News & Developments
April 2, 2013
Supreme Court Eliminates Loophole for Avoiding Federal Court
The U.S. Supreme Court recently held that a class-action plaintiff cannot stipulate prior to class certification that the plaintiff and the proposed class will not seek damages that exceed $5 million in total. The opinion closes a loophole that allowed plaintiffs to avoid federal jurisdiction under the Class Action Fairness Act (CAFA).
CAFA provides a federal district court with original jurisdiction over a civil class-action lawsuit if, among other things, the matter in controversy exceeds the sum or value of $5 million. In determining whether the matter exceeds that sum, the claims of the individual class members are aggregated.
In Standard Fire Ins. Co. v. Knowles, 2013 U.S. LEXIS 2370 (U.S. Mar. 19, 2013), the class representative stipulated that he would not at any time during the case seek damages for the class in excess of $5 million. After the defendant removed the case to federal court, the plaintiff argued for remand on the grounds the district court lacked jurisdiction because the amount in controversy fell below the $5 million threshold. The district court found that, but for the plaintiff’s stipulation, the resulting sum would have exceeded $5 million.
In its opinion, the Supreme Court reasoned that, because a plaintiff who files a proposed class action cannot legally bind members of the proposed class before it is certified, the stipulation proffered by Greg Knowles does not bind anyone but Knowles and, therefore, did not impact the value of the putative class members’ claims. For jurisdictional purposes, a federal court’s inquiry is limited to examining the case at the time it was filed in state court. When Knowles filed his lawsuit, he lacked the authority to concede the issue of the amount in controversy for the absent class members. Therefore, the district court erred when finding that the pre-certification stipulation could overcome the CAFA jurisdictional threshold. However, the high court declined to decide whether stipulations prior to class certification that limit attorney fees can be binding, because Knowles’ stipulation did not provide for that option.
The court’s ruling will have a significant impact because class-action plaintiff attorneys can no longer unilaterally stipulate to limit a class’s damages in an effort to keep the case in state court, where class certification may be easier to accomplish. Now, when determining the amount in controversy, federal courts will be directed to ignore any pre-certification stipulations concerning the class recovery offered by the representative plaintiff.
— Hilary Feybush, Gordon & Rees LLP, Los Angeles, CA
Report: Shareholders Challenged 96 Percent of M&A Deals in 2012
A recent report entitled Shareholder Litigation Involving Mergers and Acquisitions by Professor Robert Daines of Stanford Law School and Olga Koumrian, a principal of Cornerstone Research, found that in 2012, plaintiff law firms filed lawsuits on behalf of shareholders in 96 percent of M&A deals valued at over $500 million. Lawsuits were filed in 93 percent of deals valued at $100 million. On average, 5.4 lawsuits were filed in deals valued at over $500 million. Further, 39 percent of the suits were filed in Delaware Chancery Court.
The report found that plaintiff law firms are quick to act. Typically, they announce their investigations within hours of the announcement of the merger and on average file suit 14 days after the merger announcement. The cases are also quick to settle. Over 60 percent of the cases settle, and typically settle about 42 days after the lawsuit was filed. Despite the fact that in 80 percent of settlements, the only relief obtained by shareholders was additional disclosures, plaintiff law firms collected $725,000 in fees on average. Since 2009, the attorney-fee awards in these disclosure-only settlements have decreased.
While the number of deals litigated has remained fairly consistent since 2010, the settlement amounts are still on an upward climb. The report found that the “average settlement fund between 2010 and 2012 was $78 million, compared with $36 million in 2003 through 2009.” Indeed, last year two of the largest M&A settlements of the decade were reached. The El Paso Corp./Kinder Morgan Inc. deal settled for $110 million and the acquisition of Delphi Financial Group by Tokio Marine Holdings, Inc. settled for $49 million. Like most large settlements, both of these suits involved allegations of significant conflicts of interest.
The report also noted that a new type of lawsuit modeled after M&A litigation has emerged. Plaintiff law firms are starting to challenge the compensation disclosures included in annual proxy statements. Plaintiffs seek to prevent upcoming shareholder votes unless or until the companies involved in the transactions make additional disclosures. According to the report, 25 of these so-called say-on-pay lawsuits were filed in 2012. Additionally, in the last two months of 2012, law firms announced they were investigating 33 more companies, leading the report to warn that as the 2013 proxy season approaches, this “say-on-pay” litigation could expand.
Regarding his findings in the report, Professor Daines remarked, “[i]t is not plausible to think that 96 percent of target boards did a bad job selling the firm. Plaintiffs must be filing on cases where there is no underlying problem. . . .” Consequently, “[t]he question is whether we can tell the good cases from the bad ones and whether the threat of a lawsuit produces any benefits for shareholders.”
— Lindsay Parker, Cooley LLP, San Diego, CA
NLRB Reinstates Employees Fired Over Off-Duty Facebook Posts
In Hispanics United of Buffalo, Inc., 359 NLRB No. 37 (2012), a divided National Labor Relations Board (NLRB) decided that the terminations of five employees for Facebook comments posted about one of their coworkers violated the National Labor Relations Act's protection for employees who engage in certain types of concerted activities. The NLRB applied the traditional analysis of "protected concerted activities" under sections 7 and 8(a)(1) of the act to the Facebook postings and found that the terminations were unlawful.
The employer in the case provided social services to economically disadvantaged clients in Buffalo, New York. Marianna Cole-Rivera and Lydia Cruz-Moore were coworkers who assisted victims of domestic violence. Cruz-Moore was known to criticize the work performance of her coworkers in her everyday communications.
On Saturday October 9, 2010, Cruz-Moore texted Cole-Rivera indicating her intent to discuss concerns regarding employee performance with Hispanics United executive director Lourdes Iglesias. From her home, and using her own personal computer, Cole-Rivera then posted the following message on her Facebook page:
"Lydia Cruz, a co-worker feels that we don't help our clients enough . . . I about had it! My fellow co-workers how do u feel?"
Four off-duty employees responded by posting messages on Cole-Rivera's Facebook page related to Cruz-Moore's complaints, such as:
"What the f . . . Try to do my job, I have 5 programs."
"What the hell, we don't have a life as is, What else can we do???"
"Tell her to come do my f-ing job n c if I don't do enough, this is just dum."
"I think we should just give our paychecks to our clients. . . ."
Cruz-Moore then printed the postings and brought them to Iglesias. On October 12, the first workday after the Facebook postings, Iglesias fired Cole-Rivera and her four co-workers as a result of the Facebook postings. The company's position was that the Facebook posts constituted "bullying and harassment" of a coworker and violated the company's "zero tolerance" policy against harassment.
Upon review, the NLRB determined that the Facebook posts clearly constituted protected concerted activities "for mutual aid or protection," thus bringing the group-griping via Facebook by the five affected employees within the protections of section 7 of the act. The NLRB found that the Facebook posts were a "first step towards taking group action" to defend themselves against employee Cruz-Moore's criticism, which they "could reasonably believe" was going to be taken to management.
The NLRB completely rejected the employer's harassment-policy defense, holding that "legitimate managerial concerns to prevent harassment do not justify policies that discourage the free exercise of Section 7 rights by subjecting employees to discipline on the basis of the subjective reactions of others to their protected activity." In other words, if employees engage in concerted activities for mutual aid or protection, those activities cannot be the basis of discipline, even if other employees are offended by the concerted activity.
With this case, the NLRB adapted its definition of concerted activities "for mutual aid or protection" to off-duty comments posted by a group of employees on Facebook concerning another employee, and ordered Hispanics United to reinstate all five employees, with backpay. Following this case, employers should keep in mind that, as a legal matter, the NLRB's definition of “protected group activity” may override any employer-specific policy against harassment. Employers should investigate and handle employee complaints accordingly.
March 27, 2013
Protecting Brands During Domain Expansion
A recent article from Corporate Counsel addressed the pending expansion of Internet domain names and its implication for in-house lawyers charged with protecting their company’s brand. The Internet Corporation for Assigned Names and Numbers (ICANN) is a nonprofit organization that coordinates Internet domain names and their expansion. As of March 13, ICANN has received nearly 2,000 applications for new top-level domains (TLDs). Top-level domains are the characters found to the right of the dot in Internet addresses. Currently, most users are familiar with TLDs such as .com, .net, .edu, and .co. ICANN’s expansion of TLDs will change the current domain landscape and allow organizations, businesses, and even cities to create their own TLD. For example, ICANN has already received applications for new TLD strings such as .americanexpress, .nyc, and .insurance. While anyone can apply for a TLD, it should be noted that the application fee approaches $200,000 plus yearly maintenance if the application is granted. Applications for TLDs can be contested on numerous grounds.
Within each TLD, individual users can register second-level domains (SLDs) which consist of the characters before the dot. For example, a TLD for .insurance may have SLDs such as statefarm.insurance or geico.insurance. Initial registration of SLDs is far less expensive than the application fee associated with TLDs. Accordingly, brand owners will have to carefully monitor new TLDs and determine whether registration of an SLD within the domain is appropriate. To make this process somewhat easier, ICANN launched what it calls the “Trademark Clearinghouse” on March 26. Companies can register their trademarks with the clearinghouse for $150 per year and will receive notice anytime someone attempts to register a SLD that is identical to the registered mark. This notice will allow brand owners the opportunity to contest any SLD application that seeks to use a registered mark. Importantly, ICANN is not obligated to deny an application seeking to use a registered name. While the clearinghouse represents inexpensive protection against direct brand infringement, it does not guarantee protection against cybersquatters (individuals holding domain names for later sale) or others seeking to register SLDs with identical or similar names.
Corporate counsel should meet with the appropriate marketing or IT contact to review the company’s current web-address portfolio and determine what steps should be taken to protect the brand on an ongoing basis. Registration with the Trademark Clearinghouse and registration of appropriate SLDs will allow these companies to prevent costly litigation down the road and prevent brand confusion in the increasingly large realm of Internet domains.
— Greg Hearing, Gordon & Rees LLP, Denver, CO
February 28, 2013
Heightened Protection for Extrajudicial Communications
Generally, communications related to legal advice between a client and its counsel are protected from disclosure during litigation, unless, of course, that protection is waived. The well-settled rule is that the client waives this protection if it discloses communications with its attorney to a third party. Depending on the circumstances, a disclosure can result in a broader waiver than the communications actually disclosed. For example, when a client discloses a portion of an attorney-client communication during litigation, the protection is waived for all attorney-client communications related to the same subject matter. The purpose of this so-called subject matter waiver is to avoid abusing protected attorney-client communications to gain a tactical advantage during litigation.
In Center Partners, LTD v. Growth Head GP, LLC, 2012 Ill. LEXIS 1525; 2012 IL 113107 (Ill. Nov. 29, 2012), the Illinois Supreme Court held that the subject-matter waiver does not apply when extrajudicial communications, i.e., those made outside of the litigation context, are disclosed. In that case, the defendants engaged in business negotiations surrounding the purchase of a foreign corporation. To aid in the negotiations, the defendants disclosed to each other portions of communications with their respective in-house counsel. At issue in the lawsuit was whether such disclosure waived the attorney-client privilege with respect to all communications regarding the transaction or just those communications actually disclosed during the negotiations. After wading through conflicting authority from other jurisdictions, the court concluded that a broad waiver was improper under these circumstances because the communications were not made in the course of litigation. “[L]imiting application of subject matter waiver to disclosures made in litigation better serves the purpose of the [subject matter waiver] doctrine. . . . Expanding the doctrine to cover extrajudicial disclosures that are not made for tactical advantages in litigation would necessarily broaden the scope of the doctrine’s purpose.”
