Today's General Counsel, V15 N2, Summer 2018 by Today's General Counsel

SUMMER 2018 VOLUME 1 5 / NUMBER 2 TODAYSGENER ALCOUNSEL.COM

SOCIOECONOMIC RISK Boycotts and backlash “Sex” and Ar ticle VII

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SUMMER 20 18 TODAY’S GENER AL COUNSEL

Editor’s Desk

The list of things that separate us has become so long that it sometimes seems as if the Divided States of America might be a better name for our nation, but lately a few strands of unity have begun to show up. Any doubt that the #MeToo movement cut across political and cultural divides was erased recently, when a prominent Southern Baptist leader was removed from his post because of a massive backlash from evangelical women upset over comments he made in the past that are now perceived as sexist and demeaning. The workplace is perhaps the largest arena where #MeToo is prompting big changes, and in this issue of Today’s General Counsel a number of workplace issues get a critical look. Andrea Bricca writes that the way bonuses are allotted stacks the deck against women, and in the case of general counsel that has led to a dramatic disparity. Male general counsel bonuses were 31 percent higher than those of their female counterparts, according to a 2017 survey. Bricca suggests some remedies and opines that companies dragging their feet on this issue will lose talent because of it. Denise Visconti discusses gender wage-equality audits — when and how to conduct them, and how to deal with inequities in order to avoid litigation. Jack Vaughan writes about the emerging phenomenon of socio-economic risk exposure, which is growing out of our divided cultural and business environment. His prime example is The Weinstein Company, now in bankruptcy, which was reduced to a fraction of its former valuation for enabling the conduct of its namesake. An article from Alison Nadel and Natalie Colvin provides an overview of the changing attitudes toward transgender employees, and their Title VII rights. Another issue could catch many lawyers off guard. The role of fiat currency in commerce is being challenged by cryp-

tocurrencies — Bitcoin, Zcash, Dash and the others — but attorneys who have to counsel clients who use them often lack a fundamental understanding of how they work. Jon Sriro’s article discusses blockchains, how cryptocurrencies utilize blockchain technology, and the confidentiality and privacy issues raised by blockchains. On the intellectual property front, John Tanski and Jason Murata deal with an old but still vexing problem, how to decide whether to patent an invention or protect it as a trade secret.

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

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SUMMER 2018 TODAY’S GENER AL COUNSEL

Contents

2 | Editor’s Desk 10 | Executive Summaries 15 | From the Event #tgclma18

COLUMNS

36 | Workplace Issues Important Considerations In Pay Equity Audits New statutes, new responsibilities. By Denise M. Visconti

38 | The Antitrust Litigator Vertical Non-Price Restraints Rule of Reason says competition must be served. By Jeffery M. Cross 64 | Back Page Front Burner Supreme Court Upholds Inter Partes Review Decision upheld constitutionality, didn’t end dispute. By James Day

FEATURES

23 | GDPR and Data Maps First, know where it is located. By Julian Ackert 40 | What Story Will Your Metrics Tell? Analytics facilitate benchmarking. By Samantha Green 42 | Pitch for Boutiques Less is more. By Andrew A. Dick 44 | Developments in Corporate Litigation Finance Bet the company, with someone else’s money. By Brett McDonald and James Blick 48 | Canadian Disclosure Obligations for United States Cannabis Companies Is it a crime or an investment? By Virgil Hlus and Alex Farkas 50 | Tip Sheet for Commercial Leasing Transactions Plain English is best. By Jill Hayman 54 | Due Diligence for Socio-Economic Risk Backlash, boycotts and bankruptcy. By Jack Vaughan and Patrick Marrinan 56 | Gender-Biased General Counsel Bonuses Need Fixing Another big disparity. By Andrea Bricca 60 | U.S. Companies and London’s AIM Exchange Big capital pool, less regulation. By Nicholas Foss-Pedersen

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SUMMER 2018 TODAY’S GENER AL COUNSEL

Contents

L ABOR & EMPLOYMENT

16 | Transgender Employees and Employment Discrimination Courts are taking a broader view. By Alison Nadel and Natalie Colvin 18 | Ruling Limits Whistleblowers to Nuclear Option No more internal reporting for whistleblowers. By James Hockin and Meriel Schindler INTELLEC TUAL PROPERT Y

20 | Integrating Trade Secrets into a Comprehensive IP Strategy One invention, many protections. By John Tanski and Jason Murata

CYBERSECURIT Y

26 | Survey Shows In-House Teams’ Data Protection Concerns Take control of enterprise information through data remediation. By Chris Zohlen 28 Blockchain and Cryptocurrency Confidentiality Issues A hackers delight. By Jon Sriro |

COMPLIANCE

30 | Protecting Against Website Accessibility Suits The question is whether they are public accommodations. By Joshua Briones and Nicole Ozeran 32 | Federal Trade Commission Guidance to Multi-Level Marketing Companies The difference between marketing and a pyramid scheme. By JB Kelly and Bryan Mosca

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JB Kelly Patrick Marrinan Brett McDonald Bryan Mosca Jason Murata Alison Nadel Nicole Ozeran Jon Sriro Meriel Schindler John Tanski Jack Vaughan Denise M. Visconti Chris Zohlen

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SUMMER 2018 TODAY’S GENER AL COUNSEL

Executive Summaries INTELLEC TUAL PROPERT Y

L ABOR & EMPLOYMENT

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Transgender Employees and Employment Discrimination

Ruling Limits Whistleblowers to Nuclear Option

Integrating Trade Secrets into a Comprehensive IP Strategy

By Alison Nadel and Natalie Colvin McDermott Will & Emery

By James Hockin and Meriel Schindler Withers LLP

By John Tanski and Jason Murata Axinn, Veltrop & Harkrider LLP

Title VII prevents employers from discriminating against employees based on “sex” — a term with no statutory definition and no legislative history. Following that statute’s passage in 1965, courts held that Title VII does not protect against discrimination on the basis of gender identity, distinguishing discrimination based on “gender” from discrimination based on “sex.” However, the tide appears to be turning. More courts are taking a broader view of what constitutes “sex” discrimination under Title VII. For employers operating nationally, it is impracticable to attempt to have separate corporate policies for categories of discrimination depending on the relevant circuit, state and local laws. Employers should evaluate their policies and practices with transgender employees and gender identity issues in mind, and consider the following: including gender identity and gender expression as protected classes under antidiscrimination and anti-harassment policies; framing dress code, appearance and makeup policies for neatness rather than as a code to enforce traditional sex stereotypes; providing guidance on use of employees’ preferred pronouns and names in the workplace, and in related record keeping; and preparing transition plans for employees undergoing transition. A common issue that arises regarding transgender rights is bathroom access. A prudent course for employers is to permit all employees to use bathrooms consistent with their gender identity. Where possible, employers should also consider offering single-occupancy, gender-neutral bathrooms for any individual seeking additional privacy, but not require transgender individuals to use those facilities.

In February, the United States Supreme Court threw out an anti-retaliation suit brought by a former employee who was fired after internally reporting alleged securities violations. The case has overturned understanding of the test for employees to gain whistleblower status. In Digital Realty Trust, Inc. v Somers, the Court ruled that because the employee reported the alleged wrongdoing internally instead of directly to the Security and Exchange Commission (SEC), he was not protected. The SEC created rules to enforce the Dodd-Frank Act, which allowed for internal reporting. Those rules no longer obtain. The Supreme Court’s interpretation does not match the protections offered under Sarbanes-Oxley or the anti-retaliation provisions set out in most United States discrimination legislation. In most cases, no distinction is drawn between internal reporting and reporting to a regulator. Instead, broad protections are afforded, with the purpose of encouraging individuals to reveal information about acts of wrongdoing. To ensure effective reporting, employees need to be protected and, in some cases, incentivized to report concerns and possibly blow the whistle. The Digital Realty case serves to undermine that goal. The UK equivalent of the SEC, the Financial Conduct Authority, places the onus on businesses to keep their house in order. It requires financial services firms to put in place internal mechanisms that allow employees to blow the whistle. It requires organizations within its jurisdiction to appoint a director or senior manager as “whistleblower champion.” There is a duty to report certain matters that have a serious regulatory impact.

Companies that conduct R&D often have a patentability procedure. That process is also well suited to trade secret protection. In addition to deciding whether the invention justifies the cost of patent prosecution, your company should also consider whether to protect the invention as a trade secret. The decision between a patent and trade secret is not binary. Just as a single invention can result in several patents, your company can decide to patent some aspects of an invention and retain others as trade secrets. A trade secret security policy should consider premises security; document security, such as confidentiality labels and rules against copying; access restrictions, which limit knowledge of a trade secret to those employees who need to know it for their jobs; dissemination restrictions, such as a policy requiring management approval before the trade secret is disclosed to a business partner; and confidentiality agreements with employees and third parties who have access to the trade secret. Integrating trade secrets into an IP protection policy requires thought about a company’s assets and vulnerabilities. It requires commitment by company leadership to educate employees about trade secret protection and consistency over time to ensure that secrecy is not lost. With this commitment, your company can begin developing stronger trade secret protection protocols. And if you are ever called on to establish what your company does to protect its trade secrets, you will have a ready answer that will help prove a misappropriation claim.

TODAY’S GENER AL COUNSEL SUMMER 2018

Executive Summaries CYBERSECURIT Y

COMPLIANCE

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Survey Shows In-House Teams’ Data Protection Concerns

Blockchain and Cryptocurrency Confidentiality Issues

Protecting Against Website Accessibility Suits

By Chris Zohlen FTI Consulting, Inc.

By Jon Sriro Jaffe Raitt Heuer & Weiss

By Joshua Briones and Nicole Ozeran Mintz Levin

A recent study of best practices for inhouse legal teams examined the latest data privacy and security concerns among counsel at large United States corporations. Thirty practitioners from in-house legal teams shared insights on three critical and intersecting topics: the General Data Protection Regulation (GDPR), information governance (IG), and security and data remediation. Enforcement for GDPR, Europe’s strict data protection law, went into effect in May. Nevertheless, about half of the organizations in the study were taking a wait-and-see approach to determine how strict the regulators would be. In many cases, the team responsible for preventing data breaches also owns GDPR compliance, forcing it to juggle resources across two projects. Respondents suggested hiring an in-house IG expert and focusing on the “crown jewels” to protect the most sensitive information. Taking control of enterprise information through a data remediation program can reduce risk and costs. More than half of the study respondents had successfully executed such projects. Companies that had not were stuck with limited resources, lack of engagement from IT or failure to obtain C-level buy-in. Billions have been spent on cybersecurity, privacy programs and IG frameworks, but many in-house teams feel that their organizations are no safer than they were five years ago. Technology can only go so far. Organizations should have executive and board leadership on initiatives that create a culture of awareness and privacy. That ensures the entire organization is working toward the same goals.

Although cryptocurrencies provide significant benefits over fiat currencies, they store information on a “blockchain” for all to review. Therefore, in order to provide counsel, it is important to have a basic understanding of how blockchains work, how cryptocurrencies utilize blockchain technology, and the confidentiality and privacy issues associated with blockchains. The blockchains used by pseudonymous cryptocurrencies provide unlimited access for hackers to figure out the identities of the owners of addresses. Additionally, there are numerous companies in the business of linking identities with addresses and then commercializing that information. If one can link addresses on the blockchain with the identity of its owner, one could see with whom that owner is transacting business, and how much is spent and received. Disclosure of this information creates issues for organizations that intend to keep it confidential. There are also privacy considerations related to customer data. It is unclear how regulators will respond to privacy issues associated with the data stored on blockchains. Their transparency potentially exposes personally identifiable information (PII) that organizations would have a duty to safeguard under other electronic payment methods, while the immutability of the blockchain prevents organizations from removing that data upon request. Cryptocurrencies like Zcash, Dash, Monero and Bytecoin are promising examples of how cryptocurrencies can adopt technologies that maintain privacy. It is only a matter of time before cryptocurrencies like Bitcoin also develop and adopt similar technologies.

In 2017, over 250 lawsuits (most of them class actions) were filed against companies for failing to maintain websites in compliance with the Americans with Disabilities Act (ADA). Websites were said to be inaccessible to screen-reading software commonly used by blind internet users. The legal issue is whether website operators are operating “a place of public accommodation.” Some courts take the position that the ADA applies to all commercial websites; others hold that only websites with a “nexus” or connection to a physical location are subject to the ADA. The first case concerning website accessibility was tried in 2017. It resulted in a win for the plaintiff, largely based on his testimony that he intended to patronize the defendant’s physical stores once he could fully access the company’s website. According to the decision, a “causal connection” existed between the violation of the plaintiff’s rights and his troubles accessing defendant’s website. One way to make a website compliant is to have a qualified web design agency perform an audit and make sure that the audit complies with the Web Content Accessibility Guidelines (WCAG) 2.0. Although there is discussion that some guidance may come from the Department of Justice (DOJ) this year, no regulations providing specific guidelines to businesses exist. The most that businesses can do to protect themselves is conform their websites to the WCAG 2.0 standard, make sure that their third-party vendors are aware of the ADA, and train employees responsible for website and mobile app maintenance.

SUMMER 2018 TODAY’S GENER AL COUNSEL

Executive Summaries COMPLIANCE

FEATURES

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Federal Trade Commission Guidance to Multi-Level Marketing Companies

GDPR and Data Maps

What Story Will Your Metrics Tell?

By Julian Ackert iDiscovery Solutions

By JB Kelly and Bryan Mosca Cozen O’Connor

Federal Trade Commission (FTC) enforcement investigations will often target an industry that recently has been the subject of staff guidance. Earlier this year, FTC staff issued Business Guidance Concerning Multi-Level Marketing. Offered as a list of frequently asked questions, it describes the characteristics of lawful and unlawful multi-level marketing companies (MLMs), a type of direct selling company. MLMs rely on a network of participants (or distributors) to sell their products or services. Participants can earn compensation based on their own sales as well as the sales of the other participants they recruit, called their “downline” distributors. Historically, the underlying supposition of enforcement was that an MLM that did not pay compensation based on actual retail sales to actual consumers did not sell products that were in consumer demand. These MLMs, colloquially known as pyramid schemes, would not survive because eventually downline distributors run out of new individuals to recruit and cannot earn money or recover their costs through the sale of product or services alone. With the Business Guidance, the FTC staff expresses its intention to evaluate MLMs based on a case-by-case approach that considers the factors in totality to distinguish between lawful MLMs and MLMs that violate Section 5 of the FTC Act. The Business Guidance advises that the FTC will consider several factors in determining whether to initiate an enforcement action. These include whether compensation structures over-reward recruitment, proof of claimed sales, and whether claims and representations are truthful.

As corporations deal with the latest milestone in compliance, the EU General Data Protection Regulation (GDPR), data maps will prove useful for getting rid of personal data that falls in scope of GDPR Article 17, commonly referred to as “The Right to be Forgotten.” If a company is asked to delete personal data in accordance with the GDPR’s specific requirements, it needs to first understand where personal information resides within its data storage systems. An effective data map has multiple uses within the scope of the GDPR. It could be used to comply with Article 15, “Right of Access by the Data Subject.” A company can leverage a data map that captures the flow between data storage systems to confirm not only where the data subjects’ personal data resides but also the methods of “processing,” which broadly means any actions performed on the personal data. A data map has uses outside GDPR. For example, an effective data map can also be leveraged for information governance, and to develop processes for the identification, preservation and collection of information during the e-discovery cycle. When considering a data mapping initiative that is focused on data privacy, start with existing documentation. System IT owners and business users will both be good sources for interviews. Ensure that the data map development exercise includes technologies and/or methodologies to keep the information current. A stale data map can quickly become a paperweight with little value.

By Samantha Green Epiq Systems, Inc.

The need for analytics was spurred by the 2008 financial crisis. Legal spend was seen as overhead and a necessary evil. To better manage expenses, corporate clients became focused on cutting costs for legal services. The results often led to a greater emphasis on building up internal expertise to deliver more value to their company and clients in a more cost-efficient way. The use of metrics continues to evolve. By defining key performance indicators and mapping them back to concrete goals and objectives, we can spot shortcomings and drive performance and client satisfaction. Some common criteria legal departments measure are spend, workload and performance. Running regular analytics on budget identifies areas where you may be able to cut costs or reallocate resources, and helps you gauge how your outside counsel is performing. Metrics can uncover how long it takes to complete a case, what’s being handled in-house and what’s being outsourced. Tracking lawyer activity and productivity ensures that your team’s experience and expertise is utilized in the most efficient way. Corporations can create their own ways to measure in-house and outside counsel performance. Legal teams can develop confidential surveys or internal scorecards in which employees rate attributes across a spectrum of numbers (1–10) or descriptions (Excellent – Unsatisfactory). Survey questions should cover topics related to lawyer responsiveness, accessibility, communication skills and expertise. Honest feedback will help your legal team understand where they are exceeding expectations and where there are unmet needs.

TODAY’S GENER AL COUNSEL SUMMER 2018

Executive Summaries PAGE 42

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A Pitch for Boutiques

Developments in Corporate Litigation Finance

Canadian Disclosure Obligations for United States Cannabis Companies

By Andrew A. Dick Select Counsel

In the post-recession era of “do more with less” the pressure is on to find alternatives. Focusing on alternative legal service providers is one strategy; but there is another strategy to consider — retaining solo practitioners and boutique firms. Many seasoned lawyers move to smaller firms because they believe the boutique model better aligns with clients’ interests. The drive to “leverage” by managing multiple associates across a range of matters is diminished, if not eliminated, in the small firm setting. Small firm and solo lawyers tend to have the luxury of being more hands-on with their clients. They can connect directly with general counsel to pinpoint goals and desired outcomes. They can collaborate in real time to work through challenges or assess options, and to understand and appreciate company dynamics via onsite visits or embedded working situations. Knowing the big picture, these independent lawyers can also execute without filtering this knowledge down to others for follow-through. High-quality boutique firms can be hard to find, and even harder and more time consuming to vet. This is where solo and small firm networks can help. Many networks carefully vet their members, ensuring that only those with specified qualifications and experience, such as significant Big Law or in-house backgrounds, may belong to the group. By tapping the resources of a vetted network, general counsel can access hundreds of experienced solo and small firm attorneys across the full range of practices, specialties and jurisdictions worldwide.

By Brett McDonald and James Blick TheJudge Limited

The origins of the litigation finance industry lie in the distressed litigation space. Now the industry has become mainstream, and litigation funders have been increasingly focused on advertising the benefits of using external capital to blue chips and multinationals. Major corporations have been slow to embrace the concept, possibly due to a lingering sense that a well-capitalized business with a strong balance sheet may have available more cost-effective ways of handling litigation. Funders have had to look at creative ways to attract business in what is an increasingly competitive sector. An example of this (and, generally, a notable trend of 2017) has been the push by many funders for portfolio financing opportunities. Under the portfolio model, the funder spreads its capital and return across multiple cases, enabling it to commit a large chunk of capital under one deal. A key development of 2018 is the increasing use of litigation insurance. If the case is unsuccessful or the award cannot be enforced, the insurance reimburses the claimant for legal fees. In exchange, the claimant pays a premium to the insurer, either when the insurance is taken out or upon successful resolution of the case. The litigation risk-management market is evolving rapidly, offering a wide range of ways for a business to finance, control, monetize or take the risk out of litigation. When analyzing the cost/benefit of pursuing litigation, these options should be a routine consideration for general counsel and financial controllers.

By Virgil Hlus and Alex Farkas Clark Wilson LLP

In October 2017, the Canadian Securities Administrators (CSA) published CSA Staff Notice 51-352 for companies with United States cannabis-related activities. It provided some long-sought commentary on the disclosure requirements and regulation of entities with ties to the growing United States cannabis industry. Although many states have decriminalized the drug to varying degrees, cannabis remains a Schedule 1 drug as defined by the United States Controlled Substances Act. This discrepancy has caused confusion for many United States cannabis companies and investors on how to comply with Canadian disclosure requirements. Under the CSA Notice, United States cannabis companies must provide an appropriate level of disclosure to allow each investor to make an informed decision based on all “material facts and risks” related to cannabis-related activities. In particular, the Notice outlined the disclosure requirements for companies on the basis of the type of activities being undertaken. Companies with direct involvement in cultivation or distribution must outline the regulations for states in which the company operates, and confirm how the company complies with all the applicable licensing requirements and regulatory frameworks. In January 2018, United States Attorney General Jeff Sessions issued a memorandum rescinding previous guidance to federal law enforcement relating to cannabis. The CSA is considering whether its disclosure-based approach for United States cannabis companies remained appropriate in light of the rescission of the Obama administration’s hands-off approach.

SUMMER 2018 TODAY’S GENER AL COUNSEL

Executive Summaries FEATURES

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Tip Sheet for Commercial Leasing Transactions

Due Diligence for Socio-Economic Risk

Gender-Biased General Counsel Bonuses Need Fixing

By Jill Hayman Hunton Andrews Kurth LLP

By Jack Vaughan K&L Gates and Patrick Marrinan Analyitica

By Andrea Bricca Major, Lindsey, & Africa

For various reasons, leasing space is more advantageous than buying space, so commercial leasing transactions are part of every thriving business. An advantageous lease adds value; a disadvantageous one is a burden. Leases are packed with detailed provisions that translate into substantial amounts of money and potential disruptions to the operation of your business. A vital but often overlooked factor in securing the best possible lease is the quality of client-attorney communication. No matter which side of the deal you are on, it is essential to clearly stipulate what you need from your legal team. Landlords should begin with a first draft that contains clauses that are balanced in treating the landlord’s and the tenant’s respective interests. Tenants with any degree of leverage should request a balanced first draft before final rental terms are agreed. Ask that documents be written in plain English without redundancies. Both you and your counter party will want to understand your rights and obligations without having to go back to your lawyers for a translation. Be explicit as to whether you want a memo of open points after each round of negotiations and the level of detail you expect. Set realistic deadlines for your legal team. They are preparing an intellectual work product and need time to read, analyze and articulate the business risks you face. Confirm that your lawyer understands how utilities are delivered and priced to ensure you are not left covering unreasonable costs.

Today, investors and their diligence teams face the challenge of emerging socioeconomic risk exposures. These risks are varied, and they are growing out of our divided cultural and business environment. This means that investors are bringing new diligence demands to deals. Businesses are being held to account by the media, consumers and the market, for perceived or real shortcomings and failures to live up to socio-economic obligations. A good example is The Weinstein Company, which has seen its value reduced to a fraction of its former multi-billion dollar valuation, for grossly ignoring (and consequently enabling) the conduct of its namesake. Now it’s in bankruptcy. Lapses in ethical labor policy anywhere in a supply chain, lack of sensitivity to issues of importance to a particular interest group and expression of political thought on social media can all result in media backlash, boycotts and value loss in the market. While businesses scramble to address these risks and satisfy new investment criteria, investors should likewise task their due diligence teams to conduct detailed analyses of company and brand risk exposures to socio-economic issues. Empower management, legal counsel, and socioeconomic risk and research analysis experts to do the necessary research and implement an action plan. Socio-economic risks can include numerous individual issues: immigration policy stance; economic inequity concerns; racial, gender and sexual preference policy management; and much more. Many issues do not surface in responses to standard due diligence questionnaires or disclosure schedules.

Although female general counsel have a base salary that is, on average, 6.3 percent lower than their male counterparts, it is in their bonuses that the real disparity comes to light. Male general counsel bonuses were 31 percent higher than those of their female counterparts, according to a 2017 survey on in-house compensation. The way bonuses are evaluated and distributed often stacks the deck against women. Women tend to be more comfortable advocating for others than for themselves. Female general counsel may also face bias and discrimination based on preconceived opinions about their worklife balance. Some of the responsibility for fixing the problem will inevitably fall on female general counsel. The best tactic is leveraging objective data and metrics to drive performance improvement of the legal function. General counsel should seize any opportunity to demonstrate and increase the value of the legal department and its impact on the bottom line. Companies committed to diversity of all types should step back and examine the way bonuses are meted out. More likely than not, even companies that have taken outward strides towards diversity in hiring and educating employees on operating in a diverse workplace have antiquated bonus structures that keep the same people at the very top. Sooner or later, businesses that drag their feet on the bonus issue will see excellent female general counsel leave for other, more equitable opportunities. Ultimately, it’s up to the CEO to foster a fair environment and structure a bonus system that measures value regardless of gender.

TODAY’S GENER AL COUNSEL SUMMER 2018

Executive Summaries PAGE 60

U.S. Companies and London’s AIM Exchange By Nicholas Foss-Pedersen Haynes and Boone LLP

from the

EVENT Today’s General Counsel Institute attended LMA 2018 in New Orleans, Louisiana in April. Congratulations to our selfie contest winner!

Melissa Marshall @melmarshall22

The London Stock Exchange’s AIM market is the world’s leading market for high-growth companies, popular with international companies that wish to source their equity capital financing needs from sophisticated institutional investors in one of the deepest capital pools in the world. At the end of 2017, 960 issuers were listed on AIM, of which 344 were international companies and 50 were U.S. companies. AIM’s key feature is its lighter regulatory and governance regime. This enables an AIM issuer to obtain the benefits of being publicly traded but with a regulatory compliance burden, and hence management time and financial burdens, appropriate to its stage in the business life cycle. AIM has no market capitalization requirement, no free float requirement, no trading/ financial history requirement, no profitability requirement. However, an AIM listing brings the U.S. issuer within the scope of UK and EU securities regulation, including the EU Market Abuse Regulation, which governs, amongst other things, the control and disclosure of inside information and dealings in the issuer’s shares by directors, management and senior employees, and creates offenses of insider dealing and market abuse. An IPO is a major milestone in the life of a growing business; and the choice of market and exchange is clearly an important one that will be influenced by numerous factors. AIM should be considered a real and credible alternative for U.S. based high-growth companies, given the market’s focus on younger growth companies rather than large mature businesses.

Sad it’s the last day – but thrilled to have my plane read #tgclma18

8:06 AM - 11 Apr 2018

Melissa Marshall, Creative Legal Marketer, Laner Muchin.

#tgclma18

SUMMER 2018 TODAY’S GENER AL COUNSEL

Labor & Employment

Transgender Employees and Employment Discrimination By Alison Nadel and Natalie Colvin

here is a fulsome debate regarding the meaning and scope of “sex” discrimination under Title VII. In its recent decision in Zarda v. Altitude Express, Inc. the Second Circuit decided that Title VII applies to sexual orientation and observed that we are amidst “something of a revolution in American law respecting gender and sex.” A short time later, the Sixth Circuit became the first federal appellate court to hold that discrimination because of an employee’s transgender or transitioning status constitutes discrimination based on sex, in violation of Title VII in Equal Employment Opportunity Commission v. R.G. & G.R. Harris Funeral Homes, Inc. But other circuits have historically expressed contrary views; the Seventh Circuit’s decision in 1984 in Ulane v. Eastern Airlines, Inc. is among those. This conflict is not limited to the courts. There is also conflict within the executive branch on how Title VII

should be enforced. The Equal Employment Opportunity Commission (EEOC) has held that intentional discrimination because of a transgender person’s gender identity is discrimination based on sex, and therefore prohibited under Title VII. Although the Department of Justice during the Obama administration concurred, Attorney General Jeff Sessions’ October 2017 memo reversed course, concluding that federal law does not prohibit employment discrimination based on gender identity per se. Uncertain times make it more difficult to advise corporate leadership. How difficult is it now? To answer that question, we summarize the evolution of the law in this area and offer some practical considerations for employers. UNDERSTANDING THE DEBATE

Title VII prevents employers from discriminating against employees based on “sex” — a term with no statutory

definition and no legislative history. Following that statute’s passage in 1965, courts held that Title VII does not protect against discrimination on the basis of gender identity, distinguishing discrimination based on “gender” from discrimination based on “sex.” However, the tide appears to be turning, as more courts are taking a broader view of what constitutes “sex” discrimination under Title VII. First, in 1989, the U.S. Supreme Court concluded in Price Waterhouse v. Hopkins that evidence of sex stereotyping (e.g., not acting “womanly” enough and needing to dress “more femininely”) was admissible to show that the plaintiff was denied partnership due to her biological sex, thus proving sex discrimination under Title VII. Notably, that decision departed from the statutory term “sex” in concluding that “gender must be irrelevant to employment decisions.” Second, nine years later, in Oncale v.

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Labor & Employment Sundowner Offshore Services, Inc. the Supreme Court recognized that Title VII also prohibits same-sex harassment, even though that was “assuredly not the principal evil Congress was concerned with when it enacted Title VII.” In the aftermath of these Supreme Court decisions, lower courts began applying those holdings to entertain claims involving transgender individuals claiming discrimination. The First and Ninth Circuits both allowed transgender plaintiffs to proceed under laws interpreted similarly to Title VII. Similarly, the Eleventh Circuit relied on Price Waterhouse in deciding that an employer impermissibly discriminated against a transgender employee by firing her because she was transitioning from male to female. In the landmark Funeral Homes decision in March, funeral director Aimee Stephens was fired after she informed

More courts are taking a broader view of what constitutes “sex” discrimination under Title VII. her employer that she intended to transition from male to female. Stephens filed a complaint with the EEOC. The EEOC investigated Stephens’ allegations and brought its own lawsuit against the private employer for violations of Title VII. The lower court decided in favor of the employer; but the Sixth Circuit reversed, ruling that the funeral home had unlawfully discriminated against Stephens by firing her based on her transgender or transitioning status, which is inherently gender-nonconforming. The ruling marks the first time a federal appellate court has held that employment discrimination on the basis of transgender status constitutes discrimination based on sex under Title VII.

This is consistent with the EEOC’s 2012 holding in Macy v. Department of Justice that intentional discrimination because of a transgender person’s gender identity is discrimination based on sex, and therefore prohibited under Title VII. The EEOC has also held that employers may run afoul of Title VII by preventing transgender employees from using bathrooms consistent with their gender identity, intentionally misusing a transgender employee’s name and pronoun, and failing to revise employee records consistent with changes in gender identity. STATE PROTECTIONS

Title VII is federal law, but many states have their own discrimination statutes that list other specific protected categories, such as gender identity and gender expression. Some local ordinances prohibit discrimination on the basis of gender identity and gender expression even where state law does not. Employers in those jurisdictions must comply with federal law and, where it is more favorable to employees, state and local law. Some states specifically prohibit employment discrimination based on gender identity, including California, Connecticut and Massachusetts. Other states — such as Illinois, Oregon and Washington — prohibit transgender employment discrimination by including gender identity in the definition of “sex” or “sexual orientation.” A few states, including New York, have regulations or executive orders prohibiting discrimination on the basis of gender identity. Like the jurisprudence, the legislative landscape is continuing to evolve, and there is legislation pending in a number of states related to discrimination on the basis of gender identity. PRACTICAL CONSIDERATIONS

For employers operating nationally, it is impracticable to attempt to have separate corporate policies for categories of discrimination depending upon the relevant circuit, state and local laws. And as public support for and recognition of transgender individuals increases, failing to prohibit discrimination against transgender employees could invite brand

damage even if legally permissible. Employers should evaluate their policies and practices with transgender employees and gender identity issues in mind, and consider the following: • Including gender identity and gender expression as protected classes under anti-discrimination and antiharassment policies; • Framing dress code, appearance and makeup policies for neatness rather than as a code to enforce traditional sex stereotypes; • Providing guidance on use of employees’ preferred pronouns and names in the workplace, and in related record keeping; • Preparing transition plans for employees undergoing transition. One of the most common issues that arises regarding transgender rights, and one which has generated much media attention, is bathroom access. In many instances, the prudent course for employers is to permit all employees to use bathrooms consistent with their gender identity. Where possible, employers should also consider offering single-occupancy, gender-neutral bathrooms for any individual seeking additional privacy, but not require transgender individuals to use those facilities. ■

Alison L. Nadel is a partner in the Washington, D.C. office of McDermott Will & Emery. She represents clients in complex litigation matters and has extensive experience with electronic discovery. anadel@mwe.com Natalie Colvin is an associate in the Washington, D.C. office of McDermott Will & Emery, where her practice focuses on complex civil litigation. ncolvin@mwe.com

SUMMER 2018 TODAY’S GENER AL COUNSEL

Labor & Employment

Ruling Limits Whistleblowers to Nuclear Option By James Hockin and Meriel Schindler

n February, the Supreme Court threw out an anti-retaliation suit brought against a real estate trust by a former employee who was fired after internally reporting alleged securities violations. The case has overturned understanding of the test for employees to gain whistleblower status. In Digital Realty Trust, Inc. v Somers, the Court ruled that because the employee reported the alleged wrongdoing internally instead of directly to the Securities and Exchange Commission (SEC), he was not protected. The SEC created rules to enforce the Dodd-Frank Act, which allowed for internal reporting. Those rules no longer obtain.

