DECEMBER 2023
VOLUME 20/NUMBER 9
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ESG Disclosure in Proxies
• GCs have an unparalleled point of view that balances business and legal risks • Making sense of insurance claims and occurrences • DOJ pondering criminal enforcement of Sherman Act • Why you need to be careful about PFAS-free ads for products
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contents 4 Editor’s Desk COMPLIANCE
8 General Counsel Can Lead on Privacy Compliance How to make a plan for privacy compliance and chip away at it. By Nigel Jones LITIGATION
10 Traps for the Unwary: Reporting Claims Under Liability Insurance Policies Reporting requirements under liability policies can often be super technical. The failure to meet those requirements can have catastrophic results.
DECEMBER 2023 Volume 20/Number 9
THE ANTITRUST LITIGATOR
14 Is Criminal Enforcement of Section 2, the Sherman Act Coming? DOJ might pursue criminal antitrust cases under the law. By Jeffery M. Cross THOUGHT LEADERSHIP
16 Advertising Copy is for Now, PFAS are Forever: Tread Carefully on Product Claims There is a long and growing list of consumer product companies that have been sued over the alleged finding of PFAS in products. Be cautious when making claims. By John E. Villafranco and Katie Rogers
By Peter S. Selvin LEGAL OPERATIONS
12 Navigating the ESG Landscape: Proxy Statement Challenges and Opportunities General counsel are the ultimate reviewers of ESG disclosure. By Laura Ann Smith
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EDITOR’S DESK
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ntitrust attorney Jeffery Cross has been a popular columnist with Today’s General Counsel for a long time. We’ve always thought his readership was high because antitrust is an area that has to be
considered when major deals are made, and in-house counsel either sit at the table or hope to when those deals are negotiated. His topic in this issue is one that in-house attorneys, as well as corporate directors and officers, will be keenly interested in, the possibility that the DOJ Antitrust Division might soon be pursuing criminal cases under Section 2 of the Sherman Act. Your clients will be pleased to know you’re on top of this. Nigel Jones tackles privacy compliance. General counsel are well-positioned to take the lead, he writes. All they need is a good plan, and some time reserved for the tasks required to implement it. Peter Selvin discusses a common problem in D&O insurance recovery, the failure to recognize a communication as constituting a “claim.” Laura Ann Smith highlights how companies should message their ESG disclosures. John Villafranco and Katie Rogers warn that companies to be careful when making claims about PFAS.
Bob Nienhouse, Editor-In-Chief bnienhouse@TodaysGC.com
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COMPLIANCE
General Counsel Can Lead on Privacy Compliance By NIGEL JONES
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s chief problem solver, general counsel play a pivotal role in overseeing an organization’s strategy for data protection and privacy compliance. While it’s something that should involve every department throughout a company, GCs have an unparalleled point of view that balances business and legal risks. They’re uniquely placed to ensure processes are in line with applicable laws, can anticipate risks of a data breach, and help mitigate the damage if an issue occurs. GCs are already incredibly busy. But the need to devote time and money to this problem is only becoming more acute. In one recent survey, which polled almost 900 chief legal officers from around the world, cyber security, regulation and compliance, and data privacy were rated the top issues for legal officers. The majority expect the number of privacy-related fines and other regulatory enforcement to increase this year.
privacy management program in place. You don’t have to be an expert. You probably aren’t. The good news is, you don’t need to be. Data protection does not require expensive lawyers and consultants to manage. All you need is a good plan, and some time set aside each month to tick off the privacy tasks that need to be taken care of. It doesn’t have to be perfect. Lawyers love perfection. But every organization has its own particular privacy problem that it doesn’t know how to solve. It may be how to map complicated data flows; it may be its use of online advertising; it may be taming a product management team or a marketing team. Don’t let that get in the way of fixing all the other things you can take care of more easily, such as training your staff, evaluating your security, and making sure that your
If it finds those products or services in the middle of a data breach, the impact can be devastating. Loss of reputation, loss of customers, the risk of fines, and a hefty bill to put things right are all quite possible. Plus sorting privacy costs a lot less than you think. Get everyone involved. Getting privacy managed is not a one-off project, it is a program. It should involve everyone in an organization. Get a team of privacy champions together, agree on a plan, and continue to chip away at that plan. Slow and steady wins the race every time.
Nigel Jones is the former head of legal at Google EMEA and co-founder of the Privacy Compliance Hub.