For the defendants, this holding meant disclosure of communications with their respective attorneys during business negotiations did not result in waiver of all attorney-client communications in the course of the transaction. To hold otherwise “would leave attorneys out of commercial negotiations for fear that their inclusion would later force wholesale disclosure of confidential information” thereby “depriving clients of counsel at times when such counsel is most valuable.”
— Andrew Thompson, Gordon & Rees LLP, Denver, CO
February 27, 2013
Adverse Board Members Not Entitled to Communications
In a recent opinion, the Massachusetts Supreme Judicial Court ruled that a closely held corporation could assert attorney-client and work-product protection against directors and shareholders of the company with adverse interests. Chambers v. Gold Medal Bakery, Inc., ___ N.E.2d ___; 464 Mass. 383, 2013 WL 453143, represents the latest ruling in a six-year litigation battle surrounding ownership and control of a closely held corporation. Gold Medal is a large wholesale baking supplier originally founded by two brothers. Each brother owned 50 percent of the company. Presently, descendants of each brother manage the affairs of Gold Medal and sit on the four-member board.
Beginning in 2006, an attorney representing one side of the family and two of the board members sent a request for various corporate records to Gold Medal, their accountants, and their corporate counsel. The remaining board members resisted and filed suit in 2007. A 2008 settlement was reached whereby the plaintiffs were allowed to audit Gold Medal to facilitate a sale of their shares to the other shareholders or to an outside buyer. An alleged violation of the settlement agreement led to another round of litigation in 2009.
In the present lawsuit, the plaintiffs served a subpoena duces tecum on Gold Medal’s corporate counsel as the keeper of Gold Medal’s corporate records. Counsel objected on the grounds that the subpoena requested various materials protected by the attorney-client and work-product privileges. The trial court appointed a discovery master who ruled in favor of the plaintiffs and ordered disclosure of the documents. The trial court affirmed this ruling. The Massachusetts high court agreed to hear the case on direct appellate review.
On review, the Massachusetts Supreme Judicial Court held that Gold Medal could assert the attorney-client and work-product privileges as to documents prepared for or in anticipation of the previous and current litigation. The court first determined that the board members and shareholders maintaining the current suit had interests adverse to those of Gold Medal. The defendants argued that the plaintiffs had engaged in serial litigation in an effort to extract a higher stock price for their shares. The plaintiffs countered that as members of the board, they were entitled to the documents and were within the circle of the Gold Medal privilege. The court agreed with the defendants and held that the plaintiffs’ interests were adverse to the interest of Gold Medal.
The court noted that as a general rule, board members are entitled to information about the company they represent to fulfill their fiduciary obligations. When that information includes legal advice, board members are generally entitled to it. However, this right of access is based on the assumption that that the interests of directors are not adverse to that of the company. When that assumption is overcome, the company and its remaining directors may assert claims of privilege against adverse board members. This prevents “the unfair disadvantage that would result if a director with adverse interests . . . could access the corporation’s confidential communications with counsel.”
On the facts of this case, the court held that there was sufficient evidence to show that the plaintiffs’ interests were adverse to that of Gold Medal in both the 2007 litigation and the current litigation. As a result, attorney-client communications and work product created as a result of said litigation was protected from discovery. The court noted that this protection did not prevent the plaintiffs from accessing basic factual information about Gold Medal and emphasized the longstanding rule that underlying facts cannot be shielded merely by including them in an attorney-client communication. Importantly, the court stressed that there was no one factor in determining when a director has interests adverse to those of the company but noted that such a determination rests on a fact-specific analysis.
The court’s holding represents an important asset of any corporate counsel, particularly counsel representing closely held corporations. While no director can be denied access to basic information and facts surrounding the operation of the company, counsel can assert privilege to communications and work product generated in response to the actions of adverse board members who threaten or bring suit against the corporation.
— Greg Hearing, Gordon & Rees LLP, Denver, CO
February 14, 2013
California Privacy Statute Does Not Apply to Online Sales
In a 4–3 decision in Apple v. Superior Court, the California Supreme Court ruled that the state’s privacy statute restricting retailers from collecting personal information as part of credit-card transactions does not apply to online sales of downloadable materials.
The Song-Beverly Credit Card Act of 1971 governs the issuance and use of credit cards. Section 1747.08(a) of the act prohibits retailers from requesting or requiring the cardholder to provide personal identification information, which the retailer writes or otherwise records upon the credit-card-transaction form, or from using preprinted spaces designed for filling in the cardholder’s personal identification information. In 2011, the California Supreme Court found in Pineda v. Williams-Sonoma Stores, Inc., 51 Cal.4th 524, that Williams-Sonoma violated section 1747.08(a) when it requested and recorded a customer’s ZIP code during a credit-card transaction.
In Apple v. Superior Court, the plaintiff was an Apple customer who purchased electronically downloadable products via the Internet. The plaintiff alleged that Apple violated section 1747.08(a) when it requested his address and telephone number as a condition of accepting his credit-card as payment. Relying on the fact that the statute was enacted before online commerce existed, the high court looked to the legislative intent behind section 1747.08(a). The court, citing to Pineda, found that the underlying purpose of the statute was to “address the misuse of personal identification information for, inter alia, marketing purposes” and “to prohibit businesses from requiring information that merchants, banks or credit card companies do not require or need.” See also Absher v. AutoZone, Inc., (2008) 164 Cal.App.4th 332, 345. However, the court found that this legislative intent was not to achieve privacy protection at the expense of exposing consumers and retailers to undue risks of fraud.
The court recognized the severe disadvantage online retailers have compared to brick-and-mortar retailers. For example, during an in-store transaction, a merchant can verify the identification of the cardholder by comparing the signature on the credit card transaction form with the signature on the credit card or by viewing a driver’s license to ensure that the photo matches the cardholder and the name on the license matches the name on the credit card. Thus, the court determined that traditional stores have no genuine need to collect personal identification information.
Alternatively, online retailers do not have these safeguards against fraud when selling an electronically downloadable product. Because the online retailer is unable to visually inspect the credit card, the signature on the back of the card, or the customer’s photo identification, the court found that the antifraud mechanisms contained in section 1747.08(a) have no practical application to online retailers that sell electronically downloadable products.
Importantly, Apple v. Superior Court does not apply to online transactions that do not involve electronically downloadable products or to any other transactions that do not involve in-person, face-to-face interaction between the customer and retailer. Time will tell if other exceptions will fall in line.
In dissent, Justice Joyce L. Kennard said the majority decision is “a major win for these sellers, but a major loss for consumers, who in their online activities already face an ever-increasing encroachment upon their privacy.” Kennard was displeased with the majority’s departure from the unanimous holding in Pineda and with its trespass on the legislature’s “domain” by ruling far outside the statute’s plain language to carve an exception for online retailers.
Justice Marvin R. Baxter also dissented, arguing that the majority’s decision is contrary to the terms, purpose, and legislative history of section 1747.08(a). Baxter maintained that the “statutory terms reflect a legislative determination that heightened privacy interests in personal information such as addresses and telephone numbers outweigh the necessity or usefulness of such information for any supposed fraud prevention purpose in card-not-present transactions.” He found no support for the majority’s assumption that the legislative intent underlying the statute extends to protecting consumers and retailers from fraud or that Apple’s request for addresses and telephone numbers was necessary to combat fraud.
It will be interesting to see what transpires next in terms of a judicial and legislative response.
Cornerstone Research's 2012 Report on Securities Class-Action Filings
According to “Securities Class Action Filings—2012 Year in Review,” published by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, the number of federal securities-fraud class actions decreased dramatically in 2012.
In an article summarizing the report, Cornerstone Research noted that “[o]nly 152 federal securities class actions were filed in 2012 compared with 188 in 2011—the second-lowest number of annual filings in 16 years.” Cornerstone Research attributes the decrease to declines in federal merger and acquisition and Chinese reverse-merger filings. Also, there were no new filings regarding the credit crisis in 2012.
The report also revealed that filings in the financial sector have continued to decrease whereas filings were most prevalent in the consumer non-cyclical sector. There were 49 filings in this sector and 33 were against healthcare, biotechnology, and pharmaceutical companies.
As was the case in 2011, there were fewer filings targeted at very large companies in 2012. Only one out of about 29 S&P 500 companies was named as a defendant in a securities class action last year.
Dr. John Gould, Senior Vice President of Cornerstone Research commented:
What stood out in 2012 was the absence of a filing trend that influenced the total number of new cases. In the past there have been observable filing types, such as IPO cases, options backdating, mergers and acquisitions, or most recently, Chinese reverse mergers. But 2012 was not dominated by any such trend. Interestingly, in a year characterized by a dramatic drop in securities class action filings, the number of traditional Rule 10b-5 “stock drop” filings actually increased in 2012.
Professor Joseph Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research also commented:
Is there a shoe waiting to drop? The SEC claims that the Dodd-Frank bounty program has helped it build a large inventory of high-quality leads as to fraud at publicly traded corporations. But will the Commission be able to transform these leads into quality enforcement actions? And, will private-party plaintiffs be successful in prosecuting “piggyback” claims that copy the Commission’s complaints? The current quiet patch in private securities fraud litigation could certainly be unsettled if the Dodd-Frank bounty program generates a new wave of private claims.
Read the full summary of the report, including a list of the key findings regarding the number and type of filings, classification of complaints, filing lag, foreign filings, heat maps, and Disclosure Dollar Loss Index and Maximum Dollar Loss Index.
— Lindsay Parker, Cooley LLP, San Diego, CA
Developments in Corporate Legal Departments: Statistics and Billing
ALM Legal Intelligence conducts an annual survey regarding trends in corporate legal departments. The 2012 statistics provide insight as to the direction of in-house legal services and how outside attorneys can make their services attractive. In an article published by Corporate Counsel magazine, whether in-house positions remain a better choice for attorneys seeking a more traditional work/life balance is up for grabs. Pursuant to the ALM survey, legal department workloads are increasing while resources are decreasing. The workload of a legal department lawyer is now comparable to that of outside counsel.
Due to economic constraints, more corporate legal departments “are absorbing work that would have been farmed out in the past.” Keeping legal work in-house is one cost-saving measure. Another is implementing internal efficiencies such that “GCs are running their legal departments like businesses within a larger enterprise.” This includes small steps such as limiting time spent in meetings and managing emails.
The demands on in-house counsel to manage and keep legal work is lessening their ability to monitor the work issued to outside lawyers. 71 percent of respondents to the ALM survey indicated that they have no formal review policies to assist them in evaluating the quality and economy of outsourcing legal work. These respondents also emphasized that “[c]ost, results, and understanding of the business were the top three criteria that legal departments used to assess outside counsel performance.”
The changing nature of internal legal departments’ relationships with outside counsel may lead to consideration of alternative fee structures. 59 percent of respondents to the ALM survey expressed their interest in doing business with outside firms pursuant to alternative fee arrangements. This interest was qualified by in-house attorneys’ lack of time and resources to negotiate and employ such arrangements, but the survey noted that a higher volume of outsourced work may make alternative fee structures more efficient for corporate legal departments.
In an article by Aric Press in The American Lawyer, Mr. Press discusses what some call “the conversation,” that is, a discussion with corporate clients about fees. This discussion can be such an art that firms and in-house counsel are consulting with “pricing specialists” regarding the reasonableness of fees, how to structure fee arrangements, and how to collect on or challenge a fee invoice.
One specialist emphasized that pricing consultations revolve “around trying to understand a client’s goals, pressures, history, and ability to fully frame the task at hand.” In the end, pricing should be designed around the client.