While the decision strips DoddFrank back to the literal language of the text, there is concern that it undermines whistleblowing laws. Some commentaries view it as running contrary to many other United States laws containing anti-retaliation provisions that protect employees and individuals from a much broader spectrum of complaints, including (under certain circumstances) informal complaints. SUPREME COURT UNDERCUTS SEC

The Dodd-Frank Act provides protection and incentives to those who blow the whistle on possible securities and commodities violations. The headline

grabber when Dodd-Frank was signed into law in 2010 was that whistleblowers might be financially rewarded for a tip that resulted in a successful enforcement action in which more than $1 million was collected. The Supreme Court decision does not touch on that provision, but rather addresses those protections afforded to individuals who blow the whistle and suffer retaliation by their employer as a result. It means that, for the purposes of Dodd-Frank, an individual will not gain “whistleblower” status unless and until they have reported to the SEC. This flies in the face of SEC rules and guidance, which is that Dodd-Frank’s

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Labor & Employment anti-retaliation protections applied irrespective of whether the individual had blown the whistle to the SEC directly or internally to the company. The Supreme Court’s interpretation does not match the protections offered under Sarbanes-Oxley or the antiretaliation provisions set out in most United States discrimination legislation.

from retaliation, or take the nuclear option and go straight to the SEC. At the end of March, we saw the SEC award its largest ever whistleblower payments, splitting approximately $50 million between two whistleblowers, and a further $33 million to a third. With such huge sums on offer, and in light of the Supreme Court decision in

While the decision strips Dodd-Frank back to the literal language of the text, there is concern that the conclusions undermine whistleblowing laws. In most cases, no distinction is drawn between internal reporting and reporting to a regulator. Instead, broad protections are afforded, with the purpose of encouraging individuals to reveal information about acts of wrongdoing. Take Title VII, the cornerstone of federal discrimination law, as an example. That legislation prohibits retaliation against an employee or job applicant who opposes any practice prohibited by Title VII, including identifying discriminatory practices. Those individuals could choose to raise such complaints with the Equal Employment Opportunity Commission (EEOC), which would also give them protection, but they are not required to do so. Title VII recognizes that employees need protection at the outset, not when the complaint is so serious that they need to escalate to the EEOC. Although whistleblowers may have protection under other federal and state laws, this decision will doubtless hurt employees who try to resolve complaints or bring issues to the attention of management without involving the SEC. The protections that still exist under Sarbanes-Oxley only apply to public companies and have tight reporting deadlines. This decision will present employees with a difficult decision: Take the more cautious approach of raising concerns internally but risk not being protected

February, employees are encouraged to make a disclosure straight to the SEC. But employees shouldn’t be fooled: Such cases are likely to be the exception rather than the rule. To be eligible for a whistleblower award, a claimant’s information must lead to the success of the underlying action. And to maximize the reward, there must have been no unreasonable delay by the whistleblower in reporting to the SEC. UK LAW PUTS ONUS ON COMPANIES

By contrast, the UK’s equivalent of the SEC, the Financial Conduct Authority (FCA), places the onus firmly on individual businesses to keep their house in order. The FCA requires that financial services firms put in place internal mechanisms to allow their employees to raise concerns and blow the whistle. It goes so far as to require those organizations that fall within its jurisdiction to appoint a director or senior manager as their “whistleblower champion.” Although the regulations that apply to those working in financial services require an individual to be open and cooperative with regulators, such individuals need not report directly to the regulator unless either there are no internal processes or the individual is responsible for reporting to the regulator by virtue of title, for example, senior manager. Conversely, there is a duty for

the firms to report certain matters that have a serious regulatory impact. The rationale behind such legislation is that it provides the organization the opportunity to become aware of and take action if unlawful conduct occurs, provides a direct avenue for filing complaints, and does not have a chilling effect on employees who wish to make good-faith complaints because they are protected. For employers, internal reporting can be key in ensuring managers are not operating outside their responsibilities without the knowledge of more senior managers. It is important that businesses pick up on internal issues and potential regulatory breaches before they become so serious that they threaten the reputation and financial standing of the firm. To ensure effective reporting, employees need to be protected and, in some cases, incentivized to report concerns and possibly blow the whistle. The Digital Realty case serves to undermine that goal. ■

James Hockin is an employment lawyer based in Withers LLP’s London office. He is dual qualified in New York and England and Wales, and assists and advises both employer and employee clients on matters including unfair dismissal, whistleblowing, redundancy and discrimination. james.hockin@withersworldwide.com Meriel Schindler is an employment lawyer who leads the employment team in Withers LLP’s London office. She advises senior individuals and employers on workplace issues, including contract negotiations, disputes, and exit and post termination issues. She is a trained mediator. meriel.schindler@withersworldwide.com

SUMMER 2018 TODAYâ&#x20AC;&#x2122;S GENER AL COUNSEL

Intellectual Property

Integrating Trade Secrets into a Comprehensive IP Strategy By John Tanski and Jason Murata

any companies implement policies to protect their patent and copyright assets; but too often trade secrets, estimated by the U.S. Chamber of Commerce to constitute as much as 80 percent of a companyâ&#x20AC;&#x2122;s value, are given scant attention. Although there is a web of federal and state trade secret laws, a fundamental requirement for protection under all

of them is that reasonable measures be taken to safeguard these valuable assets. Showing that a business has a protection policy, and that it is followed, can therefore be powerful evidence in establishing the required elements of a misappropriation claim. Identifying Your Trade Secrets Companies that conduct R&D often

have a patentability procedure. The procedure typically involves identifying potentially patentable inventions, determining whether protection should be sought, protecting the invention while any patent application is pending and rewarding inventors for their patents. This type of process accomplishes several valuable objectives. It encourages inventors to bring their discoveries to the

TODAY’S GENER AL COUNSEL SUMMER 2018

Intellectual Property company so that prompt decisions can be made about pursuing patent protection; and it assures that those decisions are made in a systematic and consistent way, based on full information. This allows the company to strategically deploy its limited patent prosecution resources. The patentability procedure is also well suited to trade secret protection. In addition to deciding whether the invention justifies the cost of patent prosecution, your company should also consider whether to protect the invention as a trade secret. The decision between a patent and a trade secret is not binary. Just as a single invention can result in several patents, your company can decide to

extended indefinitely to cover the use of the trade secret in business. An intellectual property (IP) protection policy must therefore consider security. Companies have latitude to design protections that make sense given the demands of their business, available resources and the trade secrets’ value. Generally speaking, however, a security policy should consider (1) premises security, such as locked doors, security cameras and visitor logs; (2) document security, such as confidentiality labels and rules against copying; (3) access restrictions, which limit knowledge of the trade secret to those employees who need to know it for their jobs; (4) dissemination restrictions, such as a

Your company can decide to patent some aspects of an invention and retain others as trade secrets. patent some aspects of an invention and retain others as trade secrets. But having a clear determination about what should be patented and what should be kept secret is critical. Otherwise, the company might inadvertently destroy the trade secret by disclosing too much in the patent application. Implementing Security Measures Recognizing the value of strong patent rights, many companies are conscientious about security during the R&D process. Once a patent application has been filed, however, inventors and marketers often begin clamoring for the opportunity to share it with the world. Patents are designed to facilitate this disclosure by granting the right to exclude others from practicing the invention in exchange for disclosing that invention to others who might be able to improve it. The considerations for trade secrets are very different. To maintain an invention as a trade secret, it must be kept secret. This means that the same types of protections your company uses in its R&D process must be maintained and

policy requiring management approval before the trade secret is disclosed to a business partner; and (5) confidentiality agreements with employees and third parties who have access to the trade secret. Many of these issues will already be addressed in the procedures governing security for R&D. Nevertheless, they will not translate perfectly from the stage of developing trade secrets to the stage of using them. For example, a lab can be kept locked with access restricted to lab personnel, but the same restrictions might not be possible if the trade secret is used in the manufacturing process in a factory. The legal standard offers flexibility in designing measures that are appropriate under the circumstances. But having a level of security that is inferior to the value of a trade secret puts that secret in jeopardy. Educating Your Employees Employees are critical allies in protecting IP assets. Employees must safeguard the R&D process, disclose their inventions in a timely manner, cooperate in

patent prosecution and follow branding guidelines for trademarks. Active cooperation is even more important in protecting trade secrets because of the risk that inadvertent disclosure can destroy the trade secret. An IP protection policy should therefore require continuing employee education about your company’s IP rights and the company policies that protect those rights. We suggest five critical components to integrating trade secrets into this education campaign: • Teach employees what a trade secret is. Understanding the legal definition will help them to understand why the company’s policies exist, and will give them the tools they need to recognize areas where the policy could be improved as well as where it is not being followed. • Identify your company’s trade secrets to employees who have access to them. Employees must understand what information the company expects them to keep secret. • Teach the employees about the trade secret protection policy. Employees should understand what is required of them, what is required of their colleagues and what the consequences are for non-compliance. • Emphasize the need to respect the trade secrets of others. Not only should a trade secret policy protect your company from losing its own trade secrets, it should also guard against a claim that your company has misappropriated someone else’s trade secrets. • Include periodic refreshers. This will allow the company to remind employees of their obligations and update them on any changes to the policy. It will also allow employees to raise concerns. Monitoring Compliance For patents and trademarks, the monitoring aspect of an IP protection policy typically focuses on whether other businesses are respecting the company’s IP rights. To integrate trade secrets into the policy, however, a company must focus on itself and its employees. A

SUMMER 2018 TODAY’S GENER AL COUNSEL

Intellectual Property trade secret protection protocol will only work if it is followed and secrecy is maintained. Two important aspects of compliance monitoring are probably already part of your company’s IP protection

and provisions about the rights and obligations of each company regarding jointly developed inventions. However, joint development projects also pose distinct challenges from the trade secrets perspective.

it requires consistency over time to ensure that secrecy is not lost. With this commitment, your company can begin developing stronger trade secret protection protocols today. And if you are ever called on to establish what

Identify your company’s trade secrets to employees who have access to them. Employees must understand what information the company expects them to keep secret.

policy: (1) incentivizing improvements to the policy and (2) reinforcing confidentiality obligations in exit interviews. An often-overlooked component of IP policy is conducting regular trade secret audits. These audits allow the company to identify areas where protection is weak so it can take corrective action before a trade secret is lost. They also help your company minimize inefficiencies by identifying areas where IP protection policies burden its business operations. Moreover, they create a record demonstrating that the company is taking measures to protect its trade secrets. Enforcing Trade Secrets IP assets are not created equal. The value of a particular patent, trademark or copyright is important in deciding how to enforce it. The same is true of trade secrets. But it is uniquely necessary to move quickly to protect trade secrets because protection is lost as soon as it becomes public or loses its competitive economic value. As a result, it is critical for a company to regularly evaluate the strength and value of its trade secrets. Doing so will allow the company to make immediate enforcement decisions in the event of actual or threatened misappropriation, as all of the key information will be readily available. Challenges of Joint Development Projects It is common for companies to work together to develop new technology. Joint development agreements often include licenses for existing patent rights

Your company must protect its own trade secrets. Protection involves limiting what you disclose to those needed for the project, and negotiating contractual protections for any trade secrets that will be shared between the joint development partners. Your company must clearly define the trade secrets that will be shared. Unlike patents whose scope is defined by their claims, trade secrets are often poorly documented and incompletely and vaguely identified. Rather than broad non-disclosure obligations, agreements should limit disclosure to confidential information that is needed for the project. Any trade secrets should be precisely defined and identified to avoid later confusion and dispute. The project team must develop “clean room” procedures. These procedures keep the project’s trade secrets from leaking out to colleagues who are not working on the project. Having a clean room will thus reduce the risk that trade secrets from the project will “contaminate” either company’s independent work, thereby providing a valuable defense against a later claim that your company’s independent work was derived from the development partner’s trade secrets. Integrating trade secrets into an existing IP protection policy is not difficult. But it does require thought about a company’s assets, as well as its vulnerabilities. It requires a commitment by company leadership to educate employees about trade secret protection and invest in monitoring compliance, and

your company does to protect its trade secrets, you will have a ready answer that will help prove a misappropriation claim. ■

John Tanski is a partner in Axinn, Veltrop & Harkrider LLP’s intellectual property litigation group. He focuses on claims of trade secret theft, unfair trade practices, anti-competitive conduct, breach of contract, and fraud and breach of fiduciary duty. He has significant appellate experience in both federal and state courts. jtanski@axinn.com Jason Murata is a partner in Axinn, Veltrop & Harkrider LLP’s intellectual property litigation group. His practice focuses primarily on patent and trade secret litigation, with a particular emphasis on the mechanical, chemical and pharmaceutical arts, including patent litigation and consultation arising under Section 505(j) of the Federal Food, Drug and Cosmetic Act. jmurata@axinn.com

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starting points. Some systems may even have their own data maps as part of the system design documentation. However, leveraging the documentation for a system on its own may not be enough. To create an effective data map, one should also include information on how data flows between data storage systems. This type of map can transform data from one system into relational information across multiple systems, thus enabling an organization to better understand personal information throughout its enterprise and appropriately implement rules to delete personal information when requested per GDPR Article 17. USING A DATA MAP

An effective data map has multiple uses within the scope of the GDPR. It could be used to comply with Article 15, “Right of Access by the Data Subject.” The “Right of Access” language starts with “The data 24

subject shall have the right to obtain from the controller confirmation as to whether or not personal data concerning him or her are being processed, and where that is the case, access to the personal data….” A company can leverage a data map that captures the flow between data storage systems to confirm not only where the data subjects’ personal data resides, but also the methods of “processing,” which broadly means any actions performed on the personal data (e.g., storing or deleting). A data map also has uses outside GDPR. For example, an effective data map can also be leveraged for information governance, and to develop processes for the identification, preservation and collection of information during the e-discovery cycle. While e-discovery processes for systems that identify email and user-created business documents have become more commonplace, the discovery of information from structured database systems is

increasingly prevalent, and the processes and standards for addressing those systems have not reached the same maturity level. As with many corporate documents, data maps are only effective if they remain current. Unfortunately, I have encountered many clients with data maps that were created as part of information governance initiatives, but would subsequently be printed and sit on a shelf in an office, or reside on a file server as part of a larger document set, and quickly become obsolete. Corporate systems that maintain personal data are constantly evolving. If a corporation aspires to have a better understanding of where personal data resides within its systems, it should establish workflows that allow for evolution in methods of data preservation. This initiative should engage employees at all levels, not just IT, including those who are originating data, capturing data, requesting data, storing data, etc.

TODAY’S GENERAL COUNSEL SUMMER 2018

It is important that part of this engagement includes why this initiative is important. When everybody within a corporation understands why, they can then help support initiatives beyond simply demanding compliance. This prevents decisions being made that create unnecessary risks, or without updating the data map. Here are five tips when considering a data mapping initiative that is focused on data privacy: • Start with existing documentation, including technical design and administration documentation, as well as user guides and manuals. • System IT owners and business users will both be good sources for interviews. Getting business users together for connected systems is a great way to gather information on the data relationships between systems. • Think about and discuss data privacy

options, such as anonymization and permanent deletion, when developing the data map. If anonymization is already a consideration on the future state roadmap or next release of a system, it would be good to get that information early in the data map process. • Remember that an effective data map can be used in multiple ways, which include supplements to existing technical documentation and user guides, e-discovery preservation and collection planning, and implementation of EU GDPR compliance. • Ensure that the data map development exercise includes technologies and/or methodologies to keep the information current. A stale data map can quickly become a paperweight with little value.

information, just as a pirate could have used a map to find buried treasure. “X” marks not only the spot where the personal information resides but also the locations to potentially delete and comply with the right to be forgotten.

JULIAN ACKERT, a Managing Director at iDiscovery Solutions (iDS) in Washington, D.C., has more than 15 years of consulting and project management experience in the technology and litigation industries. He has worked on international projects involving complex data privacy, collection and review challenges. He is a member of The Sedona Conference, Working Group 11 (Data Security and Privacy). jackert@idiscoverysolutions.com

In the context of the GDPR, effective data maps can be used to identify personal 25

SUMMER 2018 TODAY’S GENER AL COUNSEL

Cybersecurity

Survey Shows In-House Teams’ Data Protection Concerns By Chris Zohlen

recent Advice from Counsel study of best practices for inhouse legal teams examined the latest data privacy and security concerns among counsel at large U.S. corporations. To help understand how these issues are impacting organizations, 30 practitioners from in-house legal teams shared insights on three critical and intersecting topics: the General Data

Protection Regulation (GDPR), information governance (IG), and security and data remediation. A recurring theme throughout interviews conducted for the study was worry over the investments needed to implement strong cybersecurity programs and meet GDPR requirements. The study outlined top areas of concern and practical advice for teams imple-

menting programs that better protect their organization from risk. GDPR

Enforcement for GDPR, Europe’s strict and highly anticipated data protection law, went into effect in May. Nevertheless, about half of the organizations in the study were taking a wait-and-see approach to determine how strict the

TODAY’S GENER AL COUNSEL SUMMER 2018

Cybersecurity

regulators would be. Nearly 80 percent of respondents said that their companies will be impacted by GDPR; and they shared a wide range of concerns. For some, maintaining adequate data security will be a challenge. In many cases, the team responsible for preventing data breaches also owns GDPR compliance, forcing it to juggle resources across two important projects. Although informa-

requires the implementation of programs that have executive buy-in and sponsorship. Respondents noted that IT and information security are too often viewed as interchangeable; but the two have different skill sets. Tapping the right resources and seeking support from experts with deep technical knowledge will produce an effective approach to mapping the

Billions have been spent on cybersecurity and IG; but many in-house teams feel that their organizations are no safer than they were five years ago. tion security experts should be solely focused on cybersecurity, they are being asked to dedicate additional time and energy to complying with the complex regulatory environment. Respondents also expressed worry over the funding required to change policies and practices for GDPR, and expect it will detract budget from innovation initiatives. Regardless of a company’s footprint in Europe, or how extensively it will be impacted by GDPR, data privacy is a growing global concern that must be addressed. Teams are evaluating their current processes and/or hiring either internal resources or an expert third party to help determine program gaps, and ensure that employee and customer data remains secure. This exercise can produce additional benefits, such as helping to update a stale records retention program, or reducing storage costs. INFORMATION GOVERNANCE

The connection between IG and data protection has long been a focus within highly regulated industries such as healthcare and financial services; but as high-profile data breaches continue to dominate the business news, companies of all stripes are beginning to implement programs that can help better protect data. It’s not an easy task, and

internal and external data environment. Assessments to find weaknesses and identify priorities early on, followed by consistent employee training and education will support long-term sustainability of programs. From a security perspective, respondents also suggested hiring an in-house expert and starting with focusing on the “crown jewels” to protect the most sensitive information first. The National Institute of Standards and Technology (NIST) framework for cybersecurity is a comprehensive resource that can guide these efforts, and will help with building a data protection program around the most sensitive assets. DATA REMEDIATION

Organizations know they are creating and saving too much data. While there are rules dictating retention of corporate information, especially in highly regulated industries, the amount of overretention is so massive, organizations often do not know how to start. Taking control of enterprise information through a data remediation program can dramatically reduce risk and costs. More than half of the study respondents had successfully executed data remediation projects. Companies that had not were stuck with limited resources, lack of engagement from IT or failure

to obtain C-level buy-in to move projects forward. Those that were effective recommended building a business case to secure executive buy-in, training staff, and creating programs that also address expected challenges. Projects that are customized to how employees work are also more likely to be successful. IT and legal should work in the background to determine which documents should be disposed of or retained, limiting the amount of times users are asked to make decisions about data. This allows employees to focus on their daily work and fosters cooperation with new data management policies. Across all of these issues, it is important to recognize the human element. Billions have been spent on cybersecurity, privacy programs and IG frameworks; but many in-house teams feel that their organizations are no safer than they were five years ago. Technology can only go so far. Organizations should have executive and board leadership on initiatives that create a culture of awareness and privacy. That ensures the entire organization is working toward the same goals. ■

Chris Zohlen is a Managing Director in FTI Consulting, Inc.’s Technology Practice. He focuses on helping clients develop and implement innovative e-discovery and IG solutions. Formerly, he was the business unit executive for IBM’s Information Lifecycle Governance business. Chris.zohlen@fticonsulting.com

SUMMER 2018 TODAY’S GENER AL COUNSEL

Cybersecurity

Blockchain and Cryptocurrency Confidentiality Issues By Jon Sriro

he technology for the practical use of cryptocurrencies is rapidly evolving, resulting in an emerging trend toward their use in business. Companies are considering the use of cryptocurrencies such as Bitcoin for goods and services purchased and sold, but before doing so, it is important to explore the legal issues associated with adoption. Although cryptocurrencies provide significant benefits over fiat currencies, they store information on a “blockchain” for all to review. Therefore, in order to provide counsel regarding the adoption of this technology, it is important to have a basic understanding of how blockchains work, how cryptocurrencies utilize blockchain technology, and the confidentiality and privacy issues associated with blockchains.

stored in a block, similar to a page in a ledger. Once a block is completed, a new block is created. PUBLIC AND PRIVATE KEYS

There are many differences between a conventional ledger and a blockchain. To understand the issues that arise from using cryptocurrency, it is necessary to have a basic understanding of how blockchains function. Blockchains utilize private and public keys to create signatures, which are used to validate transactions and entries on the blockchain/ledger. Holders (senders/receivers) of cryptocurrency each have a unique pair of public and private keys, also called a public and private address. The public key is used to verify that the holder of the private key it is paired

the wallet as the bank account where funds are stored. In order to send cryptocurrency, the holder/sender generates a cryptographically derived signature from both the private key and the transaction details. The signature, which is also alphanumeric, then is sent to the receiver of the cryptocurrency; and the transaction is validated using the signature and the holder’s/sender’s public key. The validation process confirms that the holder/sender owns the cryptocurrency transferred and that it is being properly transferred to the receiver, using the receiver’s public address. Once the transaction is validated, it is recorded on the blockchain. Unlike entries on a traditional ledger, blockchain entries are immutable. They cannot be changed. The blockchain

The blockchain, essentially an electronic ledger, is the platform for cryptocurrencies to function and process transactions. Cryptocurrencies are digital currencies that utilize complex encryption techniques to regulate the creation and transfer of units of the currency. Cryptocurrencies such as Bitcoin, Ethereum and many others utilize a blockchain to record the transfer of ownership of the cryptocurrency from one holder to another. The blockchain, essentially an electronic ledger, is the platform for cryptocurrencies to function and process transactions. Transfers of units of the currency are recorded on the ledger showing the amount of units transferred, the date and time of the transfer, and from whom and to whom the cryptocurrency is transferred. The blockchain is composed of multiple transactions

with is the one who actually owns the funds being transferred and that the transfer was authorized. The keys and associated signature are alphanumeric. The private/secret key is a 256-bit long set of characters randomly generated on the platform. Holders make a “wallet” to store their cryptocurrency records. The public key is derived from the private key through a cryptographic math function, which makes it practically impossible to figure out the private key from which it was derived. The public key is the address for the wallet. The wallet is similar to a bank account number and is used for recording transfer and receipt of payments. Although the wallet does not actually hold funds, it is useful to conceptualize

comprises multiple blocks, which are similar to pages of a ledger. Once a block on the blockchain is filled, it creates a “hash,” which is a complex math computation that reduces all of the transactions in a block into a single mathematical equation. The hash is referenced in the subsequent block and connects that block with the previous block. Any change to the ledger entries in a block would change the “hash,” resulting in the reference to the block becoming invalid in the subsequent block. These hashes link the blocks in the blockchain together. Altering a transaction in a previous block would cause the hash to be invalid, thus breaking the chain. Because the blockchain is a distributed ledger, whereby the ledger is shared

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Cybersecurity

across a vast network of computers that validate it through consensus, the blockchain cannot be changed without the consensus of the majority of computers adopting the ledger as correct. The other key difference between a blockchain and a traditional ledger is that the entries on a blockchain (this article only discusses public blockchains) are available for anyone to see. The pub-

lic address for the holder/sender and the receiver of cryptocurrencies like Bitcoin are recorded on the blockchain, making blockchains transparent. TRANSACTIONS ARE TRACEABLE BY THIRD PARTIES

It is important to understand that Bitcoin transactions are pseudonymous, not anonymous. Transactions recorded

on a blockchain of any pseudonymous cryptocurrency are, therefore, traceable. If someone discovers the identity of the owner of an address recorded on the blockchain, all of that individualâ&#x20AC;&#x2122;s transactions can be traced and known. The identification of a sender or receiver can occur many ways. Receivers of cryptocurrencies can voluntarily continued on page 35

SUMMER 2018 TODAY’S GENER AL COUNSEL

Compliance

Protecting Against Website Accessibility Suits By Joshua Briones and Nicole Ozeran

he steady shift in our economy from traditional brick-and-mortar stores to online commerce has brought increased attention to website accessibility for blind or hearingimpaired individuals. Plaintiffs’ counsel have taken notice. In 2017, over 250 lawsuits (most of them class actions) were filed against companies for failing to maintain websites in compliance with the Americans with Disabilities Act (ADA). To state a private claim under the ADA, a plaintiff must allege that (1) he/ she is disabled within the meaning of the ADA; (2) the defendant owns, leases or operates a place of public accommodation; and (3) the defendant discriminated against him/her by denying a full and equal opportunity to enjoy the services provided. The legal issue is whether website operators are operating “a place of public accommodation.” The statute lists 12 different types of public accommodations along with somewhat of a catchall that includes “other sales or

rental establishment.” The list, created when the law was passed in 1990, conceivably covers most commercial establishments but does not expressly include websites. The courts are divided as to how to interpret the term “public accommodation.” Some courts take the position that the ADA applies to all commercial websites, while other courts hold that only websites with a “nexus” or connection to a physical location are subject to the ADA. A third approach simply holds that the ADA only applies to physical places. UPWARD TREND IN FILINGS

In 2017, 7,663 ADA Title III lawsuits were filed in federal court — 1,062 more than in 2016. This 14 percent increase is almost double the 2014-2015 increase, with California and Florida continuing to be hotbeds of litigation. But New York was the big story, having almost doubled its 543 lawsuits filed in 2016, to 1,023 in 2017. Although physical accessibility

lawsuits remain common in 2018, the numbers continue to be driven largely by ADA website accessibility class actions filed in California, Florida and New York. Note that these numbers do not include the many demand letters plaintiffs sent to businesses asserting website accessibility claims, or lawsuits filed only in state courts. WHY THE UPSWING?

Previously, plaintiffs’ attorneys’ legal theories for bringing website accessibility lawsuits hadn’t been tested. Every case was settled out of court. In 2017, however, the first case concerning website accessibility was finally tried. In Carlos Gil v. Winn-Dixie Stores, Inc., U.S. District Judge Robert Scola ruled that (1) Winn-Dixie’s website was a “place of a public accommodation” under the ADA; and (2) based on the testimony of the plaintiff and his expert, the website was not sufficiently accessible. Judge Scola found that since Winn-Dixie’s website is “heavily integrated” with

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Compliance

the company’s more than 500 brick-andmortar stores across five states, www. winndixie.com is subject to the ADA. In his decision, Judge Scola also noted that despite undergoing substantial (and costly) upgrades to implement its Plenti

tion to a brick-and-mortar store; (2) due process and/or the primary jurisdiction doctrine mandate dismissal; (3) a stay is warranted pending regulatory guidance from the DOJ on website accessibility for the blind and visually impaired;

Although physical accessibility lawsuits remain common, the numbers continue to be driven largely by ADA website accessibility class actions. rewards program, Winn-Dixie’s website was inaccessible to screen-reading software commonly used by blind internet users. The plaintiff said he fully intended to patronize Winn-Dixie’s physical stores again once he could fully access the company’s website. This was a crucial component in the judge’s decision to order injunctive relief. According to the decision, there existed a “causal connection” between the injury (that is, the violation of the plaintiff’s rights) and his troubles accessing Winn-Dixie’s website — including his difficulty finding store locations when traveling. This gave plaintiffs’ attorneys legal (though nonbinding) precedent that websites constitute places of public accommodation under the ADA. Thus, they have felt emboldened to file class actions against all sectors, including museums, amusement parks, banks and retailers. The good news for potential defendants is that the only remedies available in private ADA suits are injunctions forcing you to come into compliance and attorneys’ fees. If the DOJ gets involved, it can seek civil fines and penalties. Hence, you need to do the risk/benefit analysis as to whether it is worth challenging the claim or not. Most claims can be defended by establishing that (1) the website is not a “public accommodation” under Title III of the ADA because it lacks connec-

and/or (4) the website provides other “effective communication” to its blind and visually impaired customers. Each case is different and requires an individualized analysis. MAKING WEBSITES COMPLIANT

One way to make a website compliant is to contact a qualified web design agency, have them perform an audit of all your online properties and make sure that the website complies with the Web Content Accessibility Guidelines (WCAG) 2.0. Though these guidelines have not been formally adopted by the legislature, the DOJ’s reliance on the guidelines in determining whether governmental websites comply with the ADA is persuasive. WCAG 2.0 is a technical standard requiring sound expertise. It is vital that businesses interview the considered web design agency thoroughly, as not all agencies are up to speed on WCAG 2.0 rules. A qualified web design firm will be able to identify any ADA violations and outline a plan for updating the business’s online content and properties. Businesses can also perform the audit internally. The ADA.gov website provides a complete list of ADA compliance guidelines, which detail potential problems and solutions. Congress has continued legislative efforts to provide business some relief from these “drive-by” lawsuits. Among other things, the ADA Education and Reform Act of 2017 (introduced January 24, 2017, as H.R. 620) would codify a “notice and cure period.” It would

prohibit a plaintiff from filing a lawsuit based on failure to remove an architectural barrier unless the plaintiff has first given the businesses notice of the alleged violations and an opportunity to provide a plan to address them. Some states have their own legislative reform efforts, such as Florida, where legislators passed House Bill 727 (effective July 1, 2017), and Nevada, where the State Attorney General intervened in a federal ADA Title III lawsuit by a serial plaintiff who had filed at least 275 lawsuits in seven months. Although there is discussion that some guidance may come from the DOJ this year, no regulations providing specific guidelines to businesses exist. The most that businesses can do to protect themselves is conform their websites to the WCAG 2.0 standard, make sure that their third-party vendors are aware of the ADA, and train employees responsible for website and mobile app maintenance. Accessibility is a continuing obligation. It requires auditing, monitoring and review of websites and mobile apps to ensure accessibility. ■

Joshua Briones is the Managing Member of Mintz Levin’s Los Angeles office. He is a highly experienced trial lawyer with a national practice and has represented clients in such industries as financial services, pharmaceuticals, professional sports, food and beverage, petroleum, chemical manufacturing, health care, high technology and higher education. JBriones@Mintz.com Nicole Ozeran is a litigator in Mintz Levin’s complex corporate litigation group. Her practice concentrates primarily on consumer fraud, online and telephone marketing and other consumer privacy matters, false advertising, and regulatory and statutory compliance issues. NVOzeran@mintz.com

SUMMER 2018 TODAY’S GENER AL COUNSEL

Compliance

Federal Trade Commission Guidance to Multi-Level Marketing Companies By JB Kelly and Bryan Mosca

taff at the Federal Trade Commission (FTC), the federal agency tasked with protecting consumers from anticompetitive, deceptive and unfair business practices, periodically issues non-binding, plain-language guidance to help companies comply with matters under the agency’s enforcement authority. The topics and advice covered by staff guidance provide companies with valuable insight into the subject matter that is of interest to the FTC and its staff, who typically make day-to-day decisions regarding enforcement matters. FTC enforcement investigations will often target an industry that recently

An MLM is a type of direct selling company. Similar to other direct selling companies, MLMs rely on a network of participants (or distributors) to sell their products or services to consumers, typically through person-to-person sales made in the homes of participants or prospective customers, or through social medial platforms. With MLMs, participants can earn compensation based on their own sales as well as the sales of the other participants they recruit, called their “downline” distributors. The purpose of the structure is to increase the market for buyers of the company’s products by increasing the

documents and information from companies that they suspect are engaging in unfair or deceptive conduct. The FTC and state attorneys general can issue subpoenas or civil investigative demands requiring the production of documents, written responses to questions or interrogatories, or a witness to submit to testimony through a process similar to a deposition. Following an investigation, the FTC or a state attorney general can enforce its respective consumer protection laws if it believes a company has engaged in unlawful conduct. Enforcement can include filing a complaint or an administrative action against the

In 2016, in a case involving Herbalife, the FTC signaled a shift to a fact-based analysis of the totality of the MLM’s business practices. has been the subject of staff guidance. For example, the FTC brought enforcement actions against “social media” endorsers and influencers shortly after reminding influencers to clearly disclose their relationship with companies that they endorse. Earlier this year, FTC staff issued Business Guidance Concerning MultiLevel Marketing to help members of the “diverse and varied” multi-level marketing industry comply with the law. The Business Guidance, offered as a list of frequently asked questions, describes the characteristics of lawful and unlawful multi-level marketing companies (MLMs). Although the FTC’s enforcement decisions are fact specific, the non-binding Business Guidance provides insight into the FTC’s considerations when evaluating MLMs.

number of salespeople that can connect to those buyers. The FTC and state attorneys general have concurrent authority to evaluate the business practices of companies and whether those practices harm the rights of consumers. The FTC evaluates whether a company’s business practices are “unfair or deceptive” through Section 5 of the FTC Act. Similarly, state attorneys general rely on their states’ consumer protection laws (sometimes called “mini-FTC Acts”) to scrutinize whether a company’s acts or practices are unfair, deceptive or misleading. In most jurisdictions, state attorneys general and courts consider the interpretations of the FTC to assess whether certain conduct violates state consumer protection laws. The FTC and state attorneys general have broad investigative powers to seek

company or reaching a settlement that resolves the investigation. Through these enforcement tools, the FTC and state attorneys general can seek redress for consumers, broad injunctive relief, attorneys’ fees and costs, and civil penalties (although the FTC can only seek civil penalties in court for violations of an FTC order). HISTORICAL ENFORCEMENT OF MLMS

Traditionally, MLM compliance with Section 5 of the FTC Act was evaluated by analyzing whether the MLM had an unsustainable compensation structure by requiring participants to pay “the company in return for . . . (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of the

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Compliance

product to ultimate users” (in re Koscot Interplanetary, Inc., et al., 1975). The underlying supposition was that an MLM that did not pay compensation based on actual retail sales to actual consumers did not sell products that were in consumer demand. These MLMs, colloquially known as pyramid schemes, would not survive because eventually downline distributors would run out of new individuals to recruit and could not earn money or recover their costs through the sale of product or services alone. The analysis of whether an MLM met the Koscot standard evolved as courts and companies developed new benchmarks to show that the MLM based its compensation structure on the sale of product to ultimate users (i.e., was not a pyramid scheme). The prevailing standard for many years — Amway’s “10 customer rule,”

“70 percent rule” and its buy-back policy — was based on the assumption that MLMs that had a policy to buy back unused product and paid compensation to participants that sold at least 70 percent of the product purchased in a given month to at least 10 different customers had lawful compensation structures. Subsequent courts and FTCs refined this standard by considering the compensation that an MLM could pay on wholesale sales to new recruits and on product purchased by the participant for personal consumption. Although the analysis evolved, the inquiry remained focused on the sustainability of the business model. HERBALIFE, LTD. AND VEMMA NUTRITION COMPANY STIPULATED ORDERS

In 2016, the FTC signaled a shift away from an analysis of the sustainability of the compensation structure to a

fact-based analysis of the totality of the MLM’s business practices by entering into stipulated orders with Herbalife, Ltd., a global nutrition and weight management company, and Vemma Nutrition Company, a company that sells energy drinks, nutritional beverages and weight management products. The two orders, which were drafted to the particular circumstances of each company, included commitments related to the compensation structure, representations made by the company and its participants, and ongoing monitoring. The orders imposed certain commitments that were designed to ensure that the companies paid compensation based on actual retail sales. For example, both companies were prohibited from paying compensation for recruitment of new participants and were limited in paying compensation for purchases for personal use. The orders also imposed obligations

SUMMER 2018 TODAY’S GENER AL COUNSEL

Compliance

prohibiting the companies and their participants from misrepresenting the income opportunity, or making statements of a lavish lifestyle in advertising, marketing materials or other public statements. Following the Herbalife and Vemma orders, it was unclear whether MLMs could rely on the 10/70 Rule to avoid scrutiny under Section 5. THE FTC’S BUSINESS GUIDANCE

The Herbalife and Vemma orders created uncertainty for the rest of the industry. Other MLMs had to decide whether the orders indicated a change in how the FTC evaluated MLMs or held these companies to a different standard due to specific circumstances. The Business Guidance, which reflects a holistic approach in the Herbalife and Vemma orders, provides the MLM industry with much-needed clarity. With the Business Guidance, the FTC staff expresses its intention to evaluate MLMs based on a case-by-case approach that considers the factors in totality to distinguish between lawful MLMs and MLMs that violate Section 5 of the FTC Act. The Business Guidance advises that the FTC will consider several factors in determining whether to initiate an enforcement action: Unlawful Compensation Structures Over-Reward Recruitment and Encourage “Inventory Loading” Compensation structures based on “mere wholesale purchases or payments by its participants” rather than actual sales to real customers is likely unlawful. The FTC is concerned that such compensation structures could incentivize participants to buy product, or recruit others to buy product — not for real consumer demand, but to advance in the marketing program. Purchases for personal use can count towards compensation if the purchases are truly made to satisfy personal demand. Proof of Sales MLMs are expected to be able to demonstrate that actual sales by participants were made to actual customers. Sales receipts and other direct methods to

demonstrate sales are the “most persuasive documentation” compared to attestations and other indirect proof of sales. Claims and Representations Are Truthful and Non-Misleading Claims and representations made by MLMs and their participants must be truthful and non-misleading — particularly, claims and representations about earnings and the potential success in the business opportunity. Adequate Compliance Program MLMs are encouraged to establish compliance programs that monitor the MLM’s representations, the representations made by its participants and the compensation structure. Recent FTC Consent Orders Recent FTC consent orders provide additional guidance on acceptable business practices for the entire industry. CONSIDERATIONS FOR CORPORATE COUNSEL

The Business Guidance, although nonbinding, provides the best insight, along with past FTC consent orders, into the FTC’s considerations in evaluating the legality of MLMs. The holistic approach described in the Business Guidance means that MLMs might not be able to hide behind the 10/70 Rule or similar sustainability metrics to survive FTC scrutiny. Corporate counsel in the multi-level marketing industry would be well served to evaluate their policies and procedures compared to the factors representative of lawful MLMs. The implementation of a formal compliance program (or revision of an existing program) that follows the Business Guidance could provide corporate counsel with reassurance that its company’s business practices are not likely to be subject to future FTC scrutiny. Compliance with self-regulatory standards could provide further confidence, so long as the company follows standards that are consistent with the characteristics of lawful MLMs. Corporate counsel would be well advised to remain cognizant of state

attorneys general’s concurrent authority to investigate and bring enforcement actions under state consumer protection laws. State attorneys general, who are often policy advocates as well as enforcers, can be more aggressive than the federal government to seek redress for consumers and civil penalties for state consumer protection law violations. The Business Guidance may serve as a roadmap for state attorneys general seeking to take action, and for corporate counsel seeking to ensure compliance with state consumer protection laws. A comprehensive internal compliance program should consider FTC guidance and the state consumer protection laws in the markets in which the company operates. ■

JB Kelly is a member of the oldest and largest State Attorneys General Practice, based in the DC office of Cozen O’Connor. Over his 30 years of focus on state AG matters, JB Kelly has been on the negotiating teams of the most high-profile multistate AG matters such as the tobacco and mortgage foreclosure settlements, has defended numerous companies facing consumer protection and FTC-related investigations, served as General Counsel to the State AG of North Carolina, and has held leadership roles in the National Association of Attorneys General (NAAG). jbkelly@cozen.com Bryan Mosca advises clients involved in inquiries and investigations initiated by State Attorneys General in virtually every state, across a host of issues including consumer protection, environment, data privacy and security, employment and gaming. He is a member of the 20-person State Attorneys General Practice at Cozen O’Connor. bmosca@cozen.com

TODAY’S GENER AL COUNSEL SUMMER 2018

Cybersecurity

Confidentiality Issues continued from page 29

link their identities. The owner’s address can be linked through a simple business transaction. If, for instance, Corporation A enters a transaction with Corporation B whereby Corporation A purchases widgets from Corporation B with Bitcoin, Corporation B can make the association to discover the address of Corporation A.

Law and regulation have not caught up with blockchain technology. It is unclear how regulators will respond to privacy issues associated with the data stored on blockchains used by pseudonymous cryptocurrencies. For example, the General Data Protection Regulation imposes requirements on organizations that control or process personally identifiable information (PII). These organizations are required to safeguard PII from disclosure, and to delete

new addresses, or that create stealth addresses to hide the actual addresses. Ethereum, for instance, has adopted its technology to employ zero-knowledgeproof functionality. It is only a matter of time before cryptocurrencies like Bitcoin also develop and adopt similar technologies. When counseling your organization on the adoption of a cryptocurrency, it is important to understand the underlying technology and its limitations. It is

A key difference between a blockchain and a traditional ledger is that the entries on a blockchain are available for anyone to see. Exchanges can also link one’s identity with an address. When one purchases cryptocurrency from an exchange, the identity of the purchaser is disclosed to the exchange, along with the purchaser’s associated address. The blockchains used by pseudonymous cryptocurrencies provide unlimited access for hackers to figure out the identities of the owners of addresses. As technology improves, the cryptography techniques for performing this analysis will also improve. Additionally, there are numerous companies in the business of linking identities with addresses and then commercializing that information. If one can link addresses on the blockchain with the identity of its owner, one could see with whom that owner is transacting business, and how much that owner is spending and receiving. Information regarding pricing terms and the identity of vendors and customers could also be ascertained. The disclosure of this information creates issues for organizations that intend to keep this information confidential. PRIVACY ISSUES

In addition to the confidentiality issues for an organization transacting business with a pseudonymous cryptocurrency, there are also privacy considerations related to customer data to be considered.

PII upon request by the individual once that data is no longer necessary for the purpose in which it was supplied. The transparency of blockchains potentially exposes PII that organizations would have a duty to safeguard under other electronic payment methods, while the immutability of the blockchain prevents organizations from removing that data upon request. It is still unclear whether regulators will charge organizations utilizing cryptocurrencies with this responsibility. If so, the use of pseudonymous cryptocurrencies could be chilled. Data privacy laws and regulations in the United States do not provide guidance. Based upon these uncertainties, an organization should carefully consider which cryptocurrency it adopts. There are several cryptocurrencies that are privacy focused. These currencies hide the identity of the parties to a transaction using various technologies that render the transactions on the blockchain anonymous. Cryptocurrencies like Zcash, Dash, Monero and Bytecoin are promising examples of how cryptocurrencies can adopt technologies that maintain the privacy of individuals. These cryptocurrencies use complex cryptographic protocols such as zero-knowledge proofs and other technologies that mix transactions together to generate

also important to recognize and assess the limitations and benefits of the different cryptocurrencies available. This will enable you to assess the confidentiality issues that will arise and navigate the relevant privacy laws. ■

Jonathan Sriro is a partner in the Detroit office of Jaffe Raitt Heuer & Weiss. He is a member of the firm’s Litigation, Privacy and Datasecurity and Emerging and Growth Business Practice Groups. He is responsible for advising and representing technology companies in business transactions, and co-chairs the Privacy and Datasecurity practice group. jsriro@jaffelaw.com

SUMMER 2018 TODAY’S GENER AL COUNSEL

WORKPLACE ISSUES

Important Considerations in Pay Equity Audits By Denise M. Visconti

I 36

n February 2015, Patricia Arquette won an Academy Award for her role in “Boyhood,” but what garnered the most attention during the awards show were her remarks on gender equality and the wage gap between men and women. As Arquette said in her speech, “To every woman who gave birth to every taxpayer and citizen of this nation, we have fought for everybody else’s equal rights. . . . It’s our time to have wage equality once and for all and equal rights for women in the United States of America.” The next day, California State Senator Hannah-Beth Jackson introduced the California Fair Pay Act, a bill that, as of January 1, 2016, became the first of many state laws aimed at closing the gender pay gap in the United States. Today, the concept of pay equity garners daily media coverage and has the attention of many in-house counsel and corporate leaders.

Denise M. Visconti is the Office Managing Shareholder of Littler Mendelson’s San Diego office and focuses her practice on employment litigation matters, including defending clients in wage and hour class action litigation. She regularly conducts pay equity audits for employers and helped develop the Littler Pay Equity Assessment™, which helps employers assess risk related to pay equity and identify solutions. DVisconti@Littler.com

While there have been equal pay laws on the books for decades, the various pay equity statutes enacted in the last two to three years have changed the landscape. These statutes not only shift the burden to employers to disprove that a pay gap is due to employees’ protected characteristics, they also limit the defenses available when defending against a claim of unequal pay. For a company caught flat-footed, the existence of a pay gap could present serious legal and reputational risks. One of the best ways for in-house counsel to determine whether a wage gap exists within their company, as well as whether there are any legitimate business considerations that explain that gap, is to perform a pay audit before any claim is made. When thinking about

performing such an audit, however, there are several important considerations. Not All Pay Gaps Are Unlawful: Differences in pay can be caused by a number of factors and can be incredibly complicated. Not all differences are the result of impermissible decision-making. They may be caused by such factors as occupational differences, differences in industry, and personal choices by individuals who have reduced their working schedules or left the workforce for a period of time to care for children or adult family members. The challenge is to determine whether pay gaps are the result of legitimate business considerations, or the result of gender or other protected characteristics. An audit can help with that determination. A technology-based tool I

TODAY’S GENER AL COUNSEL SUMMER 2018

helped our firm develop utilizes accepted statistical methods that have been used in litigation for decades to enable clients to evaluate their payroll data. This allows them to measure compensation differences between demographic

Attorney-Client Privilege: In-house counsel and corporate leaders considering conducting a pay audit should seriously consider performing it in a privileged context. Although the underlying data used to perform the audit

spreadsheets, mathematical formulas and technical reports that are difficult to understand. Ease of use and understandable results should be the concerns that drive the choice as to how an audit is done.

Ease of use and understandable results should be the concerns that drive the choice as to how an audit is done. groups, identify those that are statistically significant, and determine the extent to which any differences may be permissible or in need of attention. Be Prepared To Act: Conducting a pay audit should be a precursor to further investigation, particularly if the audit reveals that unexplained or problematic disparities exist. But doing an audit and not investigating the disparities — or, worse yet, not doing anything about them — could expose a company to litigation and punitive damages under some state statutes. On the other hand, undertaking an audit and thereafter taking steps to remedy any issues it reveals can serve as a defense to a potential legal action.

may not be protected, the analysis and advice on how to proceed following the audit should be done at the direction of counsel. To do otherwise could result in that analysis and advice being turned over should a claim or litigation be filed in the future. Audit Nuts and Bolts: Not all companies have statisticians on staff who can perform the complex statistical analyses needed to evaluate their payroll data. As a result, there are an increasing number of law firms, consulting firms and employer organizations offering tools for in-house counsel and corporate leaders to use for conducting pay equity audits. Although the methodologies are quite similar, often the output includes dense

For example, based on feedback from clients, we made sure our tool allows data to be analyzed quickly and comprehensively; and it presents results in a user-friendly dashboard so the analysis can be shared with, and explained to, company leaders without sacrificing relevant information. With an increasing number of states considering adding pay equity statutes to their books, the focus on the gender pay gap likely will remain for the foreseeable future. Understanding whether your company has a pay gap, and taking steps toward remedying it if it does exist, may not only protect your organization from legal risk, but could also translate into a strategic and competitive advantage. ■

V I S I T T O D A Y S G E N E R A L C O U N S E L . C O M F O R T H E L AT E S T N E W S , A N A LY S I S , C O M M E N TA R Y FOR GCs A ND OTHER IN-HOUSE COUNSEL . PLUS, R ECENT JOB OPENINGS & CA R EER OPPOR T UNIT IES.

SUMMER 2018 TODAY’S GENER AL COUNSEL

THE ANTITRUST LITIGATOR

Vertical Non-Price Restraints By Jeffery M. Cross

any of my clients are manufacturers that sell their products through distributors and retailers. The manufacturers can impose many restraints on their products that will increase the products’ competitiveness. These restraints are known as vertical non-price restraints. How do the antitrust laws view such restraints? A vertical restraint is one imposed by a party in a vertical relationship with another party, meaning the two parties are offering products or services that are complements. For example, a manufacturer offers a product. A distributor or retailer offers the complementary service of distributing or selling that product. The manufacturer or supplier is in a vertical relationship with the distributor and retailer; and the distributor is, in turn, in a vertical relationship with the retailer. By contrast, a horizontal relationship is one in which the parties sell or provide products or services that are substitutes for each other. The Supreme Court has held that vertical non-price restraints should be analyzed under the Rule of Reason. This is because such restraints can simultaneously reduce intra-brand competition

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

(among distributors or retailers of a single manufacturer’s product) and stimulate inter-brand competition (among manufacturers of the same generic product). The Supreme Court has stated that inter-brand competition is the primary concern of the antitrust laws. The Court has noted that a vertical restriction can reduce the number of sellers of a particular product, yet promote inter-brand competition by allowing the manufacturer to achieve certain efficiencies in distribution, including incentivizing distributors or retailers

to provide point-of-sale services that increase inter-brand competition. The restraints can provide such incentives because they can protect against a market imperfection called “free riding.” Free riding occurs when one retailer provides costly point-of-sale services but another retailer does not, taking a free ride on the services provided by the first retailer. The free rider can lower the price of its products because it does not incur the cost of the point-of-sale services. The retailer initially providing such services will cease doing so because it can no

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longer compete with its intra-brand rival who is free riding. One of the most common vertical non-price restraints is exclusive territory. Typically, the distributor or retailer is limited to selling products or services in a specified territory. Sometimes, the manufacturer or supplier also limits itself from selling in the designated territory or from allowing another retailer or distributor to sell in the territory. This restraint incentivizes a distributor or retailer to provide point-of-sale services

By restricting sales to authorized distributors or retailers, the manufacturer can prevent a free rider from having access to the product. by directly protecting the distributor or retailer from intra-brand competitors that might try to free ride. A variation on exclusive territory is area of primary responsibility. A manufacturer designates an area that the distributor or retailer is responsible for developing. The distributor or retailer can sell outside of the territory, but must focus its attention on sales in the territory. Usually, the manufacturer reserves the right to replace the distributor or retailer in the territory if the original distributor or retailer does not perform satisfactorily. Another vertical non-price restraint is known as the profit pass-over, which is designed to directly address the free-rider problem. The provision by distributors or retailers of point-of-sale services costs money. A free rider not making such investments can undercut the price charged

by the distributor or retailer providing such services. A profit pass-over requires a distributor or retailer selling into another’s territory to make a payment to the latter to cover costs of providing the services. A further vertical restraint is a location clause. Under this restraint, the manufacturer or supplier restricts a distributor or retailer to selling products or services only from an authorized location. It is a variation of exclusive territory. It allows the manufacturer to space its dealers sufficiently apart so that one dealer is not taking sales from a customer expected to purchase from another dealer. Distributors or retailers are free to sell wherever they want, but the idea is that they are more likely to sell within an area surrounding their location. The customer or product restriction requires distributors or retailers to sell only to other authorized distributors or retailers, or to the end-use consumer. This restraint offers an additional method for dealing with the free-rider problem. A seller taking a free ride on the pointof-sale services provided by another dealer must obtain its products from somewhere. Usually, it buys from another distributor or retailer at a deep discount for volume purchases. By restricting sales to authorized distributors or retailers, the manufacturer can prevent a free rider from having access to the product.

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An aspect of this restraint is that it puts products into the hands of distributors or retailers best able to handle the sales. The idea is that, if there are unique issues with the sale of products to each class of customer, restricting the distributor or retailer to those who can best address those issues increases inter-brand competition. Full-line forcing is yet another type of vertical restraint. This restraint requires a distributor or retailer to carry the complete line of a manufacturer’s products, as opposed to allowing the distributor or retailer to cherry-pick the hottest selling items. This restraint again increases interbrand competition. Customers who know that a dealer will carry a full line may be more willing to shop there even if ultimately he or she just buys the more popular product. Finally, one more common vertical non-price restraint is product exclusivity. The theory is that the retailer will focus attention solely on the manufacturer’s products and services, and not dilute its efforts by permitting the sale of rival products. The manufacturer or supplier has many vertical non-price restraints to use to increase inter-brand competition. Each raises antitrust issues, and it is important to understand them before imposing these restraints. ■

I refer to the magazine often and the information is useful in my daily work. Informative and worth reading.

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What Story Will Your Metrics Tell? By Samantha Green

n our metrics-driven society, law firms turn to data for a quantitative way to demonstrate business value. These tangible proof points provide a high-level view of your team’s capabilities, capacity and contributions. But metrics tell us far more than the numbers. They help legal teams uncover critical opportunities for in-house and external spend management as well as long-term structural

efficiencies and growth. They also help you recognize unmet needs, initiating a smarter redistribution of work across inhouse and outside counsel. It’s important to remember, however, that metrics don’t perfectly measure the human element that plays such a crucial role in strong attorney-client relationships. The need for analytics was spurred by the 2008 financial crisis. Legal spend was

seen as overhead and a necessary evil. To better manage expenses, corporate clients became laser-focused on cutting costs for their organization’s legal services. This triggered the rise of flat fees for outside counsel, where metrics were used to determine if these arrangements made sense financially and generated the best work. In-house teams also used metrics to reassess how they were using outside counsel. The results often led to a greater emphasis on building up internal expertise to deliver better value to their company and clients in a more cost-efficient way. Today, the use of metrics continues to evolve as legal teams rely on them to prove their business contributions, maximize resources and get the most value for their legal spend. By defining key performance indicators (KPIs) and mapping them back to concrete goals and objectives, we can spot shortcomings and drive performance and client satisfaction. While KPIs will vary by organization and goals, these are some common criteria legal departments measure: Spend In-house teams must take a good look at their own effectiveness in addition to what is spent on services by outside counsel. Running regular analytics on budget identifies areas where you may be able to cut costs or reallocate resources, and helps you gauge how your outside counsel is performing. It is also helpful to track spending by matter type, as some matters require more money and manpower. Rather than guessing, you’ll know what budget is necessary. Additionally, by monitoring your budget over time, you’ll be able to make incremental changes and report progress. Workload How much work do your attorneys have on their plates at a time? How long does it take to complete a case? What is being handled in-house and what’s being outsourced? Metrics uncover answers to these questions. They help companies identify ways to optimize their in-house

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team’s potential while offsetting higher cost outside counsel, create efficiencies in processes and better utilize internal resources. Performance Performance can be viewed across a variety of factors, such as hours worked, time taken to complete a case and case outcome. Tracking lawyer activity METRICS and productivDON’T ity ensures that your team’s PERFECTLY experience and REPRESENT expertise is SPECIAL utilized in the SKILLS AND most efficient way. Perhaps HOW THAT you’ll find EXPERTISE that too much PLAYS attorney time A ROLE is spent on administrative IN CASE work. This OUTCOME. may lead to new hires specifically for operations, allowing attorneys to focus on the type of work that brings the most value, which ultimately cuts costs and boosts profitability. It may also reveal gaps in skills, and lead to training to enhance in-house capabilities. When analyzing outside counsel, corporations will also look at similar metrics such as spend, workload and performance. Metrics are extremely useful in monitoring how long it takes for outside counsel to complete a case, as well as the amount of money spent per matter. Ultimately, these metrics force outside counsel to be more efficient. For example, if your firm has negotiated a yearly flat fee for outside counsel services, the lawyers will work more efficiently. By tracking the amount of time spent and quality of work done within that rate, corporations are better able to determine if a flat-fee arrangement makes the most financial sense and generates the best work. Metrics may reveal that you can negotiate better rates or a different flat-fee arrangement down

the road. They also could find patterns of inefficiencies that lead to firing of outside counsel. Compiled data will provide actionable insights that help make the case to your organization about your team’s performance as well as the performance of outside counsel, especially when it’s time to hire more staff, reallocate work or invest in new technologies to grow internal capabilities. What about value you can’t measure? Although there are many elements of the job that can be easily tracked and measured, there are others that can’t simply be generated in a spreadsheet or viewed on a dashboard. So much of the attorneyclient relationship (for both in-house or outside counsel) cannot be quantified because metrics don’t capture the human element. They don’t factor in whether a lawyer answers emails at 2:00 a.m., his or her likeability, competence, general ethics, attention to detail and so forth. When it comes to hiring outside counsel, you may seek out someone with a good reputation for handling the type of matter at hand, or connections that will lead to a smoother legal process. Metrics also don’t perfectly represent special skills, and how that expertise plays a role in case outcome. Some firms may deliver faster results, but the experience of getting those results may not be worth it if lawyers are unresponsive or difficult to work with. And this doesn’t just apply to law firms. Any industry where success relies heavily on client satisfaction faces the same challenges. These are the crucial tenets of relationships that get left out when we’re just zeroing in on the numbers. So how can we account for the contributions that won’t show up in a report? Corporations can create their own ways to measure in-house and outside counsel performance. Legal teams can develop confidential surveys or internal scorecards in which employees rate attributes across a spectrum of numbers (1–10) or descriptions (Excellent – Unsatisfactory). Survey questions should cover topics related to lawyer responsiveness, accessibility, com-

munication skills and expertise. Honest feedback will help your legal team understand where they are exceeding expectations and where there are unmet needs. Legal departments are facing high pressure to perform, while also cutting costs. The insights presented here, combined with meaningful metrics, should help organizations tell a compelling story of their efficiency, value and business contributions, and give you the tools to make positive changes for the future.

SAMANTHA GREEN is the Manager of Thought Leadership for Epiq Systems, Inc. She serves as a subject matter expert on all aspects of electronic discovery, data privacy and cybersecurity, drawing on her more than 15 years of litigation and consulting experience. As a litigator, she has taken a number of cases from pre-discovery through trial, and has handled a broad spectrum of cases, from government investigations (including FCPA and antitrust matters) to HSR second requests and commercial litigation matters. sagreen@epiqglobal.com

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A Pitch for Boutiques BY ANDREW A. DICK

ig Law has long provided an easy default for the in-house team. With one call or a few clicks, you have access to a buffet of resources, licensed lawyers in multiple states and sometimes countries, and a variety of niche or specialty practices. Plus, there might be the senior partner who invites you to the ball game each year. Few, if any, shareholders or executives would find fault with this scenario. However, in this post-recession era of “do more with less” (and make it predictable), the pressure is on to find alternatives. Focusing on alternative legal service providers (ALSP) is one strategy; but there is another older and more traditional strategy to consider. It’s a strategy that, thanks in part to technology, has become both more sophisticated and more feasible — retaining solo practitioners and boutique firms. The same economic downturn that turned the screws on corporate departments has also altered the legal landscape for big law firms — driving merger activity that created even bigger firms, complete with increasingly difficult conflict-checking and higher billable rates. These dynamics have Andrew A. Dick driven many is the founder and prominent large president of Select firm lawyers to go Counsel, a nationwide network of off on their own, boutique firm ator to team up torneys with Big with small groups Law backgrounds. of colleagues to andrew@select establish boutique counsel.law

firms. These firms, which in many cases have organized themselves into legal networks, can be an ideal alternative to Big Law. One reason seasoned lawyers decide to move to smaller firms is that they believe the boutique model better aligns with clients’ interests. Gone are the pressures to spend 15 hours on a simple contract review, or the frustration of being pigeon-holed into researching an esoteric sidebar issue as a member of a 12-attorney litigation army. In addition, the drive to “leverage” by managing multiple associates across a range of matters is diminished, if not eliminated, in the small firm setting. Small firm and solo lawyers tend to have the luxury of being more hands-on with their clients. They can connect directly with general counsel to pinpoint goals and desired outcomes. They can collaborate in real time to work through challenges or assess options, and to understand and appreciate company dynamics via onsite visits or embedded working situations. Knowing the big picture, these independent lawyers can also execute without filtering this knowledge down to others for follow-through. When general counsel hire a large

firm, the layers often begin to stack up. Even a simple recommendation may require multiple time-consuming reviews, all with the meter running. Leveraging boutique law firms means you are likely getting one or two experienced lawyers who know the ins and outs of the matter at hand, and can offer efficient and effective guidance. Smaller operations also provide flexibility. Want a quick, bulleted email instead of a multi-page memo? Want to speak to the partner on the same day, or even the same hour? No problem for most boutique firm lawyers. Working with solos means general counsel correspond directly with the person or people doing the work, and that can be a decided benefit when keeping a close eye on budgets. While large-firm partners are under intense pressure to generate billable hours by juggling a number of active clients and matters, small firm lawyers have the flexibility to give more attention to fewer projects. And when it comes to administrative functions like billing, engagement letters and conflict checks, their process is relatively painless in comparison to the bureaucracy of a large organization. In most cases, a solo or small firm lawyer is able to concentrate more on protecting your interests and less on the firm’s administration and processes. Specifically, there are a number of scenarios where a single independent continued on page 47

Small firm lawyers have the flexibility to give more attention to fewer projects.

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Developments in Corporate Litigation Finance BY BRETT MCDONALD AND JAMES BLICK

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he origins of the litigation finance industry and earliest examples of the practice lie in the distressed litigation space. Small, financially distressed or insolvent businesses that had potentially valuable legal claims, but few assets with which to fund litigation, found financiers willing to provide non-recourse capital in exchange for a share of the spoils of successful litigation. For steely-nerved investors in the mid to late 2000s, litigation funding was an exciting new enterprise, which offered the prospect of dazzling returns for backing the right cases. The relatively few funders operating had their pick of funding opportunities and were

firms. Most litigation attorneys have had at least some exposure to it. For funders, the next big frontier has been to try to unlock the treasure trove of potential litigation opportunities within big business. This is a market segment historically dominated by the hourly rate, where the default approach to funding litigation is simply to negotiate a discounted, capped or alternative fee with outside counsel, and then seek approval from the board or CFO for the budget. Much of the focus of the litigation funders in recent years has been on advertising the benefits of using external capital to those with deep pockets, and repackaging litigation finance to appeal to blue chips and multinationals as simply another form of corporate finance. Some significant inroads have been made. Litigation is a costly and inherently uncertain venture. No matter how large a company’s balance sheet, sinking capital into external legal fees for an unknown period of time, with no outcome certainty, is never an easy decision. The cost/benefit analysis will often come down in favor of not pursuing claims. In this context, the idea of “off balance sheet” litigation funding has appeal for many general counsel and financial controllers. Similarly, some businesses have recognized that in today’s market legal

Major corporations have been slower to embrace litigation finance than some funders would care to admit. often able to negotiate highly favorable deal terms on cases that passed scrutiny. Fast forward a decade, and the industry has become mainstream. The practice has generally received judicial support in many (although not all) common law jurisdictions, and there are now dozens of major funders operating around the world. Litigation finance is well understood and often used effectively by law

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claims are an asset, which can be potentially monetized or factored like any other. For the right case, funders will happily provide financing to be used for working capital, business expansion or other business purposes, with a return that is tied only to the success of the litigation. Sophisticated use of litigation finance in this way allows a business sitting on litigation claims to smooth out cash flow dips, reduce volatility and hedge financial risk.

Brett McDonald is Vice President and General Counsel at The Judge Group, which specializes in litigation and arbitration as well as international business transactions. brett.mcdonald@ thejudgeglobal.com

James Blick is Director at The Judge Group, and arranges litigation finance and insurance solutions. james.blick@ thejudgeglobal.com

RESISTANCE FROM WELLCAPITALIZED COMPANIES Yet, despite these potential benefits and some notable case studies, major corporations have been slower to embrace litigation finance than some funders would care to admit. This may be due to a lingering sense that litigation finance is still best suited to distressed situations, and that a well-capitalized business with a strong balance sheet may have available more cost-effective ways of handling litigation. There may be some truth in this. While the branding and public opinion of litigation finance may have changed, the cost of litigation finance capital, generally, has not. Many funders still price their return structures the same way that they did when financing distressed litigation was in its early days. The returns charged by funders are often well justified, as even the strongest claim still carries significant risk.

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Funders need to be able to absorb total losses in what are often highly concentrated portfolios, while still delivering the returns required by their investors. Nevertheless, this may be of little solace to shareholders who, at the end of a successful litigation, watch a large percentage of a substantial award go into the hands of a funder who advanced a few million dollars to a business that didn’t really need the capital. To catch and keep the attention of the corporate market, funders have had to look at more creative ways to deploy capital and attract business in what is an increasingly competitive sector. An example of this (and, generally, a notable trend of 2017) has been the push by many funders for portfolio financing opportunities, as opposed to financing individual claims. Under the portfolio model, the funder spreads its capital and return across multiple cases, enabling it to commit a large chunk of capital under one deal, potentially (depending upon the structure) cross-collateralizing between the cases within the portfolio. For a business that is involved in multiple disputes, a portfolio deal may offer a lower cost of capital and a more streamlined process than negotiating individual funding deals case by case. It may also allow for more creative options, such as obtaining financing for cases that would not be suitable for funding in isolation (for example, defensive or non-monetary litigation offering no upside for potential funders), but which can be included because of the collateral offered by the other claims within the portfolio. In 2016, it was reported that a multibillion-dollar United Kingdom corporation had signed a deal with a litigation funder to finance a portfolio of litigation, providing one of the few publicized examples of such an arrangement in practice.

THE LITIGATION INSURANCE MODEL As the litigation finance market continues to reinvent itself, other financial

institutions are moving into the space. A key development of 2018, especially in the United States market, is the increasing use of litigation insurance, as major international insurance carriers look for a piece of the action. Under the litigation insurance model, the claimant finances the litigation budget from its own balance sheet, but the insurer covers the claimant’s capital risk. If the case is unsuccessful or the award cannot be enforced, the insurance pays out and reimburses the

Increased competition from the growing number of funders should, in time, push down the cost of capital. claimant for the legal fees incurred in pursuing the claim. In exchange, the claimant pays a premium to the insurer, either when the insurance is taken out or, more commonly, upon successful resolution of the case. The option of a “contingent premium” (where the insurer gets no premium up front and no premium if the case loses), makes insurance similar to nonrecourse litigation finance, but with two important distinctions: (1) the insurance does not provide day-to-day cash flow for the litigation, but instead guarantees that capital expended by the claim holder will be returned, regardless of the outcome of the litigation; and (2) the contingent payment to the insurer out of the damages or settlement is much lower than the returns charged by litigation funders. For a business with good liquidity but a conservative attitude toward risk coupled with a sensitivity to giving away too big a share of an eventual award to outside capital providers, insurance structured in this way offers

a potentially useful alternative to litigation finance. A recent case study illustrates the point. We were working with a client in the biotech sector who was considering litigation financing for a potential claim. The case attracted significant interest and several offers from litigation funders. However, in each deal offered, the client would have had to pay a significant percentage of the award to the funder. If the award hit the higher levels of the amounts claimed, the return to even the cheapest funder would have been many multiples of the total litigation budget. Ultimately, the client could not get comfortable with the numbers. Instead, it opted to self-finance but negotiated a discounted fee arrangement with outside counsel, taking out insurance to cover (at the discounted rates) the legal fees and costs in the event that the case lost. The client also opted to pay part of the premium up front, with the balance contingent upon success, in order to further reduce the overall cost of the insurance in the event of a win. There are, of course, many situations where the primary objective for a business is liquidity or a capital injection. In those situations, insurance alone will not deliver the right solution. The litigation finance industry’s growth shows no signs of slowing. Looking to the future, increased competition from the growing number of funders should, in time, push down the cost of capital, as well as see the emergence of more innovative structures, all of which should broaden the appeal of litigation finance. In the meantime, what is clear is that the wider litigation risk-management market encompassing litigation finance and insurance is a rapidly evolving space, offering a wide range of ways for a business to finance, control, monetize or take the risk out of litigation. When analyzing the cost/benefit of pursuing litigation, these options should be a routine consideration for general counsel and financial controllers. ■

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Boutiques

continued from page 42

lawyer, or boutique firm, could be the ideal alternative to either Big Law or adding full-time staff to your own department. Unfamiliar Jurisdictions The need to confront litigation, or even the threat of litigation, in unfamiliar jurisdictions often sends general counsel to their Big Law list. But this may be an ideal place to slot in a solo, especially if the issue is a nuisance rather than a bet-the-company matter. In these cases dependable eyes and ears on the ground — lawyers that are familiar with the local laws, not to mention the judges — could be a cost-effective solution. Filling Out a Team Maybe your internal team needs extra, senior-level firepower to handle a large and complex matter. Legal departments juggling multiple matters with highquality but finite in-house resources can find themselves stretched thin, especially if the department includes a number of up-and-coming lawyers who don’t have extensive litigation and trial experience to draw on. Small firms and solos can add that experience to the team. Bringing in veteran lawyers, particularly those with Big Law or in-house experience, can help cover the gaps and allow the professional development of the in-house lawyers to proceed. In fact, it’s not unusual for larger firms themselves to tap the small and solo lawyer market on behalf of their corporate clients. Calling on former colleagues who have branched out on their own for help with sizable matters or specific types of legal work is commonplace in Big Law, in large part because firm alumni are a known quantity. Filling a Niche A lawyer with deep expertise in every niche practice area is uncommon at big

firms, and even rarer in-house. For example, when an occasional regulatory issue comes up, most large firms don’t have the full spectrum of lawyers who know their way around the labyrinth of federal agencies in Washington. Deep experience in government contracts, export control, telecommunications, healthcare and regulatory bodies — including the Occupational Safety and Health Administration and the Food and Drug Administration — can be extremely valuable when you need it; and it’s likely there is the boutique firm that can provide it. We do know that a mega-firm with a robust M&A practice could be key when acquiring a company that has a range of assets, including manufacturing plants and equipment. But even this deep well of resources may not include someone who knows what to do with the corporate jet. A boutique firm that hones in on the private aircraft industry, and especially the regulatory compliance issues before the Federal Aviation Administration and the U.S. Department of Transportation, may prove the easier, faster and more efficient option.

or in-house backgrounds, may belong to the group. By tapping a vetted network, general counsel can access hundreds of experienced solo and small firm attorneys across the full range of practices, specialties and jurisdictions worldwide. Legal networks today come in a variety of sizes and specialties. Generally, qualifications required for network invitation or membership — in terms of depth of experience, firm size and practice focus — are outlined on network websites, which can be searched online. Need employment litigation boutiques in Egypt and Israel? An international network focused on labor and employment may have the roster you need. Seeking a seasoned transactional veteran with Big Law credentials? There are dedicated lawyer networks for filling this slot, too. Most modern networks utilize online platforms that make it easy to search and generate a list of their lawyer members using a wide variety of filters, allowing quick access to the expertise you’re looking for, where you need it. Moreover, other networks will handle the search for you at no cost with concierge-style matching services aimed at pinpointing a subset of lawyers ideally suited to the specifics of the matter or departmental need. The emergence of high-quality boutique firms that can be accessed quickly through legal networks, can make them the ideal alternative — flexible, serviceoriented and cost-efficient. ■

High-quality boutique firms can be hard to find, and even harder and more timeconsuming to vet.

Networks While the benefits of leveraging small firms and solos are clear, difficulty of access and lack of quality assurance may be perceived as an obstacle. High-quality boutique firms can be hard to find, and even harder and more time-consuming to vet. This is where solo and small firm networks can help. Many networks carefully vet their members, ensuring that only those with specified qualifications and experience, such as significant Big Law

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Canadian Disclosure Obligations for United States Cannabis Companies BY VIRGIL HLUS AND ALEX FARKAS

n October 2017, the Canadian Securities Administrators (CSA) published CSA Staff Notice 51-352 for companies with United States cannabis-related activities. It provided some long-sought commentary on the disclosure requirements and regulation of entities with ties to the growing United States cannabis industry. Although many states have decriminalized the drug to varying degrees, cannabis remains a Schedule 1 drug under the United States Controlled Substances Act. Its possession, cultivation, usage and sale contravene federal laws. This discrepancy between federal and state law has caused confusion for many United States cannabis companies and investors on how to comply with Canadian disclosure requirements. Under the CSA Notice, United States cannabis companies must provide an appropriate level of disclosure to allow each investor to make an informed decision based on all “material facts and risks” in respect to cannabis-related activities. In particular, the Notice outlined the disclosure requirements for companies on the basis of the type of activities being undertaken, and provided that: 1. United States cannabis companies with direct involvement in cultivation or distribution outline the regulations for states in which the company operates, and confirm how the company complies with the applicable licensing requirements and regulatory framework; 2. Cannabis companies with indirect involvement in cultivation or distribution outline the regulations for the states in which the company’s investee(s) operate and provide reasonable assurance that the business is in compliance with applicable licensing requirements and accompanying regulatory framework; and 3. Cannabis companies with material ancillary involvement provide reasonable assurance that the applicable customer’s or investee’s business is in compliance with applicable licensing requirements and accompanying regulatory framework.

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For all United States cannabis companies, the CSA has stated that the Canadian disclosure must: 1. Describe the nature of their involvement in the United States cannabis industry; 2. Disclose that cannabis remains illegal under United States federal law, and that the approach to enforcement of United States federal laws against cannabis is subject to change; 3. State whether and how the company’s cannabis-related activities are conducted in a manner consistent with United States federal enforcement priorities; and 4. Discuss the company’s ability to access both public and private capital, and indicate what financing options are or are not available in order to support continuing operations. For those companies that do not provide such disclosure, the Notice provides that they may be subject to regulatory action. In addition, with respect to continuous disclosure obligations, United States cannabis companies may be subject to requests to refile of their non-compliant filings.

Policies of Stock Exchanges Concurrent with the CSA Notice, the Toronto Stock Exchange (TSX), the TSX Venture Exchange (TSXV), the TMX Group and the Canadian Securities Exchange (CSE) each released notices regarding their respective policies. Interestingly for investors and United States cannabis companies alike, the policies of these exchanges differ starkly. The TMX Group released identical notices confirming that listed companies are not permitted to engage in the United States cannabis market. Under TSX and TSXV policies, applicants

and companies have always been required to comply with all laws, rules and regulations applicable to their businesses. While most jurisdictions have a uniform national framework for cannabis regulation, the notices make it clear that the TMX Group is of the view that federal law takes precedence over state law with regard to the legality and regulation of cannabis-related activities in the United States. Therefore, listed companies with business activities that violate United States federal laws regarding cannabis are not in compliance with the requirements of TSX or TSXV and will either not be listed or, if already listed, will face the possibility of delisting. The TMX Group’s position is in contrast to the CSE, which lauded the CSA’s disclosure-based approach. In its news release dated October 16, 2017, the CSE stated that the CSA Notice “provides significant comfort to United States cannabis companies that their Canadian listings will remain in good standing as long as they provide the disclosure that is rightly required by regulators.” It assured companies that the CSE is “committed to ensuring that there is no disruption to the central clearing, depository and settlement services provided [to those] companies.” The CSE’s statements largely accord with its previous position supporting the listing of companies involved in the United States cannabis space, provided appropriate risk disclosure is made, and that such companies operate in accordance with applicable state law and regulation.

Current Regulatory Environment In January 2018, United States Attorney General Jeff Sessions issued a memorandum to all United States Attorneys, rescinding previous guidance to federal law enforcement

relating to cannabis, including the prior approach taken under the Obama administration. Virgil Hlus is coAlthough chair of Clark Wilson the TMX LLP’s Securities group. He maps out Group and and implements stratCSE have egies for companies remained silent in the global market. on the Sessions vhlus@cwilson.com Memorandum, the CSA said that it was considering whether its disclosurebased approach for Alex Farkas works United States with Clark Wilson LLP’s Capital Markets cannabis and Securities group companies as a full articling remained student. He has been appropriate part of numerous in light of the public company transactions and rescission of financings. the Obama afarkas@cwilson.com administration’s hands-off approach to enforcement of federal cannabis laws. It released an updated notice in February, under which United States cannabis companies are required to prominently state in their disclosure documents that cannabis is illegal under United States federal law and quantify their exposure to cannabisrelated activities. It provides additional requirements on companies that have direct or indirect involvement in cultivation or distribution. ■

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TODAY’S GENER AL COUNSEL SUMMER 2018

Tip Sheet for Commercial Leasing Transactions BY JILL HAYMAN

o matter what business you are in, you will require office space to house your employees. You may also require warehouse space to store your products, industrial space to create them and perhaps retail space to display and/or sell them. For various tax and accounting reasons, leasing space is more advantageous than buying space, so commercial leasing transactions are part of the life cycle of every thriving business. Real estate expenses usually rank among the top five of any company, and leases involve long-term relationships and the allocation of expensive risks for a variety of events that may or may not occur. An advantageous lease adds value to a commercial endeavor; a disadvantageous one is a burden to the bottom line, and poses threats of unbudgeted outlays of cash at unexpected times. Leases can be anywhere from 30 to 100-plus pages and are packed with detailed proJill Hayman is special visions that may look like boilercounsel in Hunton Andrews Kurth LLP’s plate but translate New York office, into substantial where she heads the amounts of money New York real estate and potential leasing platform. She disruptions to the brings more than 35 years of experience operation of your in executing sophisbusiness. ticated real estate Your real estate transactions. broker will assist jhayman@ your business team HuntonAK.com

in finding a suitable site and negotiating basic commercial terms. However, your real estate attorney will be responsible for identifying and mitigating hidden costs and risks. A vital but often overlooked factor in securing the best possible lease is the quality of clientattorney communication. No matter which side of the deal you are on, it is essential to clearly stipulate what you need from your legal team. Below are 10 tips to help you preempt potential issues and pave the way for a productive, cost-effective transaction: 1. Conventionally, the landlord’s attorney holds the pen. As a result, first drafts of leases tend to be completely landlord-oriented. Landlord parties should consider beginning with a first draft that contains clauses that are more balanced in treating the landlord’s and the tenant’s respective interests. Tenants with any degree of leverage should request a balanced first draft before final rental terms are agreed. Ultimately, both parties will save time and money if negotiations start with a document that includes reasonable concessions that are granted on request in your market. 2. Ask that documents be written in plain English without redundancies. Going forward, both you and your counter party will want to understand your rights and obligations without having to go back to your lawyers for a translation. Ask that your attorney avoid the “belt and suspenders” approach to drafting. Point out that often saying the same thing twice results in

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inconsistencies in the document that can be used in an adversarial manner if there is a dispute during the lease term. Beg your lawyer to write like Hemingway. Short sentences and short paragraphs are easier to understand and to administer over the course of a 10- to 20-year relationship. Remind

memos for your review and the distribution to your business team. 5. Set realistic deadlines for your legal team. They are preparing an intellectual work product and need time to read, analyze and articulate the business risks you face. Unduly rushing the process could end up costing you much more in

Leases can be anywhere from 30 to 100-plus pages and are packed with detailed provisions that may look like boilerplate but translate into substantial amounts of money.

your lawyer that judges are usually former litigators, not former real estate lawyers, so your lawyer should draft for comprehension by non-real estate professionals. 3. If your lawyer does not “hold the pen,” discuss with him or her when it makes sense to provide the other side with specific language and when it may be more cost effective to offer conceptual comments only and not pay for substantial drafting work that may be ignored by the other side. Discuss with your lawyer his or her experience with the lawyer representing your adversary, and what you can expect in terms of that lawyer’s style and response times. A lease negotiation is like a tennis game in that you only control one side of the court, so whatever knowledge you can gain about the player on the other side will help you predict and manage outcomes. 4. Be explicit as to whether you want a memo of open points after each round of negotiations and the level of detail you expect. A hybrid approach may be best, with formal memos at the beginning of the transactions, and bullet point emails as the transaction progresses and the number of open points decreases. You may want to appoint an internal team member to take notes, and prepare these

the long term. Manage the expectations of your business team. It is often helpful to distribute an estimated legal work milestone schedule showing the overall process involved in negotiating and redrafting a lease. 6. Check that your lawyer is aware of how liability and all risk policies work in real life, and how claims are made and adjusted. Many lease negotiations drag out because of arguments over language, even when the potential out-of-pocket impact is nominal due to the existence of applicable insurance coverage. Indemnifications in leases should be covered by contractual endorsements in your general liability policies, so impassioned arguments over responsibility for negligence may be entertaining but not useful. Introduce your risk manager or insurance broker to your lawyer. They should collaborate on the review and negotiation of clauses relating not only to insurance coverage but also to casualty restoration and indemnification. 7. Make sure you have the right mix of senior and junior lawyers representing your interests. The more seasoned your team, the less time it will take to close the deal and the better the results. Make sure that you understand the roles of the senior and junior lawyers, so you can ensure that each amplifies the efforts

of the others in the manner most cost effective for you. 8. Assemble your internal and external team of experts on facilities, technology, design and construction, and tax and accounting. Appoint an internal team leader to coordinate delivery of information to your lawyers that will be needed to negotiate and draft the technical points of the transaction. If you lack the internal resource and need your lawyer to fill that role, express that need to your lawyer and discuss how it will impact his or her fee. Try to coordinate communications with your legal team so that they are not receiving multiple calls with the same information or being given contrary directions on deliverables. 9. Verify that your lawyer is familiar with all phases of construction. Architects, engineers, project managers and owners’ representatives know how to construct and outfit buildings but may not know how to properly reflect your needs in legal language. Your lawyer must be able to ask the right questions so the right terms and conditions are incorporated into the lease. 10. Confirm that your lawyer understands how utilities are delivered and priced to ensure you are not left covering unreasonable hidden costs, such as fees for supplemental or overtime services. Electric service can be charged in a variety of ways containing a variety of profit centers. Make sure your lawyer can explain to you how the electric service provision in your lease operates. ■

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DUE DILIGENCE FOR SOCIO-ECONOMIC RISKS By Jack Vaughan and Patrick Marrinan

oday, investors and their diligence teams face the challenge of emerging socio-economic risk exposures. These risks are many, varied and shifting, and they are growing out of our divided cultural and business environment. This means that investors are now bringing new diligence demands to deals. For many years now, we’ve legislated against the abuses of businesses that poison people and devastate our environment. We continue the effort to enforce fairness and safety in the workplace. None of these baseline socio-economic remedies seems at odds with Milton Friedman’s influential corporate man-

date: “the one and only social responsibility of business [is] to use its resources and engage in activities designed to increase its profits … .” At the time, Friedman was rejecting a perspective gaining broad acceptance: Corporate officials and labor leaders have a “social responsibility” that goes beyond serving solely the interests of stockholders. But today, there’s little doubt that this view, which Friedman found anathema, has gained greater momentum and broader acceptance, even compared to the idealistic days of the 1960s when Friedman originally penned his views.

Today, businesses are being held to account by the media, consumers and the market for perceived or real shortcomings and failures to live up to their socio-economic obligations. The poster child is The Weinstein Company, which has seen its value reduced to a fraction of its former multi-billion dollar valuation, for grossly ignoring (and consequently enabling) the conduct of its namesake. Now it’s in bankruptcy.

BACKLASH AND BOYCOTTS Importantly, less obvious socio-economic failures can also result in a material negative impact on a business. Lapses in

TODAY’S GENER AL COUNSEL SUMMER 2018

Jack Vaughan is a corporate partner in the New York office of K&L Gates LLP. He has extensive experience advising businesses and investors in a variety of commercial, corporate and financial transactions, both nationally and internationally. He participates on the K&L Gates task force on disclosure and risk mitigation. john.vaughan@ klgates.com

55 ethical labor policy anywhere in a supply chain, lack of sensitivity to issues of importance to a particular interest group, and publication and expression of political thought on social media can all result in media backlash, boycotts and value loss in the market. Papa John’s Pizza CEO and founder, John Schnatter, was run out of town for claiming that earnings had been hurt by the company’s association with the NFL. “The NFL has hurt us. And more importantly, by not resolving the current debacle to the players’ and owners’ satisfaction, NFL leadership has hurt Papa John’s shareholders,” Schnatter said during the company’s third-quarter earnings call in November 2017. His statement was widely viewed as a criticism of the NFL player protests and led to a public alt-right endorsement of Papa John’s. Share prices plummeted 15 percent in five days, wiping out $300 million in shareholder equity. The NFL kneeling issue was brewing for over a year before Schnatter made that comment. Yet the whole time, Papa

John’s was effectively the official pizza of the NFL. The brand risk was obvious, yet no one on the company side or the investment side chose to note it. Wasn’t there a significant risk associated with this marketing and business arrangement? Yes, especially in the current socio-economically divided environment. But current disclosure requirements in the securities laws are insufficient for identifying these exposures and insulating investors against these types of socio-economic risk events. Indeed, the Investor Responsibility Research Center Institute (IRRCI) provides important background on this point. In their 2016 research study, The Corporate Risk Factor Disclosure Landscape, The IRRCI concludes: “More importantly, there is an opportunity for companies to offer more insightful, company-specific (risk factor) information. For those risks that are particularly important, a company could enhance its disclosures by providing more descriptions of its risk mitigation efforts. Additional approaches that

a company could take might include the greater use of company-specific detail; descriptions of how the nature, intensity and likelihood of key risks have changed or might change; and explanations of how significant risks can affect the company’s business. …” INVESTOR’S DEMANDS

Patrick Marrinan is co-founder and managing principal at Marketing Scenario Analytica. He assists companies, brands and investors with measuring, monitoring and mitigating socio-economic risk exposures in order to maintain and enhance stakeholder value. He has co-developed socio-economic risk scoring and benchmarking methodologies, which assist corporate response and reaction during these challenging times. patrick@ msabrandrisk.com

A recent survey conducted for Barron’s by Sentieo, the financial research firm, showed that of 67,500 SEC filings sampled over the most recent eight-year period, only 167 10-K filings included any risk continued on page 59

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TODAY’S GENER AL COUNSEL SUMMER 2018

Gender-Biased General Counsel Bonuses Need Fixing By Andrea Bricca

o one was surprised when my firm’s 2017 survey on in-house compensation found that female general counsel make less than their male counterparts. What’s important is to figure out not only why this is the case but also how to fix it. It’s not really the base salary. It’s the bonus. Although female general counsel have a base salary that is, on average, 6.3 percent lower than their male counterparts, it is in their bonuses that the real disparity comes to light. Male general counsel bonuses were 31 percent higher than those of female general counsel, according to the survey. It is important to note that this refers to cash bonuses and does not include any long-term incentive compensation, such as equity. Why are female general counsel bringing home smaller bonuses? In conversations with both male and female general counsel about the gender gap in bonuses, one thing is clear: No single factor accounts for the disparity. But the way bonuses are evaluated and distributed often stacks the deck against women. Women tend to be more comfortable advocating for others than for themselves. They are more likely to promote members of their teams and give others credit when bonus time comes around, often downplaying their own contributions, thus negatively impacting their bonuses. General counsel often get bonuses after milestone events such as the closure of a major M&A deal or the settlement of important litigation, but it’s not automatic. They often have to

educate fellow executives about the role they played in order to get the reward. Companies should develop fairer bonus structures that don’t factor in unrelated characteristics that are gendered by nature. Female general counsel may also face bias and discrimination based on preconceived opinions about their worklife balance. Even in 2018, employers perceive parenthood, for example, very differently depending on whether the employee is a mother or a father. Additionally, women do remain disproportionately burdened with managing households. One male attorney said that the only reason he was able to dedicate more time to work, and in turn receive a high bonus, was because his wife was able to handle all of the household duties; and he could focus solely on work. General counsel bonuses are based sometimes entirely and always in part upon company performance, meaning those in higher-earning industries could see bigger bonuses. Historically, female general counsel have had the largest representation in general merchandising industries such as retail and wholesaling, where pay is lower. None of the top 20 highest paid general counsel at public companies work at a retailer. Ultimately, bonuses reflect how much the employee asks for and how much she is willing to accept. Studies have shown that women are less comfortable advocating for themselves in the workplace than men, especially in traditionally male-dominated industries. Female

general counsel are more likely to accept a bonus reflecting a lower percentage of their base salary than other C-suite Andrea Bricca is a executives; and Partner with Major, Lindsey, & Africa’s because women, In-House Practice on average, Group, based in Las already make a Vegas and worklower base salary ing in the firm’s than men, their Los Angeles office. She specializes in bonuses suffer in-house placement, as well. A female including general general counsel I counsel, with an spoke with said expertise in the she understood gaming and hospitality industries. why the CEO, the CFO and the head abricca@MLA Global.com of operations at her company receive a higher percentage bonus than she does as general counsel. She explained that the legal targets (goals) are a bit softer in general than what is expected of the other executives, so general counsel have to be prepared to fight for a higher bonus if they want one. By contrast, every male general counsel I spoke with expected his bonus to match those of his fellow executives.

Closing the Gap

Despite a gendered value system that makes it difficult for women to attain higher bonuses, some of the responsibility for fixing the problem will inevitably fall on female general counsel. The best tactic is leveraging objective data and metrics to drive performance improve-

SUMMER 2018 TODAY’S GENER AL COUNSEL

ment of the legal function. While legal targets may be less tangible than those of other departments, general counsel should seize any opportunity to demonstrate and increase the value of the legal department and its impact on the bottom line. Although biases may exist, utilizing concrete data helps create an indisputable argument for a fair bonus. Objective measurement helps level a subjective playing field. Benchmarking the legal department against departments in similar-sized companies, and within similar industries, is a good place to start. Understanding areas for improvement, and where one’s department is an industry leader, allows the general counsel to take control of the narrative. If the general counsel can define what she is doing to move the business forward, she is well positioned to advocate for a hefty bonus when such progress is achieved. For example, business teams are less satisfied with the law department’s performance when they see legal as a bottleneck in the execution of a contract. So a process improvement initiative related to approval times could meet that stated goal, leading to improved customer satisfaction and a bigger bonus for the general counsel. One female general counsel adopted the improvement process known as the “Smarter Legal Model,” which applies

27 and 40 percent, up to a 60 percent reduction in litigation volume, and significant improvements in compliance and client satisfaction, she was able to make an ironclad case for a large bonus. Some examples of measurable goals that can be set for results-based bonuses include reducing outside counsel spend, reducing cycle time for contracts, improving client satisfaction, and increasing legal work output and coverage. When faced with the challenge of increasing value to the business and decreasing costs, many general counsel work to reduce size and cost of the legal department itself. However, one potential drawback of doing so is that the reduction could contribute to minimizing the general counsel’s impact and role in the business in the eyes of other executives. They should keep this Catch-22 in mind, and should try to find the right balance between size, cost and impact, keeping in mind that the last thing any legal department wants to do is increase the risk of non-compliance in an attempt to reduce spend.

Bias Recognition Up to CEO

But beyond the actions of individual female general counsel, it should be the responsibility of companies and their CEOs to change the culture that perpetuates gendered bonuses. They should recognize systemic bias within their companies, and change their policies to promote equity and remove subjectivity from the process. Many decisionmakers I spoke with identified customer satisfaction as a factor in determining general counsel bonuses. One general counsel noted that at his company, this measurement is based on an informal process led by the CEO, who has conversations with key internal clients. Companies should recognize that these

Understanding both areas for improvement and where one’s department is an industry leader allows the general counsel to take control of the narrative. business and behavioral principles to the practice of law, when she began her new role in a multi-billion dollar multinational telecom company. With reported results such as cost reductions of between

processes allow general counsel bonuses to be subject to the biases of others. The best companies carry out systematic surveys of internal client satisfaction: five to 10 simple performance questions with ratings one through five and a consistent, large statistical base of major business areas being surveyed. In this performance improvement process, the “snapshot” number is secondary to the overall yearover-year trend: If performance improves by a set target, the executive receives a bonus. Another factor impacting bonus culture is the way the general counsel is viewed in the context of the executive team. The general counsel is a relatively recent addition to the C-suite in some circles, and while that shift opened many doors for women in a historically male-dominated environment, in many companies the role itself is still undervalued. CEOs should take the lead in demonstrating to fellow executives that the general counsel should be viewed as a businessperson with legal expertise, just as the CFO is a businessperson with financial expertise. Bonuses are an important indicator of which employees the company values. Companies committed to diversity of all types should step back and examine the way bonuses are meted out. More likely than not, even companies that have taken outward strides towards diversity in hiring and educating employees on operating in a diverse workplace have antiquated bonus structures that keep the same people at the very top. Sooner or later, businesses that drag their feet on the bonus issue will see excellent female general counsel and other undervalued employees leave for other, more equitable opportunities. Ultimately, it’s up to the CEO to foster a fair environment in the C-suite and structure a bonus system that measures value regardless of gender. ■

TODAY’S GENER AL COUNSEL SUMMER 2018

Socio-Economic Risks continued from page 55

disclosures addressing “gender.” Sooner or later, the consequences of this type of risk disclosure oversight are bound to show up on the radar of the plaintiff’s bar. To compound this issue, private investment does not have the benefit of public reporting and must rely on representations, warranties and covenants in private investment documentation. Customary documentation does not currently focus on these risks and even if it did, it would only create claims for damage against an already injured business. While the business community is struggling to come to grips with the new reality of this muscular socio-economic advocacy, investors are looking for opportunities with businesses that contribute positively to society. Renewable resources have been the darling of this new focus, but investors are also looking for investments that can have positive societal impact. As Larry Fink, CEO of BlackRock, recently stated in his 2018 Annual Letter to CEOs: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” Even the activist investor, Barry Rosenstein of JANA Partners, has joined the party by demanding that Apple address the issue of children overusing its products, in order to set “an example about the obligations of technology companies to their youngest customers.” JANA sponsors the related Think Differently About Kids website. Fortunately, there are answers emerging to these pressing questions: How do investors minimize or avoid the serious economic consequences of reputational or brand damage to businesses in which

they invest? How do investors fulfill their goals of investing in businesses that are not only financially successful but also provide meaningful socio-economic contributions to society? While businesses scramble to address these risks and satisfy new investment criteria, investors should likewise task

thought dead and buried can reemerge in damaging ways. • Assess the company’s risk identification and escalation process to ensure executive managers are involved and that appropriate accountability is in place. Small problems can quickly grow into big ones, and having senior

Sooner or later, the consequences of this type of risk disclosure oversight are bound to show up on the radar of the plaintiff’s bar. their due diligence teams to conduct detailed analyses of company and brand risk exposures to socio-economic issues. The best approach? Empower management, legal counsel, and socioeconomic risk and research analysis experts to do the necessary research and implement an action plan that includes these important components: • Assess and possibly measure company exposure to socio-economic risk factors to ensure there are no glaring exposures. Socio-economic risks can include numerous individual issues: immigration policy stance; economic inequity concerns; affirmative racial, gender and sexual preference policy management; ideological and political belief issue management; and much more. Many issues do not surface in responses to standard due diligence questionnaires or disclosure schedules. • Verify that the company has taken steps to identify particular risks (ranging from conventional risks to new emerging socio-economic exposures), has established coherent policies with respect to each risk category, and actively monitors and enforces these policies. • Look into the company history with previous risk events. This may require extensive research into company policies and implementation over extended periods. Issues long

people involved helps ensure effective company responses. • Require preparation and risk stress testing. Ensure the company has developed a response plan ahead of time, so that in the event of crisis, in-place plans can help guide company action. • Determine if a company is engaging in activities that address social needs. Investors are seeking targets that deliver positive contributions to communities as well as business results; the due diligence mandate is expanding to encompass these emerging imperatives. Traditional charity and philanthropy are all good; and so are community building, environmental stewardship, workplace equity and more. The emerging challenge of socioeconomic risk presents investors with a new dimension in due diligence needs. By following the steps outlined above, investors and their legal teams can be assured they’re addressing current issues in the most through and effective manner available. ■

SUMMER 2018 TODAY’S GENER AL COUNSEL

U.S. COMPANIES AND LONDON’S AIM EXCHANGE By Nicholas Foss-Pedersen

he London Stock Exchange’s AIM market (known originally as the Alternative Investment Market) opened in 1995. From the outset, it was designed as a lightly regulated market to provide younger growth-oriented companies with cost-effective access to public equity capital. It has grown substantially in the intervening years and is now the world’s leading market for high-growth companies, popular with international companies that wish to source their equity capital financing needs from sophisticated institutional investors in one of the deepest capital pools in the world. At the end of 2017, 960 issuers were listed on AIM, of which 344 were international companies and 50 were U.S. companies (U.S. incorporated issuers or issuers with assets and management principally located in the U.S.). Notwithstanding former SEC Commissioner Roel Campos’s Nicholas Foss2007 quip likening Pedersen is a partner in the Corporate AIM to a casino Practice Group in (“I’m concerned the London office of that 30 percent of Haynes and Boone. issuers that list on His practice includes AIM are gone in a advising on AIM IPOs, both issuer and broyear. That feels like ker side, and general a casino to me and corporate law. I believe that invesnicholas.fosstors will treat it pedersen@haynes as such”), an AIM boone.com

listing and capital raising is a credible and potentially attractive alternative for U.S. high-growth companies that wish to raise equity capital to scale up and trade publicly, and potentially offers advantages over using the NYSE and NASDAQ to do so. This article explores some of those advantages as well as potential drawbacks.

AIM LISTING AND CAPITAL RAISING IS A CREDIBLE AND POTENTIALLY ATTRACTIVE ALTERNATIVE FOR U.S. HIGH-GROWTH COMPANIES. An AIM listing may involve requirements and duties that a U.S. company would not face should it instead list on a U.S. market. In particular, an AIM listing brings the U.S. issuer within the scope of UK and EU securities regulation, including the EU Market Abuse Regulation, which governs, amongst other things, the control and disclosure of inside information and dealings in the issuer’s shares by directors, management and senior employees, and creates offenses of insider dealing and market abuse.

In relation to corporate governance, the AIM Rules require an issuer to state in its admission document whether it complies with its home country’s corporate governance regime and, if not, an explanation why. Effective the end of September 2018, it must give details on its website of the recognized corporate governance code it has decided to apply (commonly either the UK Corporate Governance Code or The Corporate Governance Guidelines for Small and Mid-Size Quoted Companies, published by the Quoted Companies Alliance), how it complies with that code, and where it departs from its chosen code and the reasons for doing so. Publicly traded UK companies are subject to statutory pre-emption rights on the issue of new shares, with UK investor protection committees having established guidelines for the maximum disapplications of such rights that they recommend shareholders approve. Takeovers of such companies are regulated by the UK Takeover Code. Although these aspects of UK law do not apply to a U.S. AIM issuer, that issuer may nevertheless find that it needs to comply voluntarily to meet institutional investor expectations. Still, as long as the AIM issuer does not make a retail offer of its shares, it is unlikely to be more difficult to

TODAYâ&#x20AC;&#x2122;S GENER AL COUNSEL SUMMER 2018

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comply with UK and EU securities regulation than with the equivalent U.S. requirements. U.S. AIM issuers should note that, in certain circumstances, U.S. securities legislation might make difficult resales of the issuer’s shares by the issuer’s affiliates (which may include directors, executive officers and large shareholders) and certain “U.S. persons.” The shares to be sold would frequently have to be in certificated form rather than the trade being settled electronically. This may have an effect on liquidity if the U.S. issuer has a substantial number of affiliates and U.S. persons as shareholders.

to file a registration statement and other SEC periodic filing requirements, and the accounting, certification and other requirements of the SarbanesOxley Act. Eliminating these obligations offers time and potentially significant cost advantages.

payable. Broadly speaking, UK brokering commissions currently tend to range from three to five per cent, depending on the size of the capital raising, whereas an issuer might expect to pay a U.S. broker not much less than seven per cent on a firm commitment underwritten IPO.

WHY TO CONSIDER AIM

A U.S. ISSUER SHOULD NOTE THAT AN AIM LISTING DOES NOT PRECLUDE IT FROM CONTINUING ITS FINANCIAL REPORTING IN U.S. DOLLARS AND UNDER GAAP.

AIM’s key feature is its lighter regulatory and governance regime. It enables an AIM issuer to obtain all the benefits of being publicly traded, but with a regulatory compliance burden — and, hence, management time and financial burdens — appropriate to its stage in the business life cycle. This feature thus makes AIM very attractive to younger high-growth companies. It is reflected in AIM having no market capitalization requirement, no free float requirement, no trading/financial history requirement, no profitability requirement. AIM operates a “delegated regulation” regime. An AIM issuer must appoint a London Stock Exchange accredited nominated adviser (Nomad) that must ensure and confirm to the London Stock Exchange the issuer is appropriate for listing on AIM. If an accompanying capital raising is structured properly (which broadly means not making a share offer to more than 150 retail investors), the Nomad will be responsible for running the AIM listing and capital raising process. Neither the London Stock Exchange nor the UK securities regulator will be involved, unlike listing on a domestic U.S. market. Similarly, the AIM listing and capital raising can generally be structured so that the issuer will not be subject to onerous elements of U.S. federal securities regulation, such as the obligation

This regulatory approach, in turn, helps the AIM listing process be shorter (frequently three to four months), depending on the amount of pre-listing reorganization work that needs to be undertaken. Younger fast-growing companies often do not generate positive cash flows, and therefore have greater need to raise external capital to fund operations and growth. Negative cash flow also means that the company’s debt service ability is likely to be limited, making the ability to undertake further equity capital raisings, and the ease and cost of doing so, critically important. AIM investors are familiar with such companies’ growth trajectories and need for repeat financing through follow-on capital raisings. In 2017, AIM issuers undertook 600 equity follow-on fundraisings, with an average size of about $10,816,000 as against 241 (average size $75,000,000) on the NYSE and 103 (average size $369,000,000) on NASDAQ. This financing need, of course, also makes the cost of follow-on capital raising an important factor when such companies choose a public market on which to list. An AIM listing and capital raising will often be cheaper for smaller highgrowth companies than the NYSE and NASDAQ, both in terms of the cost of raising capital and the exchange fees

As for exchange fees (for the initial listing, follow-on capital raising and yearly fees), the minimum initial listing fee on AIM is $11,760; the minimum yearly fee is $10,138; and the minimum fee for follow-on share issues is $5,893. By comparison, on the NYSE and NASDAQ the minimum initial listing fees are $150,000 (NYSE) and $55,000 (NASDAQ); the minimum yearly fees are $65,000 (NYSE) and $42,000 (NASDAQ). NASDAQ does not charge a fee for follow-on share issues. The minimum NYSE fee is $10,000. A U.S. issuer should also note that an AIM listing does not preclude it from continuing its financial reporting in U.S. dollars and under U.S. GAAP. AIM financial reporting obligations are more relaxed, requiring semi-annual rather than quarterly reporting, and less comprehensive than reports on SEC forms 10-Q and 10-K.

ADMISSION PROCESS The AIM listing process requires the issuer to prepare and publish an AIM admission document. Although this disclosure document is less detailed and comprehensive than, say, an SEC registration document or a prospectus for listing on the Main Market of the London Stock Exchange, the issuer must make significant disclosures.

TODAY’S GENER AL COUNSEL SUMMER 2018

These include its business and trading history; financial condition; and its directors, management and significant shareholders. The admission document must include audited accounts (which may be prepared under U.S. GAAP) for the last three years or such shorter period as the issuer has been operating. If the historical information has not been audited, an accountants’ report must be included. The Nomad will usually require both to be provided. The overriding requirement is to disclose all information that investors reasonably require to make an informed decision as to the issuer’s financial position, prospects, and the rights attaching to its shares. The directors must confirm that the issuer has sufficient working capital for at least the 12 months following listing, and take personal responsibility for the accuracy of the admission

document and the absence of material omissions. Following its AIM listing, the issuer must comply with the various “continuing obligations” set out in the AIM Rules. As with AIM’s regulatory framework and the AIM Rules in general, the continuing obligations have been designed to strike a balance between investor protection and the needs of younger high-growth issuers. As an example, an AIM issuer does not need to obtain prior shareholder approval for corporate transactions, unless the transaction constitutes either a reverse takeover or a disposal that will result in a fundamental change in the AIM issuer’s business. One of the key continuing obligations — aimed at ensuring a fair and orderly market in an AIM issuer’s shares and ensuring all market users have simultaneous access to the same information — is

to disclose without delay any new developments that are not public knowledge and, if made public, would be likely to lead to a significant movement in the price of the issuer’s shares. Given AIM’s delegated regulation approach, another post-listing requirement is that the AIM issuer must retain a Nomad responsible for advising the issuer on the AIM Rules and the issuer’s compliance with them. An IPO is a major milestone in the life of a growing business, and the choice of market and exchange is clearly an important one that will be influenced by numerous factors. AIM should be considered a real and credible alternative for U.S. based high-growth companies, given the market’s focus on younger growth companies rather than large mature businesses. ■

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SUMMER 2018 TODAY’S GENER AL COUNSEL

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Supreme Court Upholds Inter Partes Review By James Day

n 2012, Congress created a new procedure that allows the United States Patent and Trademark Office to conduct a litigationlike procedure to review and potentially cancel patents. This procedure, inter partes review (IPR), has been highly unpopular with patent holders who challenged the constitutionality of the system. One of those challenges made its way to the United States Supreme Court, which recently addressed the issue in Oil States Energy Services, LLC v. Greene’s Energy Group, LLC. Oil States threatened to permanently end IPRs. The challenge by Oil States, which owned the patent invalidated through an IPR proceeding, asserted that its patent rights had been extinguished in violation of Article III and the Seventh Amendment to the United States Constitution. The Court rejected the constitutional challenge but expressly left open other constitutional arguments, ensuring that this is not the final word on the issue. The Court noted that the separation of powers question under James L. Day is a Article III is commonly partner in Farella resolved based on a Braun + Martel distinction between LLP’s Intellectual Property Litigation “private” rights, which Department in are adjudicated by an San Francisco. His Article III court (i.e., a practice emphasizes federal district court), patent disputes, in and “public” rights, both federal court and before the Patwhich can be adjudient Trial and Appeal cated by a government Board, and trade agency. The Court secret misappropriarecognized that its tion lawsuits. precedent addressing jday@fbm.com

“public” vs. “private” rights has not drawn a clear distinction, but concluded that IPR “falls squarely within the public rights doctrine.” Having resolved that patents are a “public” right, the Court had little trouble concluding that IPRs do not violate Article III or the Seventh Amendment. The Oil States decision effectively upholds the status quo, permitting the IPR process to continue as it currently exists. The decision may nevertheless provide impetus for changes to the IPR system. Many of the amicus briefs submitted to the The Court rejected Supreme Court emphasized the constitutional perceived probchallenge but lems with the expressly left open existing proceother constitutional dure. Already, arguments. the Patent Office has announced its intent to change the IPR claim construction standard that patent holders have argued is currently unfair; and we may see additional changes in the coming months based on public criticism aired in the Oil States briefing. In addition, patent holders moved quickly to take advantage of language in the Oil States decision suggesting that other constitutional arguments are not foreclosed. The Court went out of its way to state that the Oil States decision addresses only the precise issues raised in the case and that it does not address potential challenges under the Due Process or Takings Clauses. Patent holders have already filed a new class-action lawsuit seeking more than a hundred million dollars in damages for patents that have been cancelled through IPR. The Oil States decision upheld the constitutionality of IPRs, but it did not end the disputes over this new procedure. ■

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