales agency and commissionaire arrangements, loan facilities, guarantees and other security, cash pooling, and secondment of staff. It has long been accepted that inter-company agreements are a fundamental part of transfer pricing compliance for multinational groups. With the implementation of the OECD’s “Base Erosion Profit Shifting” guidance by an increasing number of countries each year, this importance is only increasing for multinational enterprises and financial institutions. A risk cannot be allocated after the event, and therefore inter-company agreements should be put in place at or before the commencement of the relevant supplies. • What transfer pricing documentation looks like: The OECD’s Transfer Pricing Guidelines recommend that local tax authorities adopt a three-tiered approach to the transfer pricing documentation that each multinational enterprise (MNE) is required to maintain. The approach comprises the following: ■■

Master file: This provides an overview of continued on page 43

A Way for General Counsel to Drive Shareholder Value By William P. Farrell, Jr.

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orporate law departments have historically been viewed, even by the in-house attorneys who lead them, as unavoidable cost centers. In-house counsel are essential to mitigating risk, protecting assets and dealing with legal, transactional and compliance issues that a business encounters. They are charged with working within often-decreasing budgets. But the thinking goes that those services inevitably create a drag on the bottom line, so the decision to pursue even the strongest legal claim of substantial value is difficult. It requires the company to advance cash, often in the seven-figure range, with no guarantee of a favorable result and with the expectation of a short-term drag on profit. However, that perception is changing fast. Progressive general counsel have adopted the view that, as part of the corporate leadership team, their goal is the same as that of the CEO or CMO: to drive shareholder value. This is not simply a new way of managing the law department but also a new understanding of the value of legal matters. Among innovative general counsel, legal claims have become corporate assets that, like physical or financial assets, must be cultivated and protected and can be financed and monetized. The most prominent example of this transformation is perhaps DuPont’s legal division.

As Sager’s notion that a legal department should generate revenue for the enterprise has taken hold, especially among large corporations, forward-thinking general counsel have also embraced tools that help them aggressively pursue claims without imposing a strain on the balance sheet. While DuPont’s model for enforcing its legal rights proved effective for a large-cap organization with vast resources, the realities of our legal system make it difficult for many companies to implement that model. Going after all those recoveries requires hiring outside attorneys and paying them to work on the cases. Those expenses come directly out of cash, so the P&L impact is immediate and ongoing, while the proceeds typically aren’t received for years — if at all. Take, for example, a company with $500 million in revenue that in a good year generates $50 million in profit. The general counsel believes a supplier owes the company as much as $100 million after it broke a contract. But in order to collect it, she’ll have to engage outside counsel, which will cost as much as $10 million. She knows neither her CEO nor her board will be willing to incur that much cost on a lawsuit they might not win. Confronted with this scenario in the past, the general counsel had few good choices. Choosing to ignore a breach of contract that harmed the company is akin to abandoning a valuable cor-

Among innovative general counsel, legal claims have become corporate assets. In 2004 the chemicals conglomerate launched its Global Recoveries Initiative, outlining a company-wide plan to identify meritorious legal claims and aggressively assert DuPont’s rights where it had been harmed. In the next five years, the initiative netted $1.5 billion in recoveries. “Our job as lawyers within the company is to be vigilant,” Thomas Sager, DuPont’s then-general counsel, said in 2010. “And if we are not, it means we are not protecting the corporation and its shareholders properly. I understand it sounds revolutionary in nature, but other corporations are following us.”

porate asset. Settling for less expensive lawyers who are not the first choice, and who may be less qualified, introduces a different risk to the company. The problem gets even thornier if the potential defendant is a mega-cap corporation; some of those companies are notorious for using their seemingly infinite resources to overwhelm plaintiffs, leading them to walk away or accept meager settlements. (This is not to suggest that large public companies are not using litigation finance. They are, often as a tool to manage quarterly earnings and protect their balance sheets and P&Ls.)

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Litigation finance has given general counsel another option, allowing them to pursue strong legal claims without asking their organizations to absorb the entire cost and risk of litigation. By transferring the risk of a lawsuit to a financier that agrees to pay the costs of the lawsuit in exchange for a portion of any proceeds, general counsel can engage the lawyers of their choice and let them litigate without onerous billing

In this scenario, legal claims come to be viewed as assets that, like other corporate assets, must be managed to deliver value to the organization. The cost of pursuing those claims is no longer an obstacle to monetizing the assets, but a factor in determining the asset’s value, both to the organization and to the litigation-finance provider. Through litigation finance, legal claims essentially become unbound from the associated

Through litigation finance, legal claims essentially become unbound from the associated expenses.

William P. Farrell, Jr. is Managing Director and General Counsel of Longford Capital. He is responsible for the overall operations, with a particular focus on transaction sourcing, investment selection and portfolio management. He has extensive trial and appellate experience as both a government prosecutor and as a partner at Neal, Gerber & Eisenberg, LLP and Gardner, Carton & Douglas. wfarrell@longfordcapital.com

constraints. They can choose which claims to pursue based on merit, and those claims will be decided on the strength of the claims — not on the parties’ financial wherewithal. The process is relatively simple. When a general counsel concludes that her organization has been harmed by a breach of contract, IP theft or any business tort, she contacts a litigation finance firm. A team of experienced litigators, finance and business executives evaluate the claim and decide whether it is likely to prevail. If they decide it is, the litigation finance firm advances the company funds to cover legal fees and other costs associated with the litigation. The general counsel is able to pursue the recovery on her own terms, with little risk to her organization. She can hire the lawyers of her choice and turn them loose without having to worry about the persistent cost pressures that often characterize commercial litigation. If the company achieves a favorable outcome, the financier receives a portion of the proceeds agreed upon up front. If the case is unsuccessful, the company owes the financier nothing; the financier absorbs the loss. If the number of firms using litigation finance continues growing at the pace of recent years, more than half of commercial litigators will be using it in the next two years. Soon, more and more general counsel will be expected to demonstrate that they are contributing directly to the bottom line. At the very least, they will be expected to run self-sustaining departments. Recoveries from enforcement of an organization’s legal rights through pursuit of valid legal claims will become the law department’s source of revenue.

expenses. General counsel who fail to pursue a strong case of patent infringement are not avoiding risk; they are forfeiting an opportunity to increase revenue. Litigation finance is even helping make legal recourse a sensible option for entities like universities and bankrupt companies, that may have struggled to come up with capital in the past. Universities can both protect their sprawling patent portfolios and generate additional funding for research and innovation. Companies in bankruptcy can generate additional cash for creditors without having to dip into finite assets. We are experiencing a change in commercial litigation. Truths that were once universal in business — deep pockets win lawsuits and in-house law departments are a necessary cost center — are becoming antiquated. Forward-thinking general counsel are relying upon the legal system to protect corporate assets and recover funds to which their organizations are legally entitled. Litigation finance helps provide access to the justice system. It provides innovative general counsel a new tool for remaking their law departments as valuable contributors to the bottom line. ■

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Open Source Software continued from page 39

the MNE’s group, including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity. ■■ Local files: The MNE must prepare a local file for each individual tax jurisdiction in which it is present. Each local file provides more detailed information on the transactions affecting that tax jurisdiction, including financial information, an analysis of comparable arm’s length prices and copies of all material inter-company agreements. ■■ Country-by-country (CbC) report: The CbC report comprises aggregated information relating to the global allocation of income, the taxes paid, and certain other indicators across all the tax jurisdictions in which the group operates. The report also requires a listing of all the “constituent entities” for which financial information is reported. Note that the OECD recommends that CbC reports should not be required for MNE groups with annual consolidated group revenue of less than $850 million. • General principles for the preparation and implementation of inter-company agreements: The following are suggested as general principles, which should apply whenever inter-company agreements are put in place or updated, whether for transfer pricing, regulatory or other purposes. Brevity: Each inter-company agreement should be as short as reasonably possible. Long and overly complex agreements are unlikely to be read by all the relevant stakeholders. They entail a higher risk in that they do not match the way the group actually operates or is capable of operating in connection with intra-group supplies. ■■ Simple language: As far as possible, intercompany agreements should be expressed in simple language so that they are easier to read, understand, and translate for the purposes of local transfer pricing compliance. Avoid quoting statutes and regulations unless it is absolutely necessary. ■■ Grouping of commercial terms: The key commercial terms should be grouped in one place rather than being distributed across definitions, schedules and appendices. Again, this allows readers to understand the effect of the agreement more quickly. Standard ■■

terms are useful to apply when preparing several (but not all) types of inter-company agreements. ■■ Consistency with transfer pricing methodology: This includes the pricing structure, the basis for allocating costs and risks across multiple service recipients and (where appropriate) the exclusion of charges for shareholder services, which do not directly benefit the relevant recipient. ■■ Consistency with legal relationships: Each inter-company agreement should be consistent with the legal relationships regarding the ownership and use of assets, the flow of supplies, related contractual relationships with third parties, and the allocation of risk reflected in those relationships. ■■ Corporate benefit: The arrangements documented in inter-company agreements should be such that the directors of each participating legal entity can properly approve them as promoting the interests of that specific entity. This includes taking account of the relevant entity’s financial resources and ability to assume risk and satisfy its liabilities, including all contingent liabilities. ■■ Legally binding: Inter-company agreements should contain the elements necessary for them to be legally binding under all applicable laws. An exception is an “agreement” between a parent company and its own branch or permanent establishment. This will not constitute an agreement as such because there is only one party, but rather it is a memorandum of the applicable commercial terms, agreed to by the board of the parent and the managers of the branch. ■■ Briefing notes for directors: Directors of participating entities should be briefed on the reasons for putting in place the agreements and the likely implications of the proposed terms. ■■ Stakeholder review: The overriding principle is that the proposed inter-company agreements should be reviewed by all relevant stakeholders to ensure that the agreements reflect the needs of the whole group, as well as the reality of intra-group transactions. ■

Paul Sutton is the co-founder of LCN Legal, an independent law firm specializing in advising on the legal design and implementation of corporate structures. During his legal career prior to establishing LCN Legal, he held positions as a director at KPMG’s UK law firm and as a corporate partner in the London offices of McGrigors and Pinsent Masons. LCN Legal does not provide tax or transfer pricing advice. paul.sutton@lcnlegal. com

MITIGATING FRAUD RISK IN CHINA 44

BY JESSE DAVES AND DAWN WILLIFORD

tâ&#x20AC;&#x2122;s no secret that foreign-owned organizations with China-based subsidiaries still face heightened risk under the Foreign Corrupt Practices Act. In 2016, 27 companies paid close to $2.5 billion to resolve FCPA cases, 15 of which (55 percent) involved activities in China. That figure underscores the challenges many foreign companies operating in China face as they navigate unfamiliar cultural and business norms. Our company recently worked with a U.S.based chemical manufacturer that learned this the hard way. Initial concerns around declining profits and product quality at a Chinese subsidiary uncovered larger issues of systemic process failures and ineffective corporate governance. The case was successfully mitigated after

several in-person comprehensive assessments, data analytics and employee interviews in China. But it cost the chemical manufacturer the resignation of its CEO and VP of China Operations, along with significant customer losses and increases in compliance costs. It also required greater investments in its core management team, a revamp of its sales processes and a shift in its business culture. Here are key takeaways manufacturers operating in China and other locations with heightened fraud risk should keep in mind before their own watershed moment occurs: Cultural change doesnâ&#x20AC;&#x2122;t happen overnight, but it does start from the top down. The problems uncovered during our assessment stemmed from a

TODAY’S GENER AL COUNSEL WINTER 2018

is a necessity. Too often, companies think of “business in Asia” as an umbrella term. But individual markets — countries and regional jurisdictions alike — are distinct. “Each country is comprised of varying languages, governing bodies, and regulations and cultures — all of which come with a unique set of challenges,” Pei-Li Wong, BDO’s Consulting Managing Director and Asia Forensic Desk Leader, explains. “Acquiring the knowledge and skill sets needed to succeed in Asia is often the first step to expanding or launching operations, but ensuring compliance with laws of both the home country and overseas ups the ante.” Improvements to the company’s internal controls resulted in the identification of more than 20 thirdparty sales agents with singular goals to secure customers, oftentimes through questionable payments. The salesmen saw nothing wrong with the practice, but viewed it as a necessity to securing contracts with businesses. The U.S. management team’s lack of awareness of the local business practice allowed it to continue until the risk had escalated. This underscores the simple but indisputable truth that continuous due diligence at the local level is required where local business practices dominate.

CONTINUOUS DUE DILIGENCE AT THE LOCAL LEVEL IS REQUIRED WHERE LOCAL BUSINESS PRACTICES DOMINATE.

long-standing, revenue-driven “whatever it takes” philosophy cultivated by the person initially put in charge of the sales team. The company acted to revamp its sales cycle in a more transparent way. To do this, it (1) parted ways with employees who were not committed to ethical business behavior, (2) developed and conducted periodic and ongoing verifications, (3) structured high-standard internal and external audits and (4) implemented continuous education for employees. A fully aligned change in culture takes years to evolve; thus where required, the sooner organizations get started, the better. Understanding local culture and business customs is key, but having people on the ground

Periodic, in-person site visits are key to early risk detection and mitigation. When it comes to identifying and staying ahead of potential risks, there is often no substitute for in-person conversations and observation. To truly understand where operational risk lies and how business is conducted in foreign markets, organizations need to ensure they are talking to the right people and obtaining accurate information. The best way to accomplish this is through in-person conversations, coupled with data analytics and document review. Companies should also install leaders knowledgeable about international regulations (or regulations the parent company is subject to) and committed to compliance with company policies. ■

Jesse Daves is Managing Director in BDO USA’s Global Forensics practice. He has conducted fraudrelated investigations involving alleged violations of the Foreign Corrupt Practices Act, embezzlement, kickbacks, Ponzi schemes, conflicts of interest and diversion of assets. He has testified as an expert witness and assisted legal counsel before and during trials by planning and strategizing how to examine witnesses and present evidence. jdaves@bdo.com

Dawn Williford is a partner at BDO USA. She has more than 15 years of internal audit, vendor construction audit, SOX compliance and other consulting experience. She assists clients with design and implementation of their internal controls framework, and development of their internal audit department. dwilliford@bdo.com

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Q&A with Mike Koehler In November 2017, Today’s General Counsel conducted a Q&A with Mike Koehler, Associate Professor at Southern Illinois University Law School. Koehler writes about the FCPA and related topics on his FCPA Professor website. He also runs the FCPA Institute, a “back-to-school” learning experience for professionals seeking to elevate their FCPA knowledge and practical skills.

President Trump seems to think that it’s naive to believe you can do business in much of the world without greasing the skids with bribery or some other ploy. Isn’t there some truth to this? In passing the FCPA in 1977, Congress recognized this precise point, and that is why the FCPA has always exempted so-called facilitation payments. The problem for companies subject to the FCPA, however, is that the DOJ and SEC seem — through enforcement theories — not to be subjected to any meaningful judiciary scrutiny and to have read this exemption out of the statute. There is much survey data out there indicating that in many foreign countries lowly paid bureaucrats will not provide basic government services such as issuing licenses, permits, etc., or clearing goods through customs without a little something for themselves. President Trump is clearly not the first person to recognize this. Congress recognized it in 1977. A solution from the U.S. point of view might be to concentrate enforcement against foreign actors, but I believe you’ve pointed out jurisdictional problems that lead to some questionable theories when enforcement is pursued. Can you give some examples? For starters, the FCPA is a supply-side statute, not a demand-side statute. In other words, only the payer, not the recipient of the alleged bribe, is subject to the FCPA. Sure, the DOJ has other laws in its arsenal, such as money laundering, which it can use (assuming there is jurisdiction) to go after corrupt foreign officials. However, the actions thus far brought tend to be against high-ranking government officials, not the low-level bureaucrats referenced in the above answer. In your blog, you say that you expect the 4th quarter of this year to be active. Is this a strictly administrative phenomenon? If history is any guide, the remainder of the year is very likely to see additional FCPA enforcement activity, including, as is often the case, during the week between Christmas and the New Year. Government agencies in this sense often operate like companies, and like to close the books on a year. This can impact yearly FCPA enforcement statistics, which seem to be all the rage these days. But as a

practical matter, there is little difference if an FCPA enforcement action is resolved on December 30th or January 2nd. According to a survey we are citing, technology is the sector in which respondents are most fearful of running afoul of the FCPA. Are their fears justified — compared, for example, to retail or manufacturing? Yes, the technology sector is a sector that has seen much FCPA enforcement activity and scrutiny. Other sectors are healthcare — which, broadly speaking, includes pharma, medical devices, etc. — as well as oil and gas. However, just because those sectors have seen much FCPA risk, it doesn’t mean that other sectors are immune from FCPA scrutiny. To the contrary, any company that does any business in the global marketplace is going to have points of contact with FCPA officials and thus certain levels of FCPA risk. There is some anecdotal evidence that as the Obama administration was coming to an end, there was a marked trend toward holding individuals accountable for FCPA violations. Do you expect that to continue under Jeff Sessions? Factually, this is not true. This link highlights DOJ FCPA enforcement actions against individuals: http://fcpaprofessor.com/focusdojindividualactions. You can see that individual enforcement action in 2016 and 2015 were below 2014, and 2014 was below 2013. Indeed, as measured by the number of individual actions related to corporate actions, individual FCPA enforcement against individuals is at historic lows. Approximately 80 percent of DOJ corporate FCPA enforcement actions lack related charges against company employees. For most of the FCPA’s history, this statistic was flipped. In other words, most corporate enforcement actions also resulted in related charges against company employees. In terms of expectations for this administration, DOJ criminal actions against individuals have been vibrant thus far. Indeed, earlier this week five individuals connected to Rolls-Royce were criminally charged. ■

TODAY’S GENER AL COUNSEL WINTER 2018

AI and the FCPA

What Tech & Data Analytics Mean What What Tech Tech & & Data Data Analytics Analytics Mean Mean Your Foreign Business for for Your Foreign Business for 3 WAYS ARTIFICIAL INTELLIGENCE (AI) CAN OPTIMIZE PROACTIVE 3 WAYS ARTIFICIAL INTELLIGENCE (AI) CAN OPTIMIZE PROACTIVE 3 WAYS ARTIFICIAL INTELLIGENCE (AI) CAN OPTIMIZE PROACTIVE AND REACTIVE RESPONSES TO CORRUPTION IN OVERSEAS OPERATIONS AND REACTIVE RESPONSES TO CORRUPTION IN OVERSEAS OPERATIONS AND REACTIVE RESPONSES TO CORRUPTION IN OVERSEAS OPERATIONS

Despite reports that anti-corruption efforts may sputter under the Trump administration, risks around the Foreign Corrupt Despite reports that anti-corruption efforts may sputter under the Trump administration, risks around the Foreign Corrupt Practices Act (FCPA) and other anti-corruption aren’t in the rearview mirror quite yet,risks according theForeign latest annual Despite that anti-corruption efforts maylaws sputter under the Trump administration, aroundto Corrupt Practicesreports Act (FCPA) and other anti-corruption laws aren’t in the rearview mirror quite yet, according tothe the latest annual 10-K filings of the top 100 publicly traded companies by revenue across industries. BDO’s 2017 RiskFactor Report series Practices Act (FCPA) and other anti-corruption laws aren’t in the rearview mirror quite yet, according to the latest annual 10-K filings of the top 100 publicly traded companies by revenue across industries. BDO’s 2017 RiskFactor Report series revealed that the number of companies citing the FCPA as a risk to business increased from 2013-17 across four sectors: 10-K filings ofthe thenumber top 100of publicly traded companies byas revenue across industries. BDO’s RiskFactor Report series revealed that companies citing the FCPA a risk to business increased from2017 2013-17 across four sectors: revealed that the number of companies citing the FCPA as a risk to business increased from 2013-17 across four sectors:

RETAIL RETAIL RETAIL

MANUFACTURING MANUFACTURING MANUFACTURING

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2017 2017 2017

New New tech tech brings brings mixed mixed fortunes fortunes when when it it comes comes to to conducting conducting operations operations abroad… abroad… New tech brings mixed fortunes when it comes to conducting operations abroad… Companies should have a greater ability to Companies can be charged with FCPA violations

Companies should have a greater ability to identify and flag data outliers thatability could Companies should have a greater identify and flag data outliers that could to indicate corrupt practices, to helpthat pinpoint identify and flag data outliers could indicate corrupt practices, to help pinpoint threats and channel anti-corruption and risk indicate corrupt practices, to help pinpoint threats and channel anti-corruption and risk mitigation efforts appropriately. threats andefforts channel anti-corruption and risk mitigation appropriately. mitigation efforts appropriately.

Companies can be charged with FCPA violations if they are deemed to havewith “created risk” of Companies can be charged FCPAaa violations if they are deemed to have “created risk” of More corporate data accumulating ifbribery. they are deemed to have “created a risk” of bribery. More corporate data accumulating fasterMore fromcorporate more places slows down bribery. data accumulating faster from more places slows down traditional data analysis and detection. faster from more places slows down traditional data analysis and detection. traditional data analysis and detection.

Enter: Enter: Data Data visualization visualization and and AI AI Enter: Data visualization and AI

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GLENN POMERANTZ GLENN POMERANTZ Partner and BDO Global GLENN POMERANTZ Partner and BDO Global Forensics Practice Leader courtesy of BDO Partner and BDO Global Forensics Practice 212-885-8379 Leader Forensics Practice 212-885-8379 Leader gpomerantz@bdo.com 212-885-8379 gpomerantz@bdo.com gpomerantz@bdo.com

STEPHANIE GIAMMARCO STEPHANIE GIAMMARCO Partner and BDO Technology STEPHANIE GIAMMARCO Partner andTransformation BDO Technology & Business Partner andTransformation BDO Technology & Business Services Practice Leader & Business Transformation Services Practice Leader 212-885-7439 Services Practice Leader 212-885-7439 sgiammarco@bdo.com 212-885-7439 sgiammarco@bdo.com

NOW NOW NOW Identification of Identification of broader patterns Identification of broader patterns across full data broader across fullpatterns data sets streamlined across full data sets streamlined by advanced data sets streamlined by advanced data analytics and by advanced analytics anddata visualizations analytics and visualizations visualizations NINA GROSS NINA GROSS BDO Global Forensics NINA GROSS BDO Global Forensics Washington, D.C. BDO Global Forensics Washington, D.C. Practice Leader Washington, D.C. Practice Leader 202-644-5414 Practice Leader 202-644-5414 ngross@bdo.com 202-644-5414 ngross@bdo.com

Analysis of full data sets for more Analysis of full data sets for more efficient, Analysis of full data reliable sets for more efficient, reliable detection efficient, reliable detection detection Increased speed, Increased speed, efficiency speed, and Increased efficiency and savings forand efficiency savings for organizations savings for and organizations and auditors enhanced organizations andby auditors enhanced by predictive analytics and auditorsanalytics enhanced by predictive and advanced statistical algorithms predictive analytics and advanced statistical algorithms advanced statistical algorithms

A Different KinD of tAKeover By Matthew L. Lalli

here is a joke in large law firms that making partner is like winning a pie-eating contest in which the prize is more pie. If you have a low to moderate appetite for

pie, the prize is not worth the effort. The same could be said of a practice niche I fell into over the past 30 years â&#x20AC;&#x201D; taking over cases that are about to go to trial. Fortunately, I really like pie.

today’s gener al counsel winter 2018

Taking over a case shortly before trial — “shortly” being a relative term — is something I have been asked to do on numerous occasions. The request has come from partners in my own firm, lawyers in other firms who want to co-counsel and clients who have grown dissatisfied with their current counsel. Most clients, and some lawyers, do not begin with a trial in mind. Typically, clients are looking for the quickest and least expensive resolution possible, and that frequently means an early settlement or dispositive motion. However, often the early settlement effort ends in an impasse and the motion is rejected for disputed issues of fact. Sometimes the emotions or principles or dollar value on either side is too great to compromise, and a trial becomes inevitable. At that time, it is not uncommon for clients and lawyers to begin to consider a transition in counsel. There are as many reasons not to change lawyers as there are reasons to do so. Mostly they pertain to cost and uncertainty about whether a change is necessary. This article presents some tips to consider if you are a client wondering how to get over that hurdle, or if you are a trial lawyer faced with a takeover request. • Making a change in lawyers will cost more money, but not as much as you might think. Whether the takeover comes during discovery, motion practice or literally right before

the first telephone call, the transition almost always is smooth. I have yet to take over a case when prior counsel was anything but professional. Whether prior counsel withdraws immediately, remains counsel of record for a transition period of weeks or months, or remains on the case as second chair, the transition begins simply with obtaining the file. Even when prior counsel withdraws immediately, you should ask for permission to call if questions arise, because questions always arise. Prior counsel can be helpful in providing important information about opposing counsel and judges, caution about a witness, thoughts about key documents or ideas they have for trial strategy. You should welcome all of these. The more information you have, the better off you will be. • Understand the scope of the case. Knowing the issues in dispute — what is at stake, the number of documents in production, the number and identity of fact and expert witnesses and the anticipated length of trial — is imperative. In all but the simplest cases, you cannot accomplish a takeover without a deep bench, and knowing the scope will allow you to staff the case appropriately with your partners, associates and paralegals. • Begin with the end in mind. In every trial, both sides will have enough evidence to support their theory of the case. It is the best story that

Making a change in lawyers will cost more money, but not as much as you might think. trial, the preparation tasks largely are the same whoever performs them. You have to develop a trial theme, review the depositions and exhibits, prepare and defend motions in limine, prepare jury instructions, make witness outlines and present the case at trial. Depending on the size of the case, it will take the new trial team some time to get up to speed. For example, in a significant case that will take two or three weeks to try, an experienced trial team can get into a position to continue discovery or perform pre-trial tasks within 100 hours or so. Also, if you have an experienced trial team with well-developed procedures, it can make up quite a few of those 100 hours with pre-trial preparation efficiency. • Moving from one lawyer or law firm to another can be awkward, but once you get past

will win. Whether the case is large or small, you should begin by preparing a case theme outline that will turn into an opening statement. This may seem counterintuitive, but beginning with the big picture will help you present the law and the evidence in a short period of time. The case theme outline always begins with a summary that contains the complete story in four or five paragraphs. If you cannot tell your story in summary fashion, your story is not simple enough for trial. The case theme outline will be a work in progress; but without one, you will be a ship lost at sea. • Begin at once to prepare the jury instructions and special verdict form. I spoke at a Federal Bar Conference a few years back and explained how I prepare jury instructions early in a case, continued on page 53

Recent Developments in Class Action Law BY FELIX SHAFIR AND JOHN QUERIO

he two most important unresolved issues in class actions are the standard by which plaintiffs must show an ascertainable class before a lawsuit can be certified for class treatment, and whether a class can be certified if it includes members who have suffered no injury. Federal appellate courts nationwide are sharply divided over these issues, and it remains to be seen whether SCOTUS will step in to resolve the conflicts. In the meantime, general counsel should press their legal teams not just to raise the strongest arguments available in the federal appellate court in which a case is pending, but also to preserve arguments that could win if SCOTUS steps in and resolves these conflicts in favor of defendants.

THE ASCERTAINABILITY REQUIREMENT

Most federal appellate courts have recognized that the existence of an ascertainable class is an essential requirement for the certification of damages in class actions under Federal Rules of Civil Procedure 23(b)(3). Several years ago, in Marcus v. BMW of North America, Carrera v. Bayer Corp. and Hayes v. Wal-Mart Stores, the Third Circuit held that this standard requires a reliable and administratively feasible method for deciding who falls within the class definition. Other federal appellate courts, however, are divided over whether plaintiffs must demonstrate administrative feasibility.

The Fourth, Sixth and Eleventh Circuits appear generally aligned with the Third Circuit in requiring an administratively feasible mechanism for determining who is, and who is not, within the class definition. For example, in Sandusky Wellness Center v. ASD Specialty Healthcare and Cole v. City of Memphis, the Sixth Circuit explained that Rule 23(b)(3)’s ascertainability requirement can be met only if it is administratively feasible to determine whether particular individuals are members of the proposed class. In EQT Production Co. v. Adair, the Fourth Circuit referenced the same concern to hold that the ascertainability requirement cannot be satisfied where “class members are impossible to identify without extensive and individualized fact-finding or ‘mini-trials.’” However, the Second, Seventh and Ninth Circuits have reached different conclusions. For example, in Briseño v. ConAgra Foods, the Ninth Circuit held that Rule 23 does not include an administrative feasibility prerequisite to class certification. In In re Petrobras Securities, the Second Circuit refused to recognize a “freestanding administrative feasibility” element that must be satisfied at the class certification stage. Even among the federal appellate courts recognizing the requirement of administrative feasibility, there are differences. In Hayes v. Wal-Mart Stores, the Third Circuit stressed that plaintiffs cannot satisfy the ascertainability

TODAY’S GENER AL COUNSEL WINTER 2018

requirement “if the only proof of class membership is the say-so of putative class members or if ascertaining the class requires extensive and individualized fact-finding.” In contrast, in Rikos v. Procter & Gamble Co., the Sixth Circuit saw no reason to follow the Third Circuit’s approach, given “the strong criticism it has attracted from other courts.” The Sixth Circuit instead concluded that plaintiffs had sufficiently demonstrated administrative fea-

ability requirement but diverge on the meaning of ascertainability, the Eighth Circuit has declined to address “ascertainability as a separate, preliminary requirement” and has instead focused on a rigorous analysis of Rule 23’s express requirements, which subsume the requirement that “a class ‘must be adequately defined and clearly ascertainable.’ ” SCOTUS recently declined an opportunity to resolve this split of authority by denying the petition for a writ of certiorari in ConAgra Brands v. Even among the federal appellate courts Briseño. But SCOTUS has been known to deny cert recognizing the requirement of administrative petitions only to take up the same issue months or years later, after it becomes feasibility, there are differences. clear that a conflict in the law will continue to fester sibility, where membership in the proposed class absent the high court’s intervention. Even though some circuit courts have sharply could be resolved through substantial review of the defendant’s internal data, “supplemented criticized the Third Circuit’s articulation of the through the use of receipts, affidavits and a speadministrative feasibility standard, the Third Circial master to review individual claims.” cuit recently reaffirmed that standard’s continuing Still other courts have paved their own unique vitality in City Select Auto Sales v. BMW Bank of North America. Clearly, the Third shows no paths. The Eighth Circuit has completely rejected sign of abandoning this requirement, and as long the existence of an independent ascertainability requirement. As that court explained in Sandusky as that continues, intermediate appellate courts Wellness Center v. Medtox Scientific, whereas nationwide will remain divided over ascertainother federal appellate courts have recognized that ability and administrative feasibility. SCOTUS is Rule 23 implicitly includes a distinct ascertainlikely to have more opportunities to address this

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action where at least one named plaintiff meets the standing requirements. However, in Mazza v. American Honda Motor Co., the Ninth Circuit contradicted this view, ruling that no class can be UNINJURED CLASS MEMBERS Under Article III of the Constitution, federal certified that contains members lacking Article III courts lack jurisdiction to decide a case unless the standing. plaintiff has standing to sue — a requirement the Recently, in Tyson Foods, Inc. v. Bouaphakeo, plaintiff can satisfy only when the defendant’s SCOTUS acknowledged that “the question whether conduct caused him or her a concrete injury. uninjured class members may recover is one of Class actions are not exempt from this standgreat importance.” To date, however, the Supreme ing requirement. Intermediate federal appellate Court has expressly declined to resolve the split courts, however, are divided over how to apply of authority over this issue. Article III when the The defendant in federal class action will Tyson Foods included include uninjured class the issue among the According to the Tenth members. Does it prequestions presented by clude class certification petition for a writ of Circuit, classwide discovery its when the named class certiorari; but the defenrepresentative has shown dant later reframed its and more litigation can a concrete injury to argument on this subject, establish his or her own which led SCOTUS to deanswer whether all class standing, but the potencline to decide the questial class includes absent tion in that case. As Chief members were harmed after Justice Roberts explained class members who lack standing because they in his concurring opinion, certification. suffered no injury? “Article III does not give Several circuits have federal courts the power rejected class certification to order relief to any in such circumstances. In Denney v. Deutsche uninjured plaintiff, class action or not,” but said Bank, for example, the Second Circuit held that that the problem is not ripe for review. SCOTUS “no class may be certified that contains members has signaled its interest in this conflict in the law, lacking Article III standing.” The Eighth and D.C. and the Court may eventually step in to decide Circuits have reached the same conclusion. if lawsuits that include uninjured absent class But other circuits have adopted a more lenient members can proceed as class actions. rule allowing class certification even if the absent Because federal appellate courts nationwide class members lack Article III standing. In Neale are sharply divided over these issues, general v. Volvo Cars of North America, the Third Circuit counsel should encourage their legal teams to held that standing for class certification purposes preserve the strongest arguments available for is shown as long as a class representative has the defense on these issues today, and preserve standing, whether in the context of a settlement or winning arguments that may be available tomorlitigation class, and that “unnamed, putative class row if SCOTUS steps in. ■ members need not establish Article III standing.” Similarly, in D.G. ex rel. Stricklin v. DeVaughn, the Tenth Circuit determined that Rule 23’s certification requirements did not require all class members to have suffered harm or threat of immediate harm, nor call for the named plaintiffs to prove class members have suffered harm. According to the Tenth Circuit, classwide discovery and more litigation can answer whether all class members were harmed after certification. Still other courts, like the Ninth and Seventh Circuits, seem confused about the issue, following different rules in different opinions. For example, in Stearns v. Ticketmaster Corp., the Ninth Circuit said that Article III standing is satisfied in a class important question of class action procedure in the near future.

Felix Shafir is a partner at Horvitz & Levy LLP. He has argued appeals in the California Supreme Court and the California Courts of Appeal, and has been lead and amicus counsel in numerous proceedings in the United States Court of Appeals for the Ninth Circuit. fshafir@horvitzlevy. com

John Querio is a partner at Horvitz & Levy LLP. Before joining the firm he held judicial clerkships with the Honorable Pamela A. Rymer, U.S. Court of Appeals, Ninth Circuit; and the Honorable David F. Levi, U.S. District Court, Eastern District of California. He is currently participating as amicus counsel in Epic Systems Corp. v. Lewis in the United States Supreme Court. jquiero@horvitzlevy. com

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Takeover

continued from page 49 often before discovery is complete. After the conference, I had three or four judges echo that point and explain how seldom lawyers actually do it. Preparing the jury instructions and special verdict form early is even more important in a takeover case. You need to prepare the case from the jury’s point of view. The jury

— whether they are court orders, summary judgment papers, mediation statements, case evaluations or discovery motions. From there, you should understand the depositions, deposition exhibits and then the broader database of documents. • Get to know the trial witnesses and evidence. If you have participated in building the case — through written discovery, document review, selection of deposition exhibits, depositions

The best way to get your arms around the facts and the law is to build from the top down rather than the bottom up. instructions and the special verdict form are the container into which you will fit the evidence. Knowing the correct law, and the areas where the law is not clear, is necessary for the case theme outline and the trial story. • Break it into small bites. Opposing counsel will not stop to allow you to make the transition. Usually they tend to see blood in the water as soon as you dive in, so you need help to attack the evidence and the law. As trial counsel, you should put yourself in charge of developing the story and preparing the case theme outline. However, someone needs to get a grasp of the documents. Someone needs to review the deposition transcripts; someone needs to understand and organize the legal issues; and someone needs to be in charge of experts. Depending on the size of the case, you might also be the “someone” for one or more of these tasks. But dividing the tasks into smaller bites, and assigning them to different members of your team, simplifies things. • Attack the evidence and the law from the top down. The sequencing inherent in the Rules of Civil Procedure is to build the case from the ground up, one brick — or one piece of evidence — at a time. That also is the natural inclination of most lawyers. You do not have that luxury when you take over a case close to trial, nor does the client want to pay you to start over. The best way to get your arms around the facts and the law is to build from the top down rather than the bottom up. Use what prior counsel already has developed, starting with the complaints and counterclaims. After that read the most recent filings first

and summary judgment motions — then the presentation of evidence of trial builds naturally. In a takeover situation, however, especially when you have not participated in discovery, you must make a conscious and concerted effort to identify and organize the evidence before trial. Meet and interview as many witnesses as you can to assess how they will present to a jury, which often comes across differently in person than on reading a cold transcript. Identify the documents you need to tell your story and determine how, when and through which witnesses you will introduce them into evidence. You do not want to end up in trial with no way to get your key documents admitted. • Embrace the advantage of the takeover. One of the great advantages of taking over a case close to trial, building the case theme from the end rather than the beginning and attacking the evidence from the top down, is that you will have the same perspective and orientation as the jurors. Jurors hear and understand a case on a level much higher, with much less detail and with fewer nuances than the lawyers who build and present the case. Often trial lawyers have so much command of facts that they let it get in the way of the simple story the jury needs to hear. With a takeover, you usually don’t have time to amass that level of detail. The takeover lawyer needs to learn to embrace the case on the same level as the jurors see it. This does not mean it is acceptable for the lawyer to go in unprepared and wing it. But you can take comfort in having the same perspective as the jurors. ■

Matthew L. Lalli is a trial and litigation attorney with Snell & Wilmer who has tried dozens of cases in courts and arbitration tribunals in Utah, California, and throughout the United States. He is the litigation practice group leader in Salt Lake City, a member of the firm’s ethics committee and loss prevention counsel to the firm. mlalli@swlaw.com

HIDDEN LEGAL RISK OF OPEN SOURCE SOFTWARE by jeff luszcz

TODAY’S GENER AL COUNSEL WINTER 2018

here is an old saying that ignorance of the law is no defense. Yet software companies, their general counsel, and the law firms that advise them are often ignorant of the open source components in their software and the corresponding compliance obligations. Almost half of the code used in all software is for open source software (OSS). Although open source provides a high-quality way for software developers to be more agile and efficient, there is also a hidden risk — the law. Open source components are, by definition, free of cost and available for anyone to use; but there are limitations, including licensing obligations with which software developers must comply. Depending on the component, penalties for failure to comply with an open source license can be severe. For example, a software company could be prevented from selling a product incorporating an open source component. Or it could be required to release, as open source, the entire software product containing the component, in order to come into compliance. EDUCATION A MUST Most software developers are unaware of open source licenses, although there is established law that enables enforcement. Adding to the risk, most GCs are unaware of the open source components their developers are using, and most companies don’t have automated means to scan their code for open source and ensure compliance with licensing terms. Both GCs and law firms need to educate themselves about the compliance risk of open source software licenses, and then ensure that their development teams and clients have the training, processes and automation in place to ensure continual IP and legal compliance. The open source movement has significantly changed how we design and build software. Although open source software (OSS) has been around for decades, commercial software companies have had their traditional software design process flipped upside down in the last 10 years. When classic commercial software packages were first created years ago, very little third-party compliance was required. Commercial packages would be purchased, small pieces of source code from books would be used, and possibly some quasi-open source toolkits or libraries that were in limited distribution would be brought in. LEGAL AND DEVELOPMENT DISCONNECT Starting in the late 1980s, and accelerating in the 1990s and 2000s, open source components have become the backbone of the software industry.

The typical commercial product contains hundreds of high-quality open source components, but data shows that open source licensing obligations are followed in only a small percentage of them. As development practices have outpaced internal processes to manage legal obligations, most companies are out of compliance. In interviews and discussions with legal and development teams, it becomes clear what has led to this disconnect. Legal teams mistakenly think that developers are aware of the requirements of using open source libraries and are taking care of them. Developers are looking for guidance, but they are often under immense time pressure to get products out of the door. Although there may be high-level corporate policies about open source usage, it is very rare for development teams to have a hard requirement that fulfilling open source obligations is a gateway for shipping the product. M&A PROBLEMS FROM OPEN SOURCE VIOLATIONS This disconnect is clear when a company building a software product is required to produce an independently verified disclosure of all the open source and commercial code it uses — a common request during mergers and acquisitions, and in working with original equipment manufacturers (OEMs) and large enterprise companies. Organizations are very surprised to see a difference of 20 times or more between what they think they are using, and what they are really using; and they are typically out of compliance with any previously unknown open source component. Acquirers and customers typically require technology companies to come into quick compliance from both legal, as well as vulnerability, perspectives. The technology provider is required to update their software to fulfill obligations of the open source they are using. Required actions include putting proper license notices and copyright statements in documentation and “about” boxes, changing how libraries are linked or used, and providing source code either for certain components or the entire software product. These actions are never easy and sometimes not possible to perform. A problem that can affect companies when working under externally imposed time constraints is that it is not always possible to come into compliance before a product is to be shipped. The product may depend on certain open source libraries requiring obligations that are contrary to the company’s business model. For instance, it is very common to encounter components in use continued on page 59

Mandatory Arbitration Isnâ&#x20AC;&#x2122;t Always Mandatory in Canada By Nikiforos Iatrou and Anastasija Sumakova

TODAY’S GENER AL COUNSEL WINTER 2018

s tools designed to help parties avoid costly, lengthy, public disputes, mandatory arbitration clauses in commercial contracts are presumptively enforceable in Canada. However, a series of cases over the past decade have shown that mandatory is not mandatory when it comes to consumer contracts, i.e., contracts of adhesion containing terms of service. Consumer protection laws — which vary from province to province in Canada — limit and, in some cases, void such clauses in order to preserve a consumer’s right to have a claim decided by the courts, typically by way of class action. Recent appellate case law in Canada suggests that for companies offering services to both consumers and business users, there is a significant risk that if a mandatory arbitration clause is defeated and consumers can bring a class action in the courts, business users may also be able to come along for the ride. By way of example, Ontario’s Consumer Protection Act prohibits mandatory arbitration clauses in consumer contracts. This means that businesses offering services to Canadian customers must consider the character of their customer base. If, for example, you are offering cloud computing or financial services to customers in Ontario, you should be considering whether your customers are (1) “consumers,” i.e., customers who use the services for personal, family or household purpose; (2) business users, i.e., individuals or corporations who acquire services for business purpose and are not covered by consumer protection legislation; or (3) both consumers and business users. In Ontario a mandatory arbitration clause, which is standard in many service agreements, is not enforceable in respect to consumers; but it is prima facie enforceable in respect to business users. As we highlight below, the risk of facing class actions from business users in Canada arises where a company provides services to both consumers and business users. A recent decision of the Ontario Court of

Appeal in Wellman v. TELUS Communications Company demonstrates the risk of dealing with consumers and business users under the same contractual terms. In particular, in light of the decision in Wellman, there is a risk that claims not subject to the consumer protection legislation in Ontario (i.e., the business users’ claims) can proceed in the courts despite a mandatory arbitration clause if they are brought alongside consumer claims in a single class action. In Wellman, the representative plaintiff claimed that the defendant TELUS Communications overcharged its customers by rounding up phone calls to the next minute without divulging this practice. The proposed class was comprised of two types of customers: 70 percent of the class were consumers who purchased the defendant’s plans for personal use, and 30 percent were nonconsumers who purchased plans for business use. TELUS’s contracts contained standard terms and conditions, including a mandatory arbitration clause. TELUS conceded that as a result of the Ontario Consumer Protection Act, the consumer claims could proceed in court. TELUS argued, however, that the business users’ claims were governed by the mandatory arbitration clause, and brought a motion for a stay of the proceeding to the extent it pertained to those claims. Relying on a 2010 Ontario case, Griffin v. Dell Canada Inc., the motion judge refused to order the partial stay and certified the class action to include both consumers and business users. TELUS appealed, drawing on the Supreme Court of Canada’s 2011 decision in Seidel v. TELUS Communications Inc. In Seidel, a partial stay was issued, and only certain consumer claims under British Columbia’s consumer protection legislation were allowed to proceed in court. TELUS argued that in light of the decision in Seidel, the motion judge did not have discretion to refuse a stay of claims that were governed by the mandatory arbitration clause. This did not sway the Ontario Court of Appeal in Wellman. It found that prior Ontario case law had not been overtaken by Seidel, which was a decision grounded in British Columbia’s legislation, not Ontario’s. Both Griffin and Seidel recognized the importance of private arbitration and the general principle that arbitration clauses are presumptively enforceable. However, the cases were decided in different legislative contexts, therefore leading to different outcomes. In comparing the legislative contexts in Griffin (Ontario) and Seidel (British Columbia), the Court noted the following differences:

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• Ontario’s consumer protection legislation expressly exempts consumer contracts from mandatory arbitration. On the other hand, British Columbia’s legislation provides that only certain claims can proceed in court; and • Ontario’s Arbitration Act provides broader authority for courts to intervene in arbitration, compared to British Columbia’s equivalent legislation. In particular, while British Columbia’s Commercial Arbitration Act allows the courts to intervene and refuse to stay a court

Nikiforos Iatrou,

recognized by Chambers and others as one of Canada’s prominent competition litigators, leads WeirFoulds LLP’s antitrust group. He was counsel to Canada’s Commissioner of Competition from 2009-2012, and is now routinely retained on civil, regulatory and criminal matters. niatrou@weirfoulds. com

Anastasija Sumakova is an associate at WeirFoulds. Her practice focuses on complex corporate and commercial disputes as well as estates, trusts and capacity litigation. She also has experience in matters involving administrative law issues and defense of class actions. asumakova@ weirfoulds.com

try to skirt the effect of a mandatory arbitration clause. This would still, of course, be subject to the analysis by the court of whether separating the claims would be appropriate. Given the result in Wellman, and the concerns raised by the concurring judge, service providers should consider mitigating against the risk of non-consumer claims being litigated in courts, despite an enforceable arbitration clause. One option to consider is to enter into separate contractual relationships with personal users, on

The risk of facing class actions from business users arises where a company provides services to both consumers and business users in Canada. proceeding only when the arbitration agreement is “void, inoperative or incapable of being performed,” Ontario’s Arbitration Act gives the court discretion to refuse a stay in a number of circumstances. The Court of Appeal affirmed the motion judge’s finding that it would not be reasonable to separate the two types of claims because (1) the consumer claims represented 70 percent of the total claims; (2) the liability and damages issues for both types of claims would be the same; (3) group arbitration was not permitted for business users’ claims; and (4) separating the two proceedings could lead to inefficiency, risk inconsistent results and create a multiplicity of proceedings. This case law demonstrates the need for businesses that offer goods and services to Canadians to take stock of their customer base before taking comfort in the enforceability of their mandatory arbitration clauses. Not only do regional differences come into play — British Columbia and Ontario are just two of 10 provinces with consumer protection and arbitration regulations to consider — but the characteristics of the customer base are also critical. In concurring reasons, one of the appeal judges in Wellman noted a concern that business litigants might try to “sidestep” arbitration clauses by adding consumer claims to non-consumer claims that would normally be arbitrable. Although that was not an issue in Wellman, given the 70-30 split in favor of the consumers, one could envisage an opportunistic plaintiff using a combined claim to

the one hand, and business users on the other. Since a key feature of class certification hearings is the existence of “common elements” among the various proposed claimants, the existence of separate contracts may make it more challenging to establish that consumers’ claims and business users’ claims have enough common elements to proceed as a class action. Companies need to think creatively about how to resist this trend of consolidating claims within a class action. Although untested by the courts, drawing a distinction between the two types of customers may be a company’s best chance at minimizing the risk of consumers’ and business users’ claims being lumped together. By expressly distinguishing the two, and by stating that the arbitration clause would not apply to consumers but would apply to business users, a company starts to build its case that — for at least some of its customers — mandatory arbitration should actually be mandatory. ■

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Open Source Software continued from page 55

that are licensed under the General Public License (GPL). The GPL is a popular and well-regarded license, used by well-known projects such as the Linux Kernel. It requires that any source code linked to the license should be provided to the end user if the code is used in a distributed product. The GPL requirement also includes the company’s own source code that they wish to keep proprietary. Companies that ship a product and link the source code to the GPL license yet want

such as license text and source bundles, as well as to encourage proper and timely management of third-party dependencies. This contract language helps make the case to the supply chain that they should take open source compliance seriously. Additionally, these agreements may explicitly discuss vulnerability reporting and procedures for handling alerts and upgrades. As a consequence of not keeping track of third-party components, users are not able to respond to reported vulnerabilities. This makes products vulnerable to outside attacks, which can lead to data loss or financial damages. Legal

Depending on the component, penalties for failure to comply with an open source license can be severe. to keep some of the source code proprietary find that this leads to a legal conflict. In many cases, coming into compliance requires the removal or rewriting of these open source libraries and features that depend on them. The recent Versata/Ameriprise court cases in the U.S. showed the implications of not fulfilling the obligation to provide source code for a thirdparty open source component. The cases caused confusion and legal issues for end users, and tied up the original software producer in court. It is expected that more companies will look to undisclosed open source dependencies as a defense in unrelated business lawsuits. Other recent court cases in the United States and Europe have made it clear that companies are responsible for compliance when their software product is distributed. This can lead to legal surprises due to unmanaged dependencies selected by their developers, as well as open source components introduced by suppliers as part of the software supply chain. What this means is that a company is responsible for compliance in the choices their developers make, as well as the choices made by developers working for the companies that provide software development kits, components, operating systems and other executables. If it is not clear who will be executing the compliance tasks, it often falls to the last organization in the chain. This is a difficult and expensive task often requiring information to which only previous members of the supply chain are privy. More and more companies are writing open source compliance requirements into supplier agreements to clarify pass-through obligations

teams are finding themselves more and more involved with security responses and the legal and financial repercussions of these attacks. As a result, legal teams are putting policies in place around component updating as part of the efforts to reduce risk to their companies. Companies that manage open source components will often establish an open source review board (OSRB). The members of the OSRB come from various teams who can help manage the use of third-party and open source software in the organization. This group typically consists of representatives from legal, engineering, security and business teams. They are responsible for setting policy, educating other employees and being a source of knowledge for the company. The policy they set can be implemented by engineering teams; and any new situations can be referred to the board. By taking the lead, legal teams can reduce risk for their organizations and, at the same time, allow their companies to be good open source citizens. Even if the power of copyright were not standing behind open source licenses, the open source development ecosystem would depend on the users to respect the philosophy of the licenses, and give back where possible. As more companies start to understand their true dependency on open source, we should expect more financial and technical support for compliance. Better compliance allows us to deliver higher quality, more secure and better-supported products — and help to support a strong open source ecosystem. ■

Jeff Luszcz is the Vice President of Product Management at Flexera Software. He leads the professional services team responsible for open source compliance and security audits. Previously he was the Founder and CTO of Palamida. JLuszcz@flexera.com

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Summary DiSpoSition in arbitration By John Shope and Diana Tsutieva

hen we ask in-house counsel to exlion or less unless the parties opt out, provide plain why their companies don’t use that after consulting the parties, the tribunal arbitration clauses, the answer fremay decide the case on documents only without quently includes the assertion that “you can’t get examination of witnesses or even a hearing. summary judgment in arbitration.” No in-house Article 39 of the latest revised Rules of the lawyer wants his client’s senior executives to travel Arbitration Institute of the Stockholm Chamber a long way and undergo cross-examination in a of Commerce, applicable to claims of any size, dispute over contract interpreexpressly permits summary tation that could be resolved procedure for issues of fact In the United States, the and law and arguments that by having a judge read the contract, or where the email pleadings are legally insufleading arbitral bodies ficient. The latest Singapore trail makes the controlling facts indisputable. International Arbitration There is a kernel of truth now explicitly provide Centre Rules provide for to the assumption that a sumearly dismissal of a claim or mary judgment — or more for summary disposition defense if it is “manifestly appropriately in the context without legal merit” or “manof arbitration, a “summary ifestly outside the jurisdiction in their rules. disposition” — is unlikely of the Tribunal.” to be rendered in an arbitraBut specific rules are not tion case. That, however, is changing. Leading required. Although an ICC task force several arbitration tribunals now expressly permit sumyears ago declined to amend its rules to expressly mary disposition; arbitration panels are issuing allow summary dispositions, ICC tribunals, in partial or total summary dispositions; courts are fact, have held that they have authority to grant enforcing these awards; and parties are includa summary disposition. ing provisions in their arbitration agreements In the United States, the leading arbitral bodies to encourage summary disposition. now explicitly provide for summary disposition in their rules. The American Arbitration AssociaFORA RULES tion’s Commercial Rule 33 and Construction Rule Three major arbitral institutions have recently 34 provide that an arbitrator may permit and rule implemented rules on summary disposition. upon dispositive motions upon a prior written Effective March 2017, the International Chamapplication. Commercial Rule 33 requires a prediber of Commerce (ICC) Rules for “expedited cate showing that the motion is likely to succeed proceedings,” which apply to claims of $2 miland will dispose of or narrow the issues.

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JAMS’ rules authorize arbitrators to permit motions for summary disposition if there is “reasonable notice to respond.” FINRA permits the respondent to file a motion for summary disposition based on either the pleadings or uncontested affidavits. The International Institute for Conflict Prevention and Resolution’s guidelines deem summary disposition permissible pursuant to the general provision in Rule 9.1 that “subject to these rules, the Tribunal may conduct that arbitration in such manner as it shall deem appropriate.” The guidelines encourage the tribunal to admit written evidence and factual presentations as appropriate for such motions, and note that, as a disincentive to frivolous motions, the tribunal may assess the costs of such a motion against an unsuccessful applicant separately from the overall costs of the case.

SUMMARY DISPOSITION DISFAVORED HISTORICALLY Several factors have limited the frequency of summary dispositions. The most significant is the fear of vacatur, but there are other reasons. Some older U.S. arbitrators “grew up” as lawyers before the U.S. Supreme Court revolutionized summary judgment practice in 1986. To this day, summary judgment (or disposition) is not available in many other legal systems. Some arbitrators have believed that in contracting for arbitration, the parties essentially expected an evidentiary hearing for any dispute. However, this reasoning is arguably circular, and certainly unsound for contracts made after the adoption of the rules just noted.

John Shope is a partner in the Boston office of Foley Hoag LLP, where he specializes in complex commercial litigation and arbitration, frequently in the energy industry. He is a member of the commercial and energy panels of the American Arbitration Association and the International Institute for Conflict Prevention and Resolution. jshope@foleyhoag.com

to maintain reputations for professionalism and efficient case management. Furthermore, arbitrators are now asked to state their views on summary disposition in publicly available responses to questionnaires. Arbitration is not to be compared to an idealized court proceeding, but rather to motion practice as it actually exists in trial courts. As noted, summary disposition is not available at all in many continental systems. In the United States, it is very difficult to move successfully for summary disposition in most state court systems. The judges are overburdened and have little or no law clerk support. This is especially true in the majority of states where the judges are elected, and the necessity of running for reelection and avoiding offense to litigants or their counsel incentivizes passing all disputed questions to the jury. Even in federal courts — in which judges have life tenure, single-judge docketing and law clerk support — only a small percentage of cases are decided by summary judgement. In one study, only 12 percent of cases experienced a motion for summary judgment that was granted in whole or in part. One reason is that the federal judges have hundreds of cases before them at once, vastly more than any arbitrator will simultaneously consider.

ENFORCEMENT TRENDS In the United States, enforcement of arbitral awards is governed by the Federal Arbitration Act, 9 U.S.C. §§, et seq., or, in international cases, the New York Convention. The FAA permits courts to vacate arbitration awards “where the arbitrators were guilty of misconduct in refusing to postpone the hearing, Some older U.S. arbitrators “grew up” as lawyers upon sufficient cause shown, or in refusing hear evidence pertibefore the U.S. Supreme Court revolutionized to nent and material to the controversy.” Arbitration summary judgment practice in 1986. lore holds that — at least in the United States — an arbitrator’s grant of summary disposition risks vacatur on the theory that by deciding the case Some have suggested that arbitrators will without a hearing, the arbitrator will be guilty decline to issue summary dispositions because of misconduct in refusing to hear “pertinent and doing so eliminates the fee income from a multimaterial” evidence. But there is scant support for day evidentiary hearing. That likelihood is diminthat position. ishing. Most arbitral bodies allow the parties to The same is true in other jurisdictions. In participate in panel selection by “strike off” or England, so long as the tribunal adopts summary direct appointment, so the panels are increasingly disposition procedures that give all parties a populated by full-time arbitrators motivated

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parties have had a reasonable opportunity to make submissions on those issues.” This clause comprehends factual as well as legal issues, and leaves the timing and the particulars for the tribunal to decide. It also waives any challenge to enforcement based on the absence of an evidentiary hearing. If misuse of the process The best way to preclude any issue is to for delay or other tactical advantage is feared, the include a provision for summary disposition agreement could also specify that a losing movin the agreement to arbitrate. ant would pay the costs and fees of the motion irrespective of the final case outcome. One merit of arbitration is that there is, Courts in France, Holland and Switzerland have in effect, competition. By contract, the busienforced summary judgments rendered in U.S. ness “customer” can select the forum with the court proceedings, so it is not much of a stretch rules that it considers best. Numerous competto expect such courts to enforce an arbitration ing dispute resolution providers now tout the award made by summary disposition as well. superior efficiency of their respective rules and procedures. The different fora and individual INCLUDE A CLAUSE arbitrators will distinguish themselves, and The best way to preclude any issue of enforcement potentially gain market share, by facilitating the or arbitrator reluctance is to include a provision efficient grant of summary disposition in approfor summary disposition in the agreement to priate cases. The day may come when summary arbitrate. One Big Four accounting firm’s standisposition will be easier to obtain in arbitration dard engagement letter, for example, provides than in court. ■ that “the arbitrators may render early or summary disposition of some or all issues, after the reasonable opportunity to present their case, the risk that a court will not enforce or set aside a summary award is low. Vacatur of arbitral decisions based on summary disposition is unlikely in the leading civil law jurisdictions as well.

Diana Tsutieva is an associate in Foley Hoag’s Washington, D.C., office. She specializes in international litigation and arbitration on behalf of foreign sovereigns. dtsutsieva@foleyhoag. com

Statement of Ownership. 1. Publication Title: Today’s General Counsel. 2. Publication No.: 1932-9024. 3. Filing Date: 12/19/2017. 4. Issue Frequency: 6X/year. 5. No. of Issues Published Annually: 6. 6. Annual Subscription Price: Free to qualified subscribers/all others $199. 7. Complete Mailing Address of Known Office of Publication: 20 N. Wacker Dr., 40th Fl., Chicago, IL 60606. Contact Person: Robert Nienhouse. Telephone: 800-208-3244. 8. Complete Mailing Address of Headquarters or General Business Office of Publisher: 20 N. Wacker Dr., 40th Fl., Chicago, IL 60606. 9. Full Names and Complete Mailing Addresses of Publisher, Editor and Managing Editor: Publisher: Robert Nienhouse, 20 N. Wacker Dr., 40th Fl., Chicago, IL 60606. Editor: Bruce Rubenstein, 20 N. Wacker Dr., 40th Fl., Chicago, IL 60606. Managing Editor: David Rubenstein, 20 N. Wacker Dr., 40th Fl., Chicago, IL 60606. 10. Owner: Nienhouse Media, Inc., 20 N. Wacker Dr., 40th Fl., Chicago, IL 60606. 11. Known bondholders, mortgages and other security holders owning or holding 1% or more of total amount of bonds, mortgages or other securities: None. 12. Tax Status: For completion by non-profit organizations authorized to mail at special rates: Not applicable. 13. Publication Title: Today’s General Counsel. 14. Issue date for circulation data below: Winter 2018. 15. Extent and nature of circulation: 15a. Total Number of Copies (Net Press run): Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 15,561. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 16,659. 15b. Legitimate Paid and/or Requested Distribution (By Mail and Outside the Mail): Outside-County Paid/Requested Subscriptions Stated on PS Form 3541 (include direct written request from recipient, telemarketing, and internet requests from recipient, paid subscriptions including nominal rate subscriptions, employer requests, advertiser’s proof copies, and exchange copies.). Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 13,642. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 14,691. 15b. Legitimate Paid and/or Requested Distribution (By Mail and Outside the Mail): In-County Paid/Requested Subscriptions Stated on PS Form 3541 (include direct written request from recipient, telemarketing, and internet requests from recipient, paid subscriptions including nominal rate subscriptions, employer requests, advertiser’s proof copies, and exchange copies.). Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 0. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 0. 15b. Legitimate Paid and/or Requested Distribution (By Mail and Outside the Mail): Sales Through Dealers and Carriers, Street Vendors, Counter Sales and Other Paid Distribution Outside USPS. Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 0. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 0. 15b. Legitimate Paid and/or Requested Distribution (By Mail and Outside the Mail): Requested Copies Distributed by Other Mail Classes Through the USPS (e.g., First-Class Mail). Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 0. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 0. 15c. Total Paid and/or Requested Circulation [Sum of 15b (1), (2), (3) and (4): Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 13,642. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 14,691. 15d. Non-requested Distribution (by Mail and Outside the Mail): Outside-County Non-requested Copies Stated on PS Form 3541 (include sample copies, requests over 3 years old, request induced by a premium, bulk sales and requests including association requests, names obtained from business directories, lists and other sources). Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 706. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 629. 15d. Non-requested Distribution (by Mail and Outside the Mail): In-County Non-requested Copies Stated on PS Form 3541 (include sample copies, requests over 3 years old, request induced by a premium, bulk sales and requests including association requests, names obtained from business directories, lists and other sources). Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 0. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 0. 15d. Non-requested Distribution (by Mail and Outside the Mail): Non-requested Copies Distributed Through the USPS by Other Classes of Mail (e.g., First-Class Mail, non-requestor copies mailed in excess of 10% limit mailed at Standard Mail or Package Services rates). Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 0. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 0. 15d. Non-requested Distribution (by Mail and Outside the Mail): Non-requested Copies Distributed Outside the Mail (Include pickup stands, trade shows, showrooms and other sources). Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 696. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 633. 15e. Total Non-requested Distribution (Sum of 15d (1), (2), (3) and (4)): Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 1,402. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 1,262. 15f. Total Distribution (Sum of 15c and 15e): Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 15,044. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 15,953. 15g. Copies Not Distributed (See Instructions to Publishers #4 (page #3)): Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 522. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 706. 15h. Total (sum of 15f and 15g): Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 15,566. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 16,659. 15i. Percent Paid and/or Requested Circulation (15c divided by 15f times 100): Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 90.7%. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 92.1%. 16. Electronic Copy Circulation: 16a. Requested and Paid Electronic Copies: Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 0. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 0. 16b. Total Requested and Paid Print Copies (Line 15c) + Requested/Paid Electronic Copies (Line 16a): Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 13,642. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 14,691. 16c. Total Requested and Copy Distribution (Line 15f) + Requested/Paid Electronic Copies (Line 16a): Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 15,044. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 15,953. 16d. Percent Paid and/or Requested Circulation (Both Print & Electronic Copies) (16b divided by 16c x 100): Avg. No. Copies Each Issue During Preceding 12 Months (Last 6 Issues): 90.7%. No. Copies of Single Issue Published Nearest to Filing Winter 2018: 92.1%.

winter 20 18 today’s gener al counsel

B A C K PA G E F R O N T B U R N E R

Can Firms Build a Wall to Protect Soft Innovation? IP strategIes and network economy InnovatIon By Michael Bednarek

the dIsruPtIve ImPact of the network economy

on established traditional retail strategies was foreseeable two decades ago. Yet the ability of today’s ubiquitous “smart devices” to communicate and share images, data and location information has paved the way for an astounding explosion of “soft innovation.” Apps like Uber, Waze, WeChat, SnapChat and Airbnb are early examples of disruptive soft innovation to come into the network economy. Organizations that choose to ignore Internet sales platforms and deny the possibility of disruptive soft innovation do so at their own peril. Those that participate find that competition is fierce. In the networked economy, competing on price can quickly converge into a race to the bottom where profits approach zero. Competition based on reputation requires corporate vigilance to protect its brand against poor reviews, counterfeits and misappropriation. As Uber is learning in its competition with Lyft and related “load sharing” apps, relying solely on first-mover advantage or competing on price is seldom enough. The most successful companies are those that commit to competition through innovation. Doing so requires a competitive advantage from soft innovation and a skillful use of available IP tools and strategy based on a broader view of intellectual capital. Soft innovation is easily copied or reverse engineered because the core innovation often resides in the business concept involved. Unfortunately, protection of 21st century innovation is a challenge in the current legal environment, where traditional IP protection tools — patent, trademark, copyright, trade secret — have not been allowed to evolve to cover modern innovation. The U.S. Supreme Court, for example, has ruled that patent protection is off limits for much soft innovation. A compelling case might still be made for sui generis IP rights for 21st century soft innovation — or at least for extending or evolving traditional IP tools to encompass modern innovation. But until such tools are available, an organization’s best strategy is to look beyond traditional

IP tools and focus on securing all facets of the intellectual capital that provide competitive advantage. This means paying particular attention to securing human capital and relational capital, since in both instances, employee mobility presents a challenge. Appropriate employment agreements, non-disclosure agreements and protection of trade secrets can help preserve their value. Protection of Attention should also be 21st century given to using traditional IP innovation is a tools strategically wherever possible under current law challenge in the and to preserving rights in the event of future changes in the current legal law. Although it is now difenvironment. ficult to obtain patent protection for business methods, there is protection for the technical aspects used to implement the soft innovation of apps. Likewise, copyright and design patent protection is available for innovative user interfaces, and trademark protection is available for indications of source. To compete based on innovation and reputation, it is imperative to protect all facets of the intellectual capital that provides an organization’s competitive advantage. By collaborating with IP and business strategists, organizations can create forward-looking soft innovation protection strategies that effectively navigate the competitive challenges that are particular to the network economy. ■

Michael Bednarek is a partner at Adams and Reese. A global IP strategist and patent litigator, he has worked with some of the world’s largest technology and financial services companies in patent and IP disputes in the U.S., Asia and Europe. michael.bednarek@arlaw.com

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