In one recent survey, which polled almost 900 chief legal officers from around the world, cyber security, regulation and compliance, and data privacy were rated the top issues for legal officers. With that in mind, here’s where GCs can start: Commit to taking the first step. You probably did a little data protection work a few years ago. You know that it is out of date. You know it needs taking care of. Don’t put it off. There are easy solutions. Take some time to find the right one for you and your organization to minimize the risk of that embarrassing data breach, which will be more work and stress than putting a simple BACK TO CONTENTS
company is transparent about the ways in which it uses personal data. You can leave some of the hard stuff until later. It doesn’t have to be expensive. You will need some budget, but it doesn’t have to be expensive or hard to justify. Getting privacy wrong is a risk to your business and one of your main jobs is to minimize risk. It goes without saying that the business will want to prioritize revenue and deliver great products and services. DECEMBER 2023
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LITIGATION
Traps for the Unwary: Reporting Claims Under Liability Insurance Policies By PETER S. SELVIN
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ompanies reporting liability insurance claims need to be aware that the pertinent rules vary depending on whether a policy is “claims made and reported” or “occurrence.” Most, if not all, Directors and Officers and Errors and Omissions policies are written on a claimsmade and reported basis. By contrast, Commercial General Insurance, or
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CGL insurance, is written on an occurrence basis. Under a claims made and reported policy, a claim must have arisen and been reported during the same policy period. By contrast, under an occurrence policy, the claim may be reported long after the expiration of the policy that gives rise to coverage. The most common mishap in the claims made and reported area is the
DECEMBER 2023
failure to recognize a communication as constituting a “claim”. While a “claim” may often be thought of as being synonymous with a lawsuit, many claims made and reported policies define “claim” to include “a demand for monetary or nonmonetary relief.” Thus, a demand letter that seeks recovery of damages, or which proposes a settlement, may well BACK TO CONTENTS
be a “claim” that is required to be reported. Similarly, a request for a tolling agreement may also qualify as claim. Suffice it to say that there are numerous court decisions denying coverage to insureds under a claims made and reported policy because notice was not timely given as a result of a failure to recognize that the insured was in fact in receipt of a “claim.” The reporting rules under claims made and reported policies are unforgiving. Strict compliance is required and the asserted lack of
of circumstances” where communications threaten, but do not yet constitute, a “claim.” In other words, notice of circumstances is given when the company is aware of facts that may reasonably be anticipated to result in a claim at a later stage. Suppose, for example, that a company terminates an employee who orally threatens to bring a discrimination lawsuit. While the oral threat is not a “claim”, it certainly puts the company on notice that a claim may be made in the future. By giving notice of circumstances, the
The most common mishap in the claims made and reported area is the failure to recognize a communication as constituting a ‘claim.’ While a ‘claim’ may often be thought of as being synonymous with a lawsuit, many claims made and reported policies define ‘claim’ to include ‘a demand for monetary or non-monetary relief.’ any prejudice suffered by an insurer, arising from non-complaint notice, is irrelevant. At a minimum, a claim must be reported during the policy period or before the expiration of any extended reporting period. Further, in some cases, the policy may require more expedited notice – such as giving notice within a certain number of days after the claim first came to the attention of the company. In either case, courts have generally declined to excuse an insured’s failure to strictly comply with those reporting requirements. This means that the failure to recognize certain communications as constituting a “claim”, and to give timely notice thereof, can be fatal to coverage. Companies should also be aware of the opportunity to give “notice BACK TO CONTENTS
company ensures that if and when the claim actually arises, it will fall into the policy year during which the notice was given. By doing so, the company preserves coverage for the claim if and when it later arises. Consider what happens if, in the foregoing example, the company failed to give notice of the circumstances. Assuming no claim arose in the current policy year, the company would go to renewal. Although the company certifies in its renewal application that it was not aware of any acts or events that would result in a claim, the employee files a discrimination claim during the next policy year. As the company had knowledge at the time of renewal of the likelihood of a claim, the insurance company will deny coverage based
on the misstatement in the application. Notably, all of this could have been avoided had the company given notice of the circumstances when the employee made the litigation threat. The reporting rules for occurrence policies are more forgiving. Generally, occurrence policies require only that notice be given “as soon as practicable”. But even where an insured gives late notice coverage is not necessarily lost. This is because occurrence policies are governed by the notice-prejudice rule, which enables an insurance company to disclaim coverage based on late notice only on a showing of substantial prejudice. From the insured’s perspective, giving notice sooner rather than later is advantageous because pre-notice defense fees and expenses will not be covered under the policy. Moreover, the later notice is given the greater the chance that the insurance company can meet its burden to show prejudice. The bottom line is that the reporting requirements under liability policies can often be super technical. As the failure to meet those requirements can sometimes have catastrophic results, companies would be well advised to carefully scrutinize policy language and if appropriate hire an insurance professional.
DECEMBER 2023
Peter Selvin is chair of the Insurance Coverage and Recovery Department at Ervin Cohen & Jessup LLP.
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LEGAL OPERATIONS
Navigating the ESG Landscape: Proxy Statement Challenges and Opportunities By LAURA ANN SMITH the ever-changing ESG landscape. All of this is made more complicated by the need to consider disclosures in light of recent anti-ESG sentiment and Supreme Court decisions which create additional potential for litigation.
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s interest in Environmental, Social, and Governance (ESG) continues to expand, investors now expect disclosure around ESG topics in proxy statements. Each year more companies are including ESG highlights in their proxy. According to Labrador’s most recent review, more than three-quarters of the S&P BSE 250 Small Cap Index included a discussion of ESG-specific topics in 2023. In the proxy statement, companies should focus on helping stakeholders understand how their ESG approach aligns with their stated strategy and business model as well
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Because ESG encompasses an ever-increasing list of areas, it can be a challenge to determine what to discuss in a proxy statement and the level of detail to provide.
as demonstrate how the board’s oversight of ESG is part of the board’s oversight of strategy. In addition, stakeholders are looking for confirmation that companies are evaluating ESG risk and opportunities, adopting sustainable business strategies, establishing appropriate goals and metrics, and committing to regular ESG reporting using appropriate frameworks. The challenge for general counsel and their teams is to ensure consistency of disclosures across multiple reports and to continually monitor
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WHERE SHOULD THE ESG SUMMARY LIVE?
According to the Labrador study, the most common locations for ESG disclosures within proxy statements are a summary within the proxy summar y (39 percent) or governance section (41 percent), or a standalone ESG section (23 percent). Most disclosures range from two to five pages, and a well-constructed, highly visual two-to-four-page summary can be just as effective as a longer dedicated section.
HOW MUCH IS TOO MUCH? Because ESG encompasses an ever-increasing list of areas, it can be a challenge to determine what to BACK TO CONTENTS
discuss in a proxy statement and the level of detail to provide. Remember the purpose of the proxy is to provide investors with the information they need to make decisions in connection with the proposals presented, including election of directors. ESG disclosures that meet stakeholder expectations in the proxy statement typically emphasize the importance of ESG to the company, how it aligns with strategy, and how ESG priorities were determined, measured, and tracked. Stakeholders also want to understand the board’s role in ESG matters – how the board oversees the determination of priorities, goal setting and allocation of resources, as well as how the board engages with the management and holds management accountable. Therefore, modern best practices suggest that proxy statements should include: • A highlights/summary that provides an overview of ESG focus areas; graphics or key figures that relate to company priorities and initiatives; ESG reporting status, including use of reporting frameworks; and URL for most recent ESG report. • A (sub-)section dedicated to ESG oversight, which describes how ESG responsibilities are allocated among management and the board and its committees. Generally, this discussion is included with board oversight of risk and increasingly utilizes a graphic or other visual to depict the distribution of ESG responsibilities.
ESG TOPICS TO CONSIDER Even within the current practice, there is significant variation in the BACK TO CONTENTS
breadth and depth of ESG-related topics addressed in proxy statements and can vary significantly by industry. Many companies find it beneficial to look at what their industry peers and others are reporting. The Labrador study found that among those that included an ESG highlights/summary section, they most often focused on the following topics: • 66 percent ESG focus areas/ priorities • 60 percent climate change/GHG/ Net Zero goals • 52 percent environmental goals • 25 percent progress against goals • 55 percent URL for their latest report • 60 percent reporting frameworks Regardless of what others are reporting, when preparing ESG disclosure in the proxy statement, consider the following: • Explain why ESG is important to the company and how it is connected to strategy. If not otherwise discussed, also highlight the company’s purpose, mission, and values. • Give an overview of the company’s ESG priorities and how they were determined. • Share key quantitative and qualitative highlights for each ESG priority, including goals and progress. • Emphasize the company’s commitment to transparency and accountability, mentioning current reporting practices and recognized frameworks, and provide the location of the most recent report/data. • Consider mentioning any relevant
awards or recognition that demonstrate ESG successes. • Describe the board’s role in overseeing ESG matters and the governance structure that supports such oversight. With the increasing trend to include ESG in proxy statements, general counsel should engage with their colleagues on the appropriate information to incorporate to inform shareholders’ voting decisions. Regardless of what ESGrelated topics a company chooses to include in their proxy statement, it is important to ensure messaging is appropriate and consistent across all reports and communications. That job, which often falls to the general counsel, is the ultimate reviewer of corporate disclosure.
Laura Ann Smith is Advisory Director at Labrador, a global communications firm focused exclusively on corporate disclosure documents. She works with companies to develop and elevate their reporting and stakeholder communications.
DECEMBER 2023
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THE ANTITRUST LITIGATOR
Is Criminal Enforcement of Section 2, the Sherman Act Coming? By JEFFERY M. CROSS
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n March, I attended the American Bar Association Antitrust Law Section’s Spring Meeting in Washington. A hot topic under discussion was the possibility that the Department of Justice (DOJ)’s Antitrust Division might pursue criminal cases under Section 2 of the Sherman Act. When Section 2 was passed by Congress in 1890, it was written as a statute that could be enforced either civilly or criminally. However, it has
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been quite some time since the DOJ pursued a Section 2 violation as a stand-alone criminal case. Section 2 makes three different types of conduct unlawful: monopolization, attempt to monopolize, and conspiracy to monopolize. Monopolization presents the greatest challenges to criminal enforcement. There are two elements to a monopolization case. First, the defendant must have monopoly power in the relevant market during
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the period of the indictment. Second, the defendant must have willfully acquired its monopoly power through anti-competitive conduct during this period. Several aspects of the monopolization case will make criminal enforcement difficult. Significantly, having a monopoly or monopoly power is not itself unlawful. The Supreme Court has indicated that the mere possession of monopoly power is not only not unlawful, it BACK TO CONTENTS
is an important element of our free market system. We want companies to strive to achieve monopoly power by innovation and business acumen, and we are willing to reward those qualities with monopoly prices, at least before another company enters the market and drives down prices by competition. This principle is consistent with the concept of monopoly power, which is generally defined as the ability to raise prices or reduce output without losing so much market share that the price increase is unprofitable. Determining whether an entity has monopoly power will require
Having a monopoly or monopoly power is not itself unlawful. determining a relevant market. But the currently accepted methodology for determining a relevant market in a Section 2 case – the Hypothetical Monopolist Test – is very consistent with the definition of monopoly power. It posits a hypothetical monopolist controlling a basket of products in the geographic area under examination. If the monopolist raises prices a small but significant amount for a period of time that isn’t transitory, will consumers substitute other products such that the price increase is unprofitable? If so, those products are added to the basket of goods held by the hypothetical monopolist and the analysis is repeated. It is an iterative process that is continued until there are no more substitutes that consumers will turn to, making the price increase unprofitable. Determination of a relevant BACK TO CONTENTS
market will add complications not typical of a criminal case, and may require economic testimony, but this issue is not insurmountable. The biggest problem in pursuing a criminal case under Section 2 is the second element, the so-called “bad act.” Obviously, blowing up your competitor’s trucks is conduct that is anti-competitive and criminal enforcement is warranted. What about aggressive competition that results in driving weaker and arguably inefficient competitors from the market? It is a fundamental principle of antitrust law that even a monopolist is entitled to compete. Arguably, consumers are better off if the inefficient competitor is forced from the market. The Supreme Court has recognized that one of the problems with policing the independent, unilateral conduct of a single firm is that the effect of anti-competitive conduct may be the same as the effect of competition. Many of the commentators at the ABA meeting opined that a specific intent to achieve an anti-competitive effect will be required to pursue criminal enforcement. But specific intent is rarely established by direct evidence. There is one likely test that might be pursued. It queries whether there is any plausible pro-competitive justification for the conduct. This test is often used to establish a per se violation under Section 1 of the Sherman Act. It has generally been the DOJ’s view that it will only bring a criminal case under Section 1 if the conduct is per se unlawful. Such a test is essentially determining whether the defendant intended to compete on the merits,
or intended solely to obtain or maintain a monopoly. Hypothetically, in the latter case, it could establish evidence required in a criminal prosecution.
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 of Smith, Gambrell & Russell, LLP and a member of the firm’s Antitrust and Trade Regulation Group.
DECEMBER 2023
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THOUGHT LEADERSHIP
Advertising Copy is for Now, PFAS are Forever: Tread Carefully on Product Claims By JOHN E. VILLAFRANCO AND KATIE ROGERS
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dvertisers that claim that their products are “PFAS-Free” should proceed cautiously. PFAS, also known as “forever chemicals,” identify a category of more than ten thousand known synthetic per- and polyfluoroalkyl substances that are found in many different consumer, commercial, and industrial products. They are coined “forever chemicals” because of their biopersistence in the environment with
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strong carbon-fluorine bonds that are chemically inert and resistant to high temperatures. The first stop for marketers should be the Federal Trade Commission’s Green Guides, which provide guidance that will help your creative team develop claims about the environmental benefits of your company’s products. The Green Guides recommend that marketers making “free-of” claims confirm the following:
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The product doesn’t have more than trace amounts or background levels of the substance. To make this determination for PFAS, companies should test samples of the product by analyzing total organic fluorine, which serves as a proxy for PFAS.
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The amount of the substance present doesn’t cause harm that consumers typically associate with BACK TO CONTENTS
the substance. Once the product has been tested, the level of total organic fluorine detected should be compared with the safe level for the specific type of consumer product.
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The substance wasn’t added to the product intentionally. This requires confirmation from the supply chain network that PFAS has not been added at any point in the product’s life cycle.
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The product doesn’t contain another substance that poses a similar environmental risk. It is important to ensure that there are no other chemicals present in the product that would pose a similar health or environmental risk as PFAS.
There is a long and growing list of consumer product companies that have been sued over the alleged finding of PFAS in products making PFAS-Free or other environmental claims. This list includes sports drink maker, BioSteel, which got hit with a class action lawsuit earlier this year alleging that its “eco-friendly” claims are false and misleading because the drink contains an elevated level of PFAS. In addition to “free-of” guidance, the Green Guides state that, if a BACK TO CONTENTS
qualified general claim conveys that a product is more environmentally beneficial overall because of a touted benefit, marketers should analyze trade-offs resulting from the benefit to ensure they can substantiate the claim. This is to confirm that there are no other stages in the life cycle that may be negatively impacted and ultimately result in a net negative environmental effect from the use of the product. Companies should consider how this guidance may affect their ability to make general environmental benefit claims, such as “eco-friendly” or “sustainable” if the product they sell or the manufacturing process they use employs PFAS or some other harmful chemical. There is a long and growing list of consumer product companies that have been sued over the alleged finding of PFAS in products making PFAS-Free or other environmental claims. This list includes sports drink maker, BioSteel, which got hit with a class action lawsuit earlier this year alleging that its “eco-friendly” claims are false and misleading because the drink contains an elevated level of PFAS. In August, BioSteel filed a motion to dismiss because, among other things, the company pointed out that the plaintiff did not explain any details regarding the purported “independent third-party testing” other than to say it was done to industry-accepted standards. The case is pending but it highlights the high level of scrutiny over PFAS contamination, particularly with products claiming to be environmentally beneficial. And this scrutiny will only intensify, given the ubiquitous nature of the class of PFAS chemicals and the non-targeted nature of the testing
available. Indeed, some level of PFAS may be detected despite companies’ best efforts to avoid it. For example, PFAS could potentially leach from packaging during shipment or while a product is on shelves. All of this warrants keeping a close eye on PFAS-related developments and litigation trends, particularly those marketers considering making any PFAS-Free or other general environmental benefit claims. The FTC is currently reviewing the Green Guides and is expected to release updated guidance in the coming year. It is unlikely that the FTC will provide more technical guidance on “free-of” claims and, in particular, PFAS-Free claims, but look out for more guidance on general environmental claims and how the presence of concerning chemicals, like PFAS, in a product may impact the types of general environmental claims that can be made for consumer products.
John Villafranco is a Partner with Kelley Drye & Warren LLP in the firm’s Washington D.C. office. Villafranco provides litigation and counseling services to household brands and Fortune 500 companies with a focus on advertising law matters and consumer protection. jvillafranco@kelleydrye.com Katie Rogers is Special Counsel with Kelley Drye & Warren LLP in the firm’s Washington D.C. office. Her practice focuses on all aspects of advertising, privacy, and labeling compliance across a variety of media and at various stages in a product’s life cycle. krogers@kelleydrye.com
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