Another consultant discussed a broad approach to fee structures, finding a place for the billable hour, the fixed fee, and a “unit price.” This specialist encouraged firms and corporate clients to hone their own skill of knowing “when to use which structure.” He suggested that a key decision in determining which method of billing works best is reaching agreement on which party bears the risk. According to this consultant, “the only professional services billing structure in which the client rather than the firm carries the bulk of the risk is the current default mode, the billable hour.”
Regardless of fee structure and historical methods of assigning legal work, both articles indicate that awareness, flexibility, and open communication are key for outside counsel and corporate legal departments to maintain productive relationships.
— Nicole Salamander, Gordon & Rees LLP, Denver, CO
Cloud Computing Creates Whirlwind of Legal Challenges
Legal challenges related to cloud computing are emerging as the data-storage practice becomes more popular with businesses and public organizations. There are many types of cloud computing (public, private, community, and hybrid models) but, in general, it is the practice of using a network of Internet-hosted remote servers to store, manage, and process data, rather than using a local server.
Organizations need to be aware of the legal implications surrounding a move to cloud computing and must ensure that cloud-computing service contracts are drafted to minimize risk while adding security. Data-protection needs will vary with the industry, so there is no one-size-fits-all solution to cloud computing. For example, organizations that operate in the financial-services industry may be subject to the Gramm-Leach-Bliley Act’s data-privacy requirements, whereas health-care providers are subject to different privacy standards under the Health Insurance Portability and Accountability Act (HIPAA). Organizations may also be required to take additional measures to protect confidential data and other personally identifying information about their consumers and/or employees. Regardless of what standards apply to your organization, a well-drafted, customized service contract is the key to addressing these issues.
Other considerations include information accessibility and how data is stored while “at rest” on a cloud provider’s system as well as how the data is transported to and from a location. For example, it is recommended that data be encrypted while stored on a cloud provider’s system. If that data were subpoenaed, the requesting party would have the data, but it would be unusable unless the requesting party also obtains the user’s encryption key. Similarly, data transferred over telecommunications or other methods (tapes/USB drives, etc.) should be encrypted to protect interception.
There also are legal implications when a cloud service provider and its users are involved in litigation or must respond to a subpoena. Cloud computing puts an organization’s data under the control of a third-party cloud service provider. Rule 34(a) of the Federal Rules of Civil Procedure states that a party may serve a request to produce electronically stored information (ESI) in the responding party’s “possession, custody, or control.” The cloud service provider often is the party that has “possession” and “custody.” Usually a cloud service contract gives the cloud user “the legal right to obtain the documents on demand,” therefore the customer is in “control” of the ESI.
Ideally, the cloud service provider should not be required to produce responsive documents without the permission of the cloud user. However, that issue is the subject of ongoing litigation. In Flagg v. City of Detroit, 252 F.R.D. 346 (E.D. Mich. 2008), a cloud service provider received a subpoena seeking the production of ESI in the cloud. The subpoena covered text messages sent or received by city of Detroit employees who used devices supplied by SkyTel. The court determined that this data in the cloud was potentially discoverable under federal discovery laws, however the court did not consider the subpoena issued to the cloud provider because the required evidence was more easily acquired by an ESI request to the cloud user, the city of Detroit.
The proliferation of cloud computing also raises jurisdictional questions. Information in foreign data centers may be subject to foreign laws. An organization migrating its data into the cloud should understand what a cloud service provider will do in response to legal requests for information and for discovery.
When selecting a cloud service provider, organizations should ensure a provider can efficiently retrieve data from the cloud and respond to litigation-hold notices. A cloud service provider should also be able to suspend automated document-retention/deletion rules to ensure the adequate preservation of relevant information. This goes beyond placing a hold on archival data in the cloud. An organization should be able to identify the data sources in the cloud that may contain relevant information and then modify its retention policies to ensure that cloud-stored data is preserved for discovery. Taking this step creates a defensible document-retention strategy that protects an organization from court sanctions under the Federal Rules of Civil Procedure’s “safe harbor” provisions.
A cloud service provider should also be able to deploy automated legal-hold acknowledgements. This feature allows record custodians to be properly notified of litigation and thereby retain information that might otherwise be deleted. Failing to ensure such protections increases the risk to organizations and their counsel of data loss, adverse evidentiary rulings (e.g. spoliation claims), and monetary sanctions.
January 17, 2013
Chancery Court Allows Suit Against Novell to Continue
Earlier this month, the Delaware Court of Chancery found that plaintiffs’ bad-faith claim was reasonably conceivable and therefore survived the defendants’ motion to dismiss. The court dismissed all other claims.
The crux of the amended complaint is that the Novell board of directors favored acquirer, Attachmate, over a competitive bidder, Party C, who twice submitted a superior bid. Specifically, the amended complaint alleges that Novell’s board informed Attachmate of a pending patent sale, but not Party C. Had Party C known of the patent sale—which would have given it $450 million in cash upon acquiring Novell—it may have increased its offer. Also, Attachmate was allowed to work with strategic partners, but Party C was not. The court recognized that a disinterested and independent board need not treat all bidders equally and that Novell’s board may have a plausible and sufficient explanation for its disparate treatment of Attachmate over Party C. However, defendants “do not have the opportunity to ‘prove their case’ on a motion to dismiss.” Absent an explanation inferable from the pleadings, the breach of fiduciary-duty claim survived: “[T]here may be a plausible explanation for [the Board’s] conduct, but the Court does not have access to those facts.” Similarly, allegations that one of the Novell directors, who was a former partner of the principal stockholder of Attachmate, leaked confidential information to Attachmate could not be dismissed at the motion-to-dismiss stage.
Next, the court turned to the issue of whether the defendants acted in bad faith or merely breached the duty of care. In the absence of bad faith, the defendants’ actions would be exculpated by the section 102(b)(7) provision in Novell’s charter. The court held that the fact that the Novell Defendants did not tell Party C about the patent sale, but did tell Attachmate, was sufficient to infer that the board acted in bad faith.
The court dismissed the plaintiffs’ remaining breach-of-fiduciary-duty claims. Namely, the court found that:
- the deal-protection measures (no solicitation, matching rights, termination fee) did not give rise to claim for breach of fiduciary duty because those are “routine” terms;
- although one of the board member’s (who was Novell’s president and CEO at the time) severance agreement contained incentives triggered by a change in control, that potential financial gain was not enough to establish that his role in the acquisition led to a breach of the board’s fiduciary duties;
- the change in J.P. Morgan’s (Attachmate’s financial advisor) presentation numbers did not give rise to a claim because “[a]ttempts to infer a breach of fiduciary duty from hindsight quibbles with a financial advisor’s fairness opinion do not succeed as a general matter”;
- Elliot, a minority shareholder with no representative on the board, did not dominate the process;
- the equity commitment between Elliot and Attachmate did not give rise to a breach of fiduciary duty because Novell was not a party to the agreement or the negotiations thereof; and
- The plaintiffs’ allegations that the board failed to make ten material disclosures failed because the information was not material.
In addition, the court rejected the plaintiffs’ claim that the defendants did not maximize the sale of Novell’s patent portfolio. The court stated that the plaintiffs are mistaken that the board had a duty to auction the patent portfolio. Instead, the court viewed the claim through lens of the business-judgment rule and concluded that the plaintiffs did not adequately allege bad faith.
Lastly, the court rejected the plaintiffs’ aiding-and-abetting claims against acquirer Attachmate and a minority shareholder of Novell. To prove aiding and abetting against Attachmate, the plaintiffs would have had to prove that Attachmate knew it was receiving confidential information that Party C was not receiving. The amended complaint makes no such allegations. Moreover, the court found that the minority shareholder engaged in an arms-length process, which does not support an aiding-and-abetting claim.
— Lindsay Parker, Cooley LLP, San Diego, CA
December 21, 2012
SEC Issues Wells Notice over Netflix Facebook Post
In December 2012, the Securities and Exchange Commission (SEC) issued a Wells notice to Netflix and its CEO, Reed Hastings, because of a Facebook post. On July 3, Hastings posted on Facebook that “Netflix monthly viewing exceeded 1 billion hours for the first time ever in June.” No press release was issued, nor was an 8-K filed.
The SEC’s concern is that the disclosure was material, but was not issued in a Regulation FD-compliant manner. Regulation FD requires public companies to make full and fair public disclosures of material non-public information.
Hastings, on the other hand, contends that the post was not “material information.” He also contends that the posting should be considered acceptably public because he has over 244,000 subscribers, including many reporters and bloggers.
This is not the first time the SEC has looked at whether website postings can be Regulation FD-complaint. In September 2006, the SEC rejected Sun Microsystems’ CEO’s request to allow him to disclose material nonpublic information on his blog under Regulation FD or, at least, to satisfy Regulation FD’s “widespread dissemination” requirement through disclosures on websites and blogs. In response to the request, the SEC stated that before it could
embrace his suggestion that the “widespread dissemination” requirement of Regulation FD can be satisfied through web disclosure, among the questions that would need to be addressed is whether there exist effective means to guarantee that a corporation uses its website in ways that assure broad non-exclusionary access, and the extent to which a determination that particular methods are effective in that regard depends on the particular facts.
There are a lot of grey areas when it comes to the use of social media for disclosure purposes. The SEC has issued some guidance regarding the use of company websites to make public announcements of material information complaint with Regulation FD. However, many questions still remain.
— Lindsay Parker, Cooley LLP, San Diego, CA
December 12, 2012
Delaware Supreme Court Scolds Chancery Court
The Supreme Court of Delaware issued a stern reprimand to its Chancery Court in Gatz Props., LLC v. Auriga Capital Corp., 2012 Del. LEXIS 577 (Del. Nov. 7, 2012). While ultimately affirming the Chancery Court decision, the Delaware Supreme Court declared that the Chancery Court’s finding that default fiduciary duties do exist under Delaware’s Limited Liability Company Act “must be regarded as dictum without any precedential value.” In a footnote, the court explained that it felt compelled to address the dictum “‘because it could be misinterpreted in future cases as a correct rule of law,’ when in fact the question remains open.”
The supreme court declined to provide any guidance as to whether managers of LLCs are in fact bound by default fiduciary duties whereas the Chancery Court had sought to reconcile Delaware law and provide a clear understanding that fiduciary duties and common-law concepts of fiduciary law will apply absent contractual abolition of the duties. The Supreme Court proceeded to scold the Chancery Court for tackling an issue without having a justiciable controversy before it because the operating agreement of the LLC in question required the LLC manager to act in good faith and there was no reason to go beyond the agreement and opine on the Delaware LLC Act’s statutory structure. The Supreme Court also dispelled the notion of relying on other prior cases, explaining that they were decided on specific circumstances and did not intend to provide guidance as to whether default fiduciary duties do exist under Delaware’s LLC Act. The Supreme Court took the opportunity to remind the judiciary that “the obligation to write judicial opinions on the issues presented is not a license to use those opinions as a platform from which to propagate their individual world views on issues not presented.” The Supreme Court went so far as to cite to the Delaware Judges’ Code of Judicial Conduct, explaining that if Delaware judges “wish to stray” beyond case specific issues or “ruminate” on the “proper direction” of Delaware law, they can resort to “law review articles, the classroom, continuing legal education presentations, and keynote speeches.”
That said, the Supreme Court affirmed the substantive rulings of the Chancery Court, finding that the member-manager of the LLC in question violated the contractual fiduciary duties set forth in the operating agreement and was not entitled to the protection of the exculpatory provisions because he had failed to act in good faith in the management and auction of the LLC-owned golf course. The Supreme Court also affirmed two collateral but very interesting issues in the case that are of interest to corporate litigators. First, the Supreme Court affirmed the finding that the Gatz defendants were appropriately reprimanded by the trial court for mishandling document collection in that the counsel permitted their clients to search for and assemble their own electronic evidence as opposed to counsel playing a more active role. This is a lesson and a warning to counsel concerning best practices when searching for, collecting, and assembling discovery responses. Second, the Supreme Court affirmed the trial court’s imposition of one-half of the legal fees and expenses of the prevailing party on the basis that Gatz acted in bad faith and took positions that were not supported by the record. It will be interesting to see if this case provides a basis for more fee shifting in the face of litigation positions that are determined to be frivolous or even unsupported.
November 30, 2012
Spoliation by In-House Counsel May Result in Criminal Prosecution
Discovery sanctions are never ideal, but criminal prosecution is worse. Recent trends indicate that federal prosecutors may use 18 U.S.C. § 1519 to prosecute in-house counsel who participate in the destruction or concealment of evidence during (or even before) a government investigation. Section 1519 provides as follows:
Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.
To obtain a conviction under this section, federal prosecutors must prove: 1) the defendant knowingly altered, destroyed, mutilated, concealed, covered up, falsified, or made a false entry as to any record, document, or tangible object; 2) in doing so, the defendant intended to impede, obstruct, or influence a government investigation or administration of a matter; and 3) the investigation or administration of a matter falls within the jurisdiction of a federal agency or department. See United States v. Yielding, 657 F.3d 688 (8th Cir. 2011).
For example, this statutory provision was applied in a criminal case against the former vice president and associate general counsel of a pharmaceutical company in United States v. Stevens, 771 F. Supp. 2d 556 (D. Md. 2011). In Stevens, the prosecution alleged that the defendant obstructed a Food and Drug Administration (FDA) investigation by withholding and concealing documents. In her defense, the defendant asserted that she relied in good faith on the advice of counsel when responding to the FDA’s inquiry. The court found that the advice-of-counsel defense negated the specific intent required by 18 U.S.C. § 1519.
Awareness of 18 U.S.C. § 1519 and its requirement of specific intent can help in-house counsel avoid prosecutorial crosshairs. A recent article discussing the implications of 18 U.S.C. § 1519 for corporate counsel and executives explains that routine document-destruction policies, in the absence of any intent to impede an ongoing or impending government investigation, are permissible. Further, implementation of formal policies allowing for the monitoring of routine document destruction by counsel or compliance officers, as well as a policy requiring approval by counsel or compliance officers before routine document destruction, is advisable. Finally, although reliance on the advice of outside counsel can provide a defense to allegations of improper document handling related to a governmental investigation, companies must still employ good faith and good judgment in choosing outside counsel and in following outside counsel’s advice.
— Nicole Salamander, Gordon & Rees LLP, Denver, CO
November 21, 2012
Corporate Leaders Turning to GCs to Identify Risk Before It Happens
According to a new study by consulting firm KPMG, there is a growing trend toward increased integration between in-house legal departments and their companies’ business operations, with general counsel becoming more involved in their companies’ business strategy than in previous years. In particular, senior management are turning to their general counsel to identify risk before it happens. “The role [of general counsel] is moving from one of ‘fire-fighting’ and reacting to events to being more strategic and proactively anticipating risks at an earlier stage.” Thus, the ability to identify future legal and regulatory risks is one of the skills most valued by senior business leaders in their general counsel. The study found that general counsel can hone this skill by developing relationships with other business units to become more commercially and financially aware of the company’s operations. The key is not only understanding the business, but also being able to talk to business leaders on their terms. The areas that are predicted to pose the most risk in the upcoming years are: adjusting to the volume and complexity of regulation, maintaining data security and protection, complying with different regulatory regimes, and protecting the company’s public reputation.
— Lance J. Ream, Gordon & Rees LLP, Denver, CO
November 1, 2012
Court Says No to Social-Media Fishing Expedition
Social media is becoming an ever-increasing subject of litigation discovery, and likely will be the source of disputes during pretrial conferences. In a recent New York case, the Appellate Division, Fourth Department confirmed that the state’s well-settled principles of disclosure are just as applicable to social-media content as they are to any other type of disclosure material, and refused a defendant access to the plaintiff’s social-media content.
In Kregg v. Maldonaso, No. CA 11-02294 (N.Y. App. Div. Sep. 28, 2012), the appellate panel reversed a decision by Erie County trial court that granted defendant motorcycle-manufacturer Suzuki disclosure of the “entire contents” of the plaintiff’s and other social-media accounts. The case stemmed from an accident in which the plaintiff’s son was critically injured while driving a motorcycle manufactured and distributed by Suzuki. After learning that the injured son’s family established and maintained Facebook and MySpace accounts on his behalf, Suziki moved to compel disclosure of the “entire contents” of those and any other social-media accounts related to the injured son. Over the plaintiff’s objection that Suzuki’s demand for such disclosure was irrelevant and burdensome, and that it was a “fishing expedition,” the trial judge granted the motion.
The appellate court unanimously reversed, reasoning that while CPLR 3101(a) allows for full disclosure of all matter material and necessary in the prosecution or defense of an action, a party need not respond to demands that are overbroad. Relying on McMann v. Harleysvill Ins. Co. of N.Y., 78 A.D.3d 1524, 1525 (N.Y. App. Div. 2010), the appellate panel found that Suzuki’s request lacked sufficient facts to demonstrate that any information in the social-media accounts could contradict the plaintiff’s claims or impeach the allegations concerning the diminution of the injured son’s enjoyment of life. The court also concluded that disclosure of social-media content must be narrowly-tailored and relate solely to the claimed injury. The court opted to vacate the entire demand rather than to modify it.
— Zachary G. Newman and Faris Elrabie, Hahn & Hessen LLP New York, NY
October 15, 2012
CA Code to Limit Right to Ask for Access to Personal Social Media
Personal social media such as Facebook, Twitter, and LinkedIn provide a wealth of information about a person’s true extracurricular activities. Photos can reveal illegal or unbecoming conduct. Status updates admit what a person is doing at any given time. Social-media applications even have GPS trackers pinpointing a user’s exact location. These social-media sites have for obvious reasons served as an enticing alternative for employers who wish to engage in background checks and monitor employee conduct.
Well, perhaps no more. Effective January 1, 2013, Labor Code section 980 (AB 1844) will prohibit an employer from requesting a job applicant or employee for access to his or her social media, except in limited circumstances. Section (b) of the new statute provides that an employer may not “require or request” a job applicant or employee to:
(1) disclose a username or password for the purpose of accessing
personal social media;
(2) access personal social media in the presence of the employer; or
(3) divulge any personal social media.
The meaning of this third rule against asking an employee to “divulge any personal social media” is far from clear. Because “divulge” is used in a very general sense, and not with respect to any specific information, it apparently means telling the employer which types of accounts the employee has (e.g. Facebook versus MySpace). Yet legislative history materials, including the California Senate’s analysis, suggest that “divulge” means to disclose specifically the username and password of an account. Until courts interpret the statute more specifically, employers should be careful not to inquire into an employee’s social-media practices altogether.
Despite the above, the new law would not prohibit the following:
Accessing employer-issued electronic devices. The new law defines “social media” so broadly it includes emails and text messages. Legislators carved out an exception for when employers must access personal digital assistants (PDAs) such as Blackberry devices and smart phones, which may be protected by a password known only to the employee. Generally, employees have no privacy rights to employer-issued PDAs and computers.
Requesting the employee to “divulge” for a bona fide investigation. An employer may request that the employee “divulge any personal social media” if it is relevant to a formal investigation. The new law
does not alter an employer's existing rights and obligations to request an employee to divulge personal social media reasonably believed to be relevant to an investigation of allegations of employee misconduct or employee violation of applicable laws and regulations, provided that the social media is used solely for purposes of that investigation or a related proceeding.
Lab. Code § 980(c). Because the definition of the term “divulge” in this context is undefined, it remains unclear whether the employer can request the username and password beyond merely asking what types of accounts the employee has. Until this ambiguity is resolved, employers should err on the side of caution when requesting a username or password during a bona fide investigation.
Befriending? The three prohibitions listed above all contemplate a job applicant or employee taking the affirmative step of giving information or else logging in while the employer overlooks so that the employer can step into the employee’s shoes. As written, the law does not appear to prohibit the employer who has its own account from making a “friend request” to the employee or from asking to join the employee’s network. Similarly, the law does not seem to prohibit the employer from using a third party’s account or a straw-man account to befriend the employee to be able to view the employee’s web pages. Notwithstanding these alternatives, it is advisable to not use a straw-man or third-party account to access information, as this practice could lead to claims of fraud, misrepresentation, and violation of privacy.
The legislature did not provide for any specific penalties for violating this new law. As such, existing law under the Labor Code Private Attorneys General Act would likely allow an aggrieved employee to file a civil lawsuit, to receive a specific penalty amount, and to obtain an attorney-fee award.
Interestingly, the Department of Labor Standards Enforcement has disclaimed any desire or responsibility to investigate or enforce any alleged violations of this new law.
October 10, 2012
Report Explores Why Corporate Clients Fire Outside Counsel
Law firms generally want to keep their clients, regardless of economic conditions. However, law firms can be fired just like any other service provider and may be left wondering why. Acritas, a legal-market research firm based in the United Kingdom, recently issued a report that explores the reasons corporate clients fire their outside counsel. According to the report, top explanations given by in-house attorneys for switching law firms include expense, quality of advice, quality of service, and client relations. Expense and quality were linked, as in-house lawyers stated that paying high bills for unsatisfactory advice or lack of appropriate industry expertise was an impetus for replacing outside legal advisors. Corporate clients also commonly mentioned poor service, such as delay in communications or interpersonal conflict, as grounds for severing the lawyer-client relationship.
Aside from these more obvious reasons for firing a law firm, interruptions in client relationships provided another basis for finding new outside counsel. The report indicated that law firms may drop the ball when the corporate client’s lawyer retires or changes firms. Making an effort to transition the client to another lawyer within the firm, and following up on that effort through communicating with in-house attorneys can go a long way to ensuring that the client remains with the firm. Although the report covered responses from big-name companies dealing with well-known law firms, the good market sense of providing high-quality service at competitive prices and maintaining key client relationships applies to any size law firm desiring to maintain its client base.
— Nicole Salamander, Gordon & Rees LLP, Denver, CO
October 2, 2012
GC of Microsoft Supports Increased Diversity in the Legal Profession
Bradley Smith, Microsoft Corp.’s general counsel and Senior vice president of legal and corporate affairs, chairs the company’s Diversity Pipeline Committee and is a member of the Leadership Council on Legal Diversity. In a recent interview, Smith discussed the need for increased diversity in the legal profession and what his company is doing to foster it.
According to Smith, it is vital for the legal profession to reflect his company’s diverse customer base to effectively serve its needs. Not only is Microsoft increasing diversity within its own legal department, but also it has instituted policies to promote diversity within the firms it works with. For example, if a firm makes quantifiable gains in either overall diversity or the number of diverse attorneys working on Microsoft’s matters, the company pays its outside counsel a two-percent diversity bonus. In addition to increasing overall diversity, Smith also focuses on increasing diversity in positions of leadership. He believes that collaboration between clients and firms is important. Thus, Microsoft participates in programs that allow its diverse in-house attorneys to mentor young associates at its outside law firms and work together on pro bono matters.
Like other GCs, Smith relies on data provided by his outside counsel to measure progress. Diversity now plays an important role when making hiring—and firing—decisions at many companies. “[T]he truth is, if you put your money where your mouth is, people know what you care about, and law firms tend to do a good job of paying attention to what their clients care about.”
Law.com has more on this story.
— Lance J. Ream, Gordon & Rees LLP, Denver, CO
Apple v. Samsung Addresses Spoliation of ESI
Apple v. Samsung Electronics Co, LTD, Case No. C-11-1846 LHK (PSG), Slip Op. (N.D. Cal July 25, 2012) provides guidance on how to protect potentially relevant electronically stored information (ESI) from spoliation. In this high-profile Northern District of California case, Apple gave Samsung initial notice of its concern regarding potential infringement of Apple’s patents in August 2010. At that time, Samsung was using an email program in which users’ emails were deleted every two weeks unless they were affirmatively saved. After receiving initial notice of Apple’s concerns, Samsung sent out a litigation-hold notice to 27 of its employees directing them preserve all documents that might be relevant. Samsung did not take any other actions relating to the potential lawsuit until the case was actually filed in April 2011, at which time it sent out litigation-hold notices to approximately 2,700 employees and sent counsel to Korea to help educate employees about what they needed to preserve.
Samsung argued that its preservation duty did not arise until Apple filed its complaint in April 2011. However, this position was difficult for Samsung to support given that the litigation hold sent by the company to 27 employees in August 2010 stated that there was "a reasonable likelihood of future patent litigation."
Magistrate Judge Paul Grewal held that Samsung’s preservation duty arose in August 2010 when Apple notified it of possible patent infringement. Judge Grewal pointed out that Samsung failed to meet its preservation duty because: 1) It did not stop the practice of deleting emails every two weeks once it received Apple’s August 2010 letter; 2) the number of litigation-hold notices sent to Samsung employees after Apple’s August 2010 letter was inadequate; and 3) the company failed to monitor the preservation efforts made by its employees to ensure that they were complying with the litigation hold.
The court had the authority to sanction or dismiss claims made by Samsung, but ultimately Judge Grewal ordered that the jury receive a strongly worded adverse instruction at trial stating that Samsung failed to preserve evidence after its duty to preserve arose, and that the jury should presume that Apple has met its burden of proving that the lost evidence was favorable to Apple. The day after Judge Grewal's ruling, Samsung filed its own motion for an adverse-inference jury instruction against Apple on the grounds that Apple failed to issue any litigation-hold notices until April 2011. Judge Lucy Koh, the federal judge presiding over trial, ultimately granted Samsung's request for an adverse-inference instruction against Apple and decided that the court would provide the jury with the same adverse-inference instruction about both companies. Apple and Samsung eventually agreed that neither party would use the adverse-inference jury instruction at trial.
Judge Grewal’s and Judge Koh's rulings that both Samsung and Apple failed to preserve evidence and their decision to order a negative inference instruction to the jury reveal the importance of preserving evidence at the first indication of possible litigation. The decisions made by the judges also suggest that companies need to educate their employees about the litigation hold once it is made, and they must also be vigilant in monitoring their employees to confirm that they are following the directions that are part of the hold.
August 23, 2012
NLRB Cautions Employers Against Unlawful Social Media Policies
The National Labor Relations Board (NLRB) recently published a report on employer social-media policies that focused on conduct employers should avoid in regulating employee activity on social-media sites such as Facebook and Twitter. The Operations Management Memo provides a detailed review of seven cases involving such policies—six in which the policies were found to be lawful and one in which they were not. According to the NLRB, social-media policies are unlawful when they interfere with employees’ rights under the National Labor Relations Act (NLRA), which protects employees’ rights to engage in concerted activity, including discussing and sharing information regarding their wages and working conditions with coworkers. In drafting policies, employers are cautioned against overbroad and ambiguous rules that employees could interpret to prohibit concerted activity. The NLRB emphasized that policies that “would reasonably tend to chill” concerted activity are unlawful. Employers should thus provide specific examples of social activities that they seek to prohibit and provide “limiting language or context that would clarify to employees that the rule does not restrict” their rights under the NLRA.
For example, a policy prohibiting employees from “releas[ing] confidential guest, team member or company information” is unlawful because it “would reasonably be interpreted as prohibiting employees from discussing and disclosing information regarding their own conditions of employment. . . .” Furthermore, a policy that asks employees to be sure that their posts “are completely accurate and not misleading and that they do not reveal non-public company information on any public site” is unlawful because it uses overbroad terms, would reasonably be interpreted to apply to discussions about the employer’s labor policies, and does not provide any guidance through specific examples. Additional examples are discussed in the report.
The NLRB hopes that this report, “with its specific examples of various employer policies and rules, will provide additional guidance” to employers reviewing current social-media policies or implementing new ones.
—Patricia Astorga, Weil, Gotshal ∓ Manges LLP, New York, NY
Recent Decision Sheds Light on Termination for Insubordination
Most cases define insubordination as a refusal by an employee to work as directed by someone in authority. In some instances, the employee has a right to refuse to follow an order that requires him or her to act illegally or unethically. However, in general, failure to require employees to work as directed has dire consequences for an employer. A lack of discipline and respect in the workplace can be a source of aggravation for coworkers and supervisors alike. In Paratransit, Inc. v. Unemployment Insurance Appeals Board (Medeiros), the California Court of Appeal recently announced that an employee who refuses to obey a lawful order of someone in authority is guilty of misconduct and willful or wanton disregard of the employer's interests such that the employee is disqualified from unemployment benefits pursuant to section 1256 of the Unemployment Insurance Code.
In Paratransit, the employer and the employee's union were parties to a collective bargaining agreement that required that
All disciplinary notices must be signed by a Vehicle Operator when presented to him or her provided that the notice states that by signing, the Vehicle Operator is only acknowledging receipt of said notice and is not admitting to any fault or to the truth of any statement in the notice.
The employee, a vehicle operator, was the subject of a passenger complaint. After a full investigation, the employer called the employee to a meeting and presented him with a written disciplinary notice. The employee, acting under a belief that his union president had instructed all members never to sign anything without a union representative present, refused to sign the notice and was terminated. The employee applied for unemployment-insurance benefits, which were originally denied because the Employment Development Department and the California Unemployment Insurance Appeals Board administrative-law judge found that he was discharged for "misconduct" and thus disqualified from receiving unemployment under section 1256 of the Unemployment Insurance Code.
The court ultimately held that the employee was terminated for insubordination under section 2856 of the Labor Code, and thus disqualified from unemployment-insurance benefits. It found that the employee's refusal of the employer's request to sign the disciplinary notice constituted an unjustified refusal to comply with a lawful and reasonable order.
Although arising in the context of a unionized employer, the Paratransit decision is not limited to those situations in which a collective bargaining agreement requires members of a union be present to sign disciplinary notices. Indeed, the court of appeal pointed out that the lower court and the collective bargaining agreement were in sync on this issue. Consequently, employee handbooks should make it clear that an employee must provide written acknowledgment of a receipt of a disciplinary notice and that refusal to comply with a legitimate and legal employer directive is grounds for termination. Supervisors and managers should be aware that when a legitimate, clear, and concise directive is given to an employee, it should be complied with. Disciplinary notices, however, should always clarify that, by signing the document, the employee is confirming its receipt and not endorsing its content.
A lack of compliance with lawful directives from any employee undermines the employer's control of the workplace and damages the work environment for everyone. On the other hand, managers and supervisors should also be warned that attempts to have an employee acknowledge certain facts during an investigation or provide specific factual information may not be protected by the same set of policies. Encouraging frankness of employees should be the goal in most workplaces. A lack of frankness undermines the trust relationship that is necessary to assure a truly hospitable, productive, and secure workplace.
Similarly, directives that are given in an informal or vague fashion may not be accorded the same levels of enforcement. Managers and supervisors should secure compliance through usual human-resources procedures including, if necessary, discipline sanctioned by the employer's handbook or policies and procedures. Raising of voices, use of profanity, and physical intimidation are not appropriate in the workplace. Nothing damages a workplace faster than screaming, intimidation, or physical touching of employees in anger. Every employee is entitled to a secure and hospitable personal work space. Employees should generally be allowed to perform without significant interference. Nevertheless, lack of performance or attention to detail, or failure to follow lawful directives, are all work behaviors that industrial psychiatrists believe contribute to damaging employee satisfaction and morale.
June 26, 2012
Navigating the Social-Media-Policy Minefield
Employers looking to implement policies governing the use of social media by employees in the workplace will have to devise policies that do not conflict with the National Labor Relations Act (NLRA), which may be a challenge. The National Labor Relations Board (NLRB), the agency charged with enforcing the NLRA, recently issued an opinion that warns employers about improper use of social-media policies, while also providing helpful guidance for employers looking to implement such policies.
The NLRA protects employees’ right to discuss and share information regarding the terms and conditions of their employment, even in non-unionized settings, which is conduct referred to as “concerted activity.” Any employer rule or policy that interferes with employees’ right to engage in a concerted activity, such as discussing wages and working conditions with coworkers, will be considered unlawful under the NLRA. If an employer actually disciplines an employee for violating an unlawful policy that obstructs a concerted activity, the employer may be subject to liability for unfair labor practices.
This protection raises complicated issues in the context of social-media policies. The very nature of social media is that it allows individuals to communicate and spread information to a wide audience instantaneously, which often can become a permanent fixture on the Internet. As a result, employers have legitimate concerns regarding how employees use social media, particularly with respect to the disclosure of confidential information, the portrayal of the company, and the treatment of coworkers.
According to the NLRB, a social-media policy that could reasonably be construed to “chill” employees in the exercise of their right to engage in concerted activities may be found unlawful. In preparing a policy, the NLRB cautions employers against framing overbroad and ambiguous social-media policies because employees could interpret them as including and, thus, prohibiting lawful concerted activity. Therefore, it is imperative that employers specifically identify and provide examples of the conduct they seek to limit to reduce any risk of confusion.
For example, a social-media policy that prohibits the disclosure of “conditional information,” without identifying the specific information, could be found unlawful because employees might construe the language as restricting the disclosure of information about their employment, such as wages. The policy should define and specify the scope of confidential information, such as information regarding company reports, systems, technology, and strategy.
Consider, also, a policy that restricts employees from expressing their personal opinions and dissatisfaction regarding the workplace, or prohibits “inappropriate posts” regarding coworkers and management. Such restrictions could also be viewed as curbing protected activities. The policy would need to qualify the restricted conduct, such as prohibiting posts that include discriminatory, harassing, and threatening language, or posts that contribute to a hostile work environment based on a protected category. Similarly, a policy that requires employees to be “respectful” when on social media should specifically prohibit conduct that is malicious, obscene, or threatening. The policy could require employees to show proper respect for the employer’s intellectual property. The policy could also prohibit employees from making posts as statement of policy of the employer or on behalf of the employer.
While the NLRB provides several case studies in the recent opinion that provide specific guidance depending on the content of the social-media policy, the bottom line is that because the NLRB is rigorously scrutinizing employers’ social-media policies, employers should review existing policies to ensure compliance and be aware of the NLRB’s concerns when preparing any new social-media policies.
Second Circuit Criticizes Lack of Deference to SEC Settlement Decision
The Second Circuit’s recent decision in Securities & Exchange Commission v. Citigroup Global Markets, Inc., 2012 WL 851807, --- F.3d --- (2d Cir. Mar 15, 2012) highlights the relevance of Chevron-style deference to policy judgments made by administrative agencies in choosing to settle enforcement actions.
The case arose from a proposed $285 million consent judgment in an SEC enforcement action regarding Citigroup’s allegedly negligent misrepresentations in marketing of collateralized debt obligations (CDOs). The district court refused to approve the consent judgment, primarily because the settlement did not require an admission of liability by Citigroup. U.S. Secs. and Exchange Comm’n v. Citigroup Global Mkts. Inc., No. 11 Civ 7387, 2011 WL 5903733, at *6 (S.D.N.Y. Nov. 28, 2011). Without establishment of the underlying facts either through a trial or an admission of liability, the district court opined, it was impossible to assess the fairness of the settlement. The decision therefore challenged the validity of the SEC’s longstanding practice of allowing settlement without any admission of guilt by defendants.
The case came before the Second Circuit’s motion panel by way of the SEC’s motion to stay the district-court proceedings. The court held that the SEC and Citigroup were likely to succeed in overturning the district court’s rejection of the settlement and consequently ordered the stay. In doing so, the court thoroughly chastised the district-court judge for his incursion into matters of agency discretion.
Though the Second Circuit found several problems with the district court’s reasoning, it was most concerned that the district court had not deferred “to the S.E.C.’s judgment on wholly discretionary matters of policy,” including the determination of whether the settlement would advance the public interest, and instead “imposed what it considered to be the best policy to enforce the securities laws.” The court reasoned that an agency’s decision to settle includes decisions about resource allocation and probable litigation outcome, which are generally not susceptible to judicial review under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)and Heckler v. Chaney, 470 U.S. 821 (1985). Accordingly, while the court declined to hold that a court can never review an agency’s settlement decision, the court did conclude that “the scope of a court’s authority to second-guess an agency’s discretionary and policy-based decision to settle is at best minimal.”
The Second Circuit also questioned the district court’s view that the public interest could not be advanced by a “neither admit nor deny” settlement. The court “saw no basis to doubt” that the SEC considered the public interest in deciding to settle without forcing Citigroup to admit liability, especially in light of the fact that settlement may not have been possible without such a compromise.
Although the Second Circuit will not hear oral argument on the meritsof the settlement until later this year,the court's order on the stay motion strongly indicates that the district court’s decision is likely to be overturned. More broadly, the Second Circuit’s decision evinces a hands-off approach to settlement decisions by administrative agencies, granting them potentially limitless discretion to determine what litigation outcomes will best serve the public interest. Though this approach has been criticized for providing too little oversight, it can be expected to work in the favor of companies involved in agency enforcement proceedings in the Second Circuit. A high level of deference will reduce defense costs and provide an increased level of certainty to litigants entering settlement negotiations with various agencies.
—Katherine C. Wax, Perkins Coie LLP, Seattle, WA
Northrop Grumman Wins Committee's Pro Bono Award
Northrop Grumman Corp. is the 2012 winner of the Corporate Counsel Committee’s Annual Pro Bono Award. Northrop Grumman is a global corporation that is considered a leader in defense technology, providing critical technology to our armed services, including information technology, electronic systems, and technical services. Their commitment to the delivery of pro bono services benefits the members of our armed forces who have sacrificed quality of life serving our country. These beneficiaries of Northrop Grumman’s pro bono program are our silent heroes.
The delivery of pro bono services is more important today than it has been for many years, and challenges faced by members of our community are more complicated and wide-ranging. Economic factors and emerging technology have combined to create an environment for individuals who do not have the resources to get help with their personal and legal needs. The traditional role of a lawyer as pro bono counsel for someone involved in litigation has expanded to include providing advice and assistance ranging from how to identify and participate in assistance programs to how to apply for jobs. Corporate law departments face professional limitations when engaging in private litigation and are often challenged to find new and innovative ways to allow their members to provide pro bono services in a manner that does not interfere with their professional responsibilities as in-house counsel.
The Corporate Counsel Pro Bono Committee recognizes that there are many ways in which a corporate law department may perform pro bono legal services. Among the selection factors considered by the committee are:
- whether the law department’s program is a formal program
- whether there is a written pro bono policy adopted by corporate leadership
- whether pro bono work is evaluated as a part of the regular performance review of in-house lawyers
- whether the pro bono program has its own budget
- whether the program enjoys high participation
- would learning about the program inspire others to start pro bono programs
- whether the pro bono program has a lasting impact on the community
The Operation IMPACT (Injured Military Pursuing Assisted Career Transition) program started by Northrop Grumman scored high marks on all factors. The program began in 2005 and identifies opportunities for wounded veterans to gain meaningful post-military employment. The program meets with external organizations to inform them about the program and to solicit candidates. It provides accommodations and training to help the veterans succeed in their post-military employment and facilitates post-hiring support for veterans and their families. Northrop Grumman has contacted more than 400 wounded veterans and hired more than 50 veterans through Operation IMPACT. The program has been identified as a “best practice” by the U.S. Department of Labor and the Department of Veteran Affairs.
In connection with Operation IMPACT, Northrop Grumman’s Law Department has solicited and interviewed candidates for departmental positions. One of the individuals hired is Amanda Marin-Aceveto, whose fiancé (and now husband) Javier Torres returned home from a tour in Afghanistan. He suffered wounds in an ambush that resulted in him being told by doctors that it would be unlikely he would ever walk again. Through Operation IMPACT, Mrs. Marin, who had no formal legal experience, became employed by Northrop Grumman’s Office of General Counsel as a paralegal.
In 2009, Northrop Grumman expanded its commitment to public service by creating the “Network of Champions.” Through this, Northrop Grumman identifies and works with other companies who have a similar interest in assisting wounded veterans by creating job opportunities for them and their families. Over 65 companies have joined the network since it was started.
Attorneys in Northrop Grumman’s legal department also participate in the Washington Metro Chapter of the American Corporate Counsel Association’s “Street Law” program. The program is a pipeline that works with high-school students to promote knowledge of the legal system, the democratic process, and the rule of law. Volunteers teach classes at disadvantaged high schools and work with students on mock trials.
Northrop Grumman’s attorneys also participate in a number of other formal and informal pro bono programs around the country, including the District of Columbia Bar Association’s Pro Bono Program, which provides free legal services for indigent clients who are at risk of losing their homes or who are facing other legal challenges.
The Corporate Counsel Committee is pleased to recognize Northrop Grumman’s Law Department for its dedicated delivery of pro bono services to benefit our nation’s veterans, our nation’s youth, and our indigent citizens who need legal services.
—Charles E. Griffin, Butler, Snow, O'Mara, Stevens & Cannada, PLLC, Ridgeland, MS
April 30, 2012
Ninth Circuit Rejects Selective Waivers of Attorney-Client Privilege
In a recent opinion, the Ninth Circuit became the latest U.S. Court of Appeals to reject the argument that a party may selectively waive the attorney-client privilege. As a matter of first impression in the Ninth Circuit, the unanimous panel in In re Pacific Pictures Corp., No. 11-71844, 2012 WL 1293534, --- F.3d --- (9th Cir. Apr. 17, 2012), joined eight other circuits in declining to adopt the so-called selective waiver of the privilege.
The case involved a longstanding dispute between D.C. Comics and the creators of the character that eventually became Superman, and their heirs, over the intellectual-property rights to Superman. During a joint venture between the heirs and Marc Toberoff, a Hollywood producer and attorney, Toberoff hired another lawyer, David Michaels, to work for another of Toberoff’s companies. Michaels later took documents regarding the heirs and sent them to D.C. Comics.
In 2007, D.C. Comics sued Toberoff and the heirs, among others, alleging that Toberoff had interfered with the contractual relationship between D.C. Comics and the heirs. Shortly after that suit was filed, Toberoff asked the U.S. Attorney’s Office to investigate Michaels. As a part of that investigation, Toberoff voluntarily complied with a subpoena for documents, making no redactions before producing the documents.
D.C. Comics, in its suit, sought to discover the documents Toberoff had turned over to the U.S. Attorneys, arguing that his disclosure had waived any attorney-client privilege that might have existed. The magistrate judge agreed but stayed his order pending review. After the district court declined to review the order, the defendants sought a writ of mandamus from the Ninth Circuit.
On appeal, the court noted that the Ninth Circuit had previously declined to consider the question of whether a party could selectively waive the attorney-client privilege. But, the court observed, aside from the Eight Circuit’s decision in Diversified Industries, Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1978) (en banc), every other circuit court considering the issue since—the Tenth, Seventh, Sixth, First, Federal, Second, Third, and Fourth Circuits—had rejected the selective-waiver argument.
The Ninth Circuit officially joined those other circuits in Pacific Pictures. In light of the general principle that courts should construe the privilege narrowly, the court noted that allowing selective waivers would “‘not serve the purpose of encouraging full disclosure to one’s attorney in order to obtain informed legal assistance; it merely encourages voluntary disclosure to government agencies, thereby extending the privilege beyond its intended purpose.’” (Quoting Westinghouse Elec. Corp. v. Republic of Philippines, 951 F.2d 1414, 1425 (3d Cir. 1988)). The court also noted that Congress had, on several occasions, declined to adopt a theory of selective waiver or a new privilege for disclosures to the government.
The court also rejected the defendants’ other arguments against discovering the purportedly privileged documents that Toberoff had turned over to the U.S. Attorneys. Of note, the court concluded that Toberoff’s confidentiality agreement with the U.S. Attorneys did not protect the documents because, again, “Congress has declined to adopt even this limited form of selective waiver.” In addition, the court found that the “common interest” exception to waivers of the privilege did not apply simply because Toberoff was the victim of the crime being investigated by the U.S. Attorneys. Finally, the court concluded that Toberoff’s response to the subpoena was not an “involuntary disclosure” (and thus, potentially, not a waiver of the privilege) because Toberoff both “solicited the subpoena” and chose not to redact the documents.
In sum, the Ninth Circuit became the latest in a near-unanimous slate of circuit courts to conclude that a party who discloses attorney-client communications in one context—even for a government investigation—risks destroying the privileged nature of those communications in subsequent litigation.
—Wade Carr, SNR Denton US LLP, Kansas City, MO
March 30, 2012
ACC Census Reveals Trends among Corporate Counsel
Among the highlights, in-house counsel report handling more issues internally, including litigation. Their specialties have also changed to reflect the times. In-house counsel are more likely to specialize in regulatory matters, government lobbying, and privacy issues than in the past. The respondents also report gaining more prestige within their companies and working closer with their corporate executives. Although in-house counsel are earning more than in previous years, the ACC’s report indicates that there are fewer opportunities for promotion. Still, job satisfaction remains high.
Keywords: litigation, corporate counsel, ACC, census report
— Lance J. Ream, Gordon & Rees LLP, Denver, CO
Third Circuit Narrowly Construes Discovery Cost-Shifting Statute
The Third Circuit recently issued an opinion to provide “definitive guidance” to district courts regarding the electronic-discovery charges taxable to an opposing party under 28 U.S.C. § 1920(4). In Race Tires America, Inc. v. Hoosier Racing Tire Corp., No. 11-2316, 2012 WL 887593, --- F.3d --- (3d. Cir. Mar. 16, 2012), the court vacated most of the district court’s $365,000 award of charges relating to vendor electronic-discovery fees. The court concluded that only costs regarding the “scanning of hard copy documents, the conversion of native files to TIFF, and the transfer of VHS tapes to DVD involved ‘copying’” and, therefore, only these charges were recoverable under the express terms of the statute.
After granting the defendant’s motion for summary judgment, the district court considered the defendant’s bill of costs and concluded that the entire amounts charged by the electronic discovery vendors were taxable. These charges included activities involving: (1) the preservation and collection of electronically stored information (ESI); (2) processing the collected ESI; (3) keyword searching; (4) culling privileged material; (5) scanning and TIFF conversion; (6) optical-character-recognition conversion; and (7) conversion of videos from VHS to DVD format. The district court determined that the steps the vendors performed were the “electronic equivalent of exemplification and copying” and, therefore, were taxable to the opposing party. The district court went on to conclude that “the requirements and expertise necessary for production were an indispensible part of the discovery process” and that these charges were “necessarily incurred and reasonable” expenses.
On appeal, the Third Circuit considered whether the costs associated with electronic discovery were taxable to the opposing party as either “exemplification” or “the making of copies of any materials” under 28 U.S.C. § 1920(4). As a question of statutory construction, the court reviewed the district court’s holding de novo.
The court determined that none of the electronic-discovery charges constituted “exemplification” because the vendor’s work did not produce illustrative evidence or authenticate public records. Nor did the majority of charges fall under the “making of copies.” Of the activities undertaken by the vendor, only the conversion of native files to TIFF, the scanning of documents to create digital images, and the conversion of VHS tapes to DVDs could be considered copying. The court refused to allow the costs associated with electronic discovery beyond that of copying materials. That the discovery services provided were highly technical and beyond the expertise of the attorneys did not impact whether the services were taxable under the statute. The court noted that unless parties elect to obtain a cost-shifting protective order, the courts are limited to shifting only the costs explicitly enumerated in 28 U.S.C. § 1920.
The court affirmed the taxation of approximately $30,000 in charges relating to scanning, and TIFF and DVD conversion without considering whether these charges were necessary or reasonable, finding that the question of the reasonable amount of costs taxable as copies “necessarily obtained” for the use in the case falls within the discretion of the district court.
While the opinion clarifies the costs chargeable in the Third Circuit, the extent to which electronic discovery is taxable to the opposing party is still unsettled in other jurisdictions and litigants may find many courts continuing to take a more liberal view of the charges included under 28 U.S.C. § 1920.
Keywords: litigation, corporate counsel, discovery costs, e-discovery, Third Circuit
March 29, 2012
Delaware Chancery Court Stays Tag-Along Derivative Action
The Delaware Court of Chancery recently granted the defendants’ motion to stay a shareholder derivative action in favor of a securities class action arising from the same underlying facts. In Brenner v. Albrecht, Case No. 6514-VCP (Del. Ch. Jan. 27, 2012), Vice Chancellor Parsons ruled that “practical considerations ma[de] simultaneous prosecution of both cases unduly complicated, inefficient, and unnecessary.”
In November 2009, the company at issue, SunPower Corp., publicly disclosed that it was conducting an internal investigation into “unsubstantiated accounting entries.” This spawned numerous different lawsuits, including a securities class action in the Northern District of California and five different derivative actions in California state and federal court. The plaintiffs in the derivative actions agreed to stay the proceedings pending, at the earliest, resolution of the motion to dismiss the securities class action.
In March 2010, SunPower announced the results of its internal investigation—Philippines-based personnel had understated actual expenses to conform to internal expense projections, which caused SunPower to understate its cost of goods sold. As a result, SunPower had to restate its financial results for all of fiscal year 2008 and the first three quarters of fiscal year 2009. Finding “a cogent and compelling” inference of scienter, U.S. District Judge Richard G. Seeborg subsequently denied a motion to dismiss the amended complaint in the securities class action. This paved the way for the securities class action to move forward into discovery.
Meanwhile, in May 2011, the Brenner plaintiff filed a derivative action in Delaware Chancery Court. The plaintiff made an 8 Del. C. § 220 “books and records” request prior to filing this derivative action, and as a result, he had access to confidential SunPower documents. These confidential documents allegedly revealed that SunPower incurred $8 million in restatement and investigation expenses prior to commencement of the securities class action.
The defendants subsequently moved to stay the Brenner derivative action in favor of the securities class action, arguing that proceeding with the derivative action could prejudice SunPower’s defense of the securities class action, and that the relief sought in the derivative action—indemnification for expenses and damages that SunPower incurs from the restatement—was largely contingent on the outcome of the securities class action.
Vice Chancellor Parsons agreed with the defendants and granted the motion to stay. In so holding, Vice Chancellor Parsons stressed the possible conflicts that could result from allowing both the Brenner derivative action and the securities class action to proceed simultaneously:
SunPower could pursue a litigation strategy of either cross-claiming that its directors and officers are the primary wrongdoers who should indemnify it, as is asserted in this derivative action, or collaborating with its directors and officers and denying that any wrongdoing occurred, as SunPower is doing in the Securities Class Action. Either litigation strategy would appear reasonable, but it is not practicable for two actors—Brenner and SunPower’s board—to pursue divergent strategies in two simultaneous actions on behalf of the same entity.
Vice Chancellor Parsons also emphasized that adverse rulings in Brenner could estop SunPower from advancing contrary assertions on its own behalf in the securities class action, and that even if this did not come to bear, at the very least, there was a risk of inconsistent rulings. Moreover, although a portion of the derivative claim in Brenner was ripe for adjudication—the $8 million in restatement and investigation costs—the full extent of damages would not be known until resolution of the securities class action. Vice Chancellor Parsons therefore reasoned that the securities class action should proceed first. Because potential prejudice to the Brenner plaintiff—delayed recovery and passage of time as an impairment to the discovery process—did not outweigh the strong practical considerations for staying the derivative action, Vice Chancellor Parsons granted the motion to stay.
There are two important takeaways from this case. First, Brenner should be used as a strong pressure point to get derivative plaintiff’s counsel to voluntarily agree to a stay while a securities class action is pending. Second, Brenner is the clearest articulation to date of the risks of allowing tag-along derivative actions to proceed while securities class actions are pending against a company and its officers and directors.
Keywords: litigation, corporate counsel, derivative litigation, Delaware Chancery Court, Vice Chancellor Parsons, stay of proceedings
— Catherine O’Connor, Cooley LLP, San Diego, CA
February 29, 2012
Judge Issues Order Approving Computer-Assisted E-Discovery
Last week, Magistrate Judge Andrew Peck of the U.S. District Court for the Southern District of New York proclaimed that “[c]omputer-assisted review now can be considered judicially-approved for use in appropriate cases.” In Da Silva Moore, et. al., v. Publicis Groupe & MSl Group, No. 11 Civ. 1279 (ALC) (AJP), Judge Peck affirmed the parties’ e-discovery review plan, which will use predictive coding by a computer to cull down the large universe of electronic documents in the case. Judge Peck (who had previously authored an article on computer-assisted discovery review) also gave guidance and recommendations for practitioners grappling with the issue in the future.
Judge Peck emphasized the importance of an appropriate process in developing a computer-assisted discovery-review plan. The parties in Da Silva Moore agreed to a protocol that will begin with the creation of a “seed set” of documents that will “train” the coding software. Senior attorneys will review a random sample of documents from the entire email set for relevance and the computer will use the properties of those documents to code other documents. A portion of the seed set will also be created by “judgmental sampling”—attorneys will run keyword searches of all the documents (using keywords created by both parties) and code “top hits” from those searches. Crucially, all of the non-privileged documents reviewed to create the seed set, even if coded irrelevant, will be turned over to the requesting party to make the process as transparent as possible.
The parties also agreed to certain quality-control testing after the seed set is created. The producing party will review the documents produced by the coding software in iterative rounds to confirm that the computer is returning relevant documents. Attorneys will also review a random sample of documents deemed irrelevant to make sure that highly relevant documents are not being discarded. Again, the requesting party will be allowed to see all of the non-privileged documents, relevant or irrelevant, that the producing party reviews at this stage.
Judge Peck explained the factors that he evaluated in approving computer-assisted review in the case:
[T]he Court determined that the use of predictive coding was appropriate considering: (1) the parties’ agreement, (2) the vast amount of ESI to be reviewed (over three million documents), (3) the superiority of computer-assisted review to the available alternatives (i.e., linear manual review or keyword searches), (4) the need for cost effectiveness and proportionality under Rule 26(b)(2)(C), and (5) the transparent process proposed by [the defendant].
Judge Peck also offered his opinion that Federal Rule of Evidence 702 and Daubert would not apply to the process of computer-assisted discovery review. The admissibility of each document at trial would “depend upon the email itself . . . [and] not how it was found during discovery.”
The court offered several “lessons for the future” for practitioners considering computer-assisted review:
• Only after computer-review software has been “trained” and the results have been quality-control tested will a court likely be able to determine when review and production can stop, because only then “can the parties and the Court see where there is a clear drop off from highly relevant to marginally relevant to not likely to be relevant documents.”
• Parties can control discovery costs by “staging” discovery to begin with the most-likely-to-be-relevant sources, while leaving the requesting party an opportunity to seek more discovery after conclusion of the first-stage review.
• Parties should engage in “strategic proactive disclosure of information,” sharing information about who the key custodians are and exchanging proposals on how to search for requested documents.
• Counsel should be prepared to explain complicated e-discovery concepts in an easily understandable way, and should even consider having their e-discovery vendor present at court conferences where e-discovery issues are discussed.
In his closing remarks, Judge Peck offered a takeaway for practitioners: “computer-assisted review is an available tool and should be seriously considered for use in large-data volume cases where it may save the producing party (or both parties) significant amounts of legal fees in document review.” While acknowledging that computer-assisted review “is not a magic, Staples-Easy-Button, solution appropriate for all cases,” Judge Peck’s ruling provides a template and needed guidance for attorneys looking to blaze the trail with this exciting (and now judicially sanctioned) technology.
Keywords: e-discovery, document review, computer-assisted review, Magistrate Judge Andrew Peck
— Shannon Sorrells, Cooley LLP, San Diego, CA
February 7, 2012
"Big Four" Firm Denied Request to Limit Preservation Obligations
The U.S. District Court for the Southern District of New York recently issued a stirring rebuke of “Big Four” accounting firm KPMG’s request for a less intense document-preservation obligation. In Pippins v. KPMG LLP, Case No. 11-cv-00377 (CM) (JLC) (S.D.N.Y. Feb. 3, 2012), Judge Colleen McMahon affirmed Magistrate Judge James Cott’s order requiring KPMG to preserve all hard drives for thousands of employees who may be putative class members in an overtime-wage dispute.
In Pippins, plaintiffs were employed by KPMG as Audit Associates or Audit Associate Seconds (collectively “Audit Associates”) in six different states. The plaintiffs alleged that KPMG willfully misclassified Audit Associates as exempt employees and thereby improperly denied them overtime wages. The plaintiffs also alleged that KPMG failed to keep accurate records detailing the amount of time each Audit Associate worked. The plaintiffs brought an action pursuant to both the Fair Labor Standards Act and the New York Labor Law. KPMG maintains that plaintiffs fall under the administrative and professional exemptions to both laws and therefore are not entitled to overtime wages.
In August 2011, while a discovery stay was in place pending a class-certification ruling, KPMG filed a motion for a protective order to limit the scope of its document-preservation obligations. Specifically, instead of preserving computer hard drives for thousands of former employees who may have fallen within the proposed class, KPMG sought a protective order requiring it to preserve only “a random sample of 100 former Audit Associates’ hard drives from among those already preserved in the course of this and other litigations.” KPMG claimed that the burden of preserving the thousands of hard drives at a cost of over $1,500,000 was disproportionate to the potential benefit.
In October 2011, Magistrate Cott denied KPMG’s motion. Citing Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 217–18 (S.D.N.Y. 2003), he found that the former employees’ hard drives were relevant, non-duplicative, and created by or for “key players” in the litigation. Magistrate Judge Cott’s order noted that KPMG’s “ongoing burden is self-inflicted to a large extent,” and highlighted KPMG’s reluctance to work with plaintiffs to generate a reasonable, less burdensome method of sampling the employees’ hard drives.
In affirming Magistrate Judge Cott’s order, Judge McMahon noted at the outset that this dispute could have been avoided had the parties simply brought the issue to her attention:
Neither side bothered to ask me whether, in my opinion, the stay prevented KPMG from producing any hard drives for inspection, so that negotiations over how to carry out a procedure that both sides agreed would be beneficial (sampling) could proceed in a meaningful way. Had I been contacted, I would have immediately ordered KPMG to produce a small number of hard drives so that Plaintifffs’ counsel could peruse them, and that would have been the end of the matter.
Judge McMahon next criticized KPMG’s actions as “inappropriately us[ing] the discovery stay as a shield:”
Frankly, the only things that were unreasonable were: (1) KPMG’s refusal to turn over so much as a single hard drive so its contents could be examined; and (2) its refusal to do what was necessary in order to engage in good faith negotiations over the scope of preservation with Plaintiffs’ counsel . . . It smacks of chutzpah (no definition required) to argue that the Magistrate failed to balance the costs and benefits of preservation when KPMG refused to cooperate with that analysis by providing the very item that would, if examined, demonstrate whether there was any benefit at all to preservation.
Judge McMahon therefore ordered KPMG to preserve all hard drives for the former Audit Associates “without exception” until the parties come to an agreement regarding a sampling methodology or until KPMG abandons its argument that certain class members were exempt from overtime wages because of their particular job duties.
There are two important takeaways from Judge McMahon’s decision. The first takeaway is to be reasonable when taking positions on discovery and/or document-preservation obligations. The cost of preserving a few more hard drives may pale in comparison to the cost of litigating a protracted discovery dispute. The second takeaway is to seek early judicial advice or guidance on discovery issues, where appropriate. Even before the mandated Fed. R. Civ. P. 26(f) discovery conference, judges are becoming increasingly willing to address document preservation and discovery early on in a case through status conferences, case-management conferences, or other informal means short of motion practice.
Keywords: document preservation, Judge Colleen McMahon, electronic discovery, Zubalake
— Ryan E. Blair, Cooley LLP, San Diego, CA
February 7, 2012
9th Cir. Further Curtails Consumer False Advertising Class Actions
The Ninth Circuit recently issued a significant ruling that further curtails consumer false-advertising class-action litigation in the wake of Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011). The majority in Mazza et al. v. Am. Honda Motor Co., 2012 U.S. App. LEXIS 626 (9th Cir. 2012) reversed the Central District of California, which had certified a nationwide class of all consumers in the United States who purchased or leased Acura RL vehicles equipped with a collision mitigation braking system (CMBS) for two reasons. First, the appellate court held, the district court erred in concluding that California law could be applied to a nationwide class. Second, it found that the district court improperly ruled that all consumers who purchased or leased the Acura RL vehicles with the CMBS relied on the defendant’s allegedly misleading advertisements.
In Mazza, the plaintiffs—from 44 different states—alleged that certain of the defendant’s advertisements misrepresented the characteristics of the CMBS and omitted material information on its limitations. The plaintiffs’ complaint asserted four claims under California Law, viz., California’s Unfair Competition Law (UCL), False Advertising Law, Consumer Legal Remedies Act, and a claim for unjust enrichment. The district court certified the plaintiffs’ class, and held that California law could be applied to all class members because Honda failed to prove how differences in the laws of various states are material, or how other states had an interest in applying their laws to the suit. The district court also held that all class members were entitled to an inference of reliance under California law.
In a 2–1 decision, the Ninth Circuit ruled that the district court misapplied California’s choice-of-law rules when it certified the nationwide class under the state’s consumer-protection and unjust-enrichment laws. The court delineated how different jurisdictions possess materially different consumer-protection laws. For instance, it noted that the California consumer laws at issue have no scienter requirement, whereas other states’ consumer-protection statutes do require scienter. The court emphasized that each state has an interest in setting the appropriate level of liability for companies conducting business within its territory. It therefore held that each class member’s consumer-protection claim should be governed by the consumer-protection laws of the jurisdiction in which the transaction took place.
The impact of Mazza will likely result in a marked decrease in the volume of nationwide consumer class-action litigation instituted in California, because California’s strict consumer-protection laws can no longer be applied in the Ninth Circuit to plaintiffs from other jurisdictions. Mazza, therefore, appears to present an additional hurdle for plaintiffs, who have seen their ability to sue collectively curtailed after the Supreme Court ruling in favor of Wal-Mart stores in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011) (holding that the commonality requirement is not met by generalized questions that do not meaningfully advance the litigation and is not met where named plaintiffs and putative class members have not suffered the “same injury”).
—Sarah J. Triplett, Gordon & Rees LLP, Sand Diego, CA
Post-Nicastro, Opposite Jurisdiction Outcomes for Foreign Defendant
In summer 2011, the U.S. Supreme Court decided J. McIntyre Machinery Ltd. v. Nicastro, 131 S. Ct. 2780 (2011). Nicastro dismissed New Jersey state tort claims against J. McIntyre, a British company, finding that J. McIntyre’s contacts with New Jersey—which were limited to the sale of the one machine at issue—were insufficient to establish specific jurisdiction. However, Nicastro failed to produce a majority opinion and left unresolved whether Justice Brennan’s stream-of-commerce theory, first articulated in Asahi Metal Indus. Co. v. Super. Ct. of Cal., Solano Cnty., 480 U.S. 102 (1987), would become obsolete. Indeed, although six justices agreed the claims against J. McIntyre must be dismissed, only four justices outright rejected Justice Brennan’s approach and applied Justice O’Connor’s Asahi opinion, which requires purposeful availment of the forum state and more than mere placement of a product into the stream of commerce. The decision was hailed as a victory for foreign manufacturers but the unresolved spilt between the applicable jurisdiction tests outlined by Justice Brennan and Justice O’Connor has limited its impact.
Most recently, two federal district courts came to differing conclusions with regard to jurisdiction over the same foreign defendant. In Ainsworth v. Cargotec USA Inc., No. 2:10-cv-00236, 2011 WL 4443626 (S.D. Miss. Sept. 23, 2011), a federal district court in Mississippi considered Nicastro in a case involving state-tort claims against an Irish forklift manufacturer. The Ainsworth court found Nicastro to be “rather limited in its applicability” because the Supreme Court majority had “declined to choose between the [Justice Brennan and Justice O’Connor] Asahi plurality opinions.” Left without clear guidance, Ainsworth followed Fifth Circuit precedent and applied Justice Brennan’s stream-of-commerce theory to determine that jurisdiction over the foreign defendant was proper.
Conversely—and just one week later—a Kentucky federal district court decided Lindsey v. Cargotec USA Inc., No. 4:09-cv-00071, 2011 WL 4587583 (W.D. Ky. Sept. 29, 2011). Lindsey determined that, in light of Nicastro, it could not exercise jurisdiction for state-tort claims over the same Irish forklift manufacturer. The Lindsey court followed Nicastro and prior Sixth Circuit precedent adopting Justice O’Connor’s jurisdiction theory from Asahi. It also noted many similarities between the foreign defendants in Nicastro and Lindsey: no physical presence in the forum state, no ownership or use of property in the forum state, no direct shipments to or sales in the forum state. In both Nicastro and Lindsey, the foreign defendant’s contact with the forum state was limited to an independent distributor.
Cases like these that produce inconsistent results for the same foreign defendant having the same contacts with the forum state highlight the need for the Supreme Court to finally adopt one of the Asahi tests. Certainty and predictability in this realm is preferable for both foreign corporations and the domestic ones that deal with them. While it remains to be seen when such a decision will come down, Nicastro seems to indicate that the Court is not likely to take another 20-year hiatus from personal jurisdiction. The two tie-breaking justices indicated that they were open to hitting the reset button on this issue if the Court were presented with a case that provides “a better understanding of the relevant contemporary commercial circumstances.”
—Isabella C. Lacayo, Weil, Gotshal & Manges LLP, New York, NY
Sixth Circuit Strikes Out Class Allegations at Pleadings Stage
Defense attorneys, whether they are in-house litigators or outside counsel, are always looking for creative ways to make early attacks on facially unsustainable class allegations. The Sixth Circuit recently made a strong statement on this front by affirming a district court’s order granting a motion to strike class allegations on the grounds that individual questions raised by the 50 states’ consumer-protection laws predominated over any factual questions common to the proposed class. See Pilgrim v. Universal Health Card, LLC, 660 F.3d 943 (6th Cir. 2011).
In Pilgrim, the plaintiffs pled a nationwide class against the defendants, alleging that they had deceptively marketed a plan for obtaining discounted health services in violation of the Ohio Consumer Sales Practices Act (the law of one of the defendants’ residences). Rather than await a motion for class certification, one of the defendants moved to strike the class allegations at the responsive pleadings stage. The defendant argued that the law of each individual class member’s state of residence governed his or her claims, such that the laws of all 50 states must be applied and individual issues would predominate over common ones. The district court agreed, struck the class allegations, and dismissed for lack of subject-matter jurisdiction.
The Sixth Circuit affirmed. It agreed that the law where the injury occurred governed each class member’s claim, and that the individual legal questions raised by the 50 states’ laws predominated over any common factual questions. Individual fact issues also plagued the allegations, including regional variations in availability of discounts, a substantial number of apparently satisfied customers in the class, and differences in the defendants’ advertising due to the varying requirements of state consumer-protection laws.
The Sixth Circuit’s ruling provides an instructive precedent for those who seek to attack class certification on the pleadings, before class discovery in certain instances. While the Pilgrim plaintiffs maintained that the court addressed the class issues prematurely and that they should be entitled to class discovery, the Sixth Circuit noted that Federal Rule of Civil Procedure 23(c)(1)(A) contemplates resolution of certification “at an early practicable time,” not necessarily only once class discovery has occurred. Those facing class allegations that require application of all 50 states’ laws or allegations that on their face defy even the possibility of compliance with Rule 23’s predominance and superiority requirements should keep the Pilgrim case in mind.
Keywords: corporate counsel, pleading, class action, 6th Circuit, Rule 23
—Eric Lyttle, Weil, Gotshal & Manges LLP, Washington, D.C.
December 28, 2011
New Laws for 2012 May Warrant Updating Employee Handbooks
On January 1, 2012, a host of newly enacted employment laws will go into effect, creating new rules and regulations for employers everywhere. As such, it is once again time for employers to consider whether the new rules and regulations—and continued judicial decisions—warrant updates and revisions to their employee handbooks.
In California, for example, legislation that will directly impact businesses in 2012 includes limitations on reviewing employee credit reports for employment purposes (codified at California Labor Code § 1024.5); new penalties for misclassifying employees as independent contractors; and new rules prohibiting discrimination on the basis of appearance and apparel consistent with the employee's gender identity (i.e., the Gender Non-Discrimination Act, A.B. 887). One significant newly enacted employment law, the Wage Theft Prevention Act of 2011 (the WTPA codified at California Labor Code § 2810.5) adds a number of notice requirements for employers and increases the penalties available under existing provisions of the California Labor Code. The WTPA, which is modeled on a similar New York–state law, requires that employers provide written notice to employees at the time they are hired of specific information, including:
- the name, address, and telephone number of the employer's workers' compensation insurance carrier;
- the regular payday designated by the employer;
- the rate or rates of pay and basis thereof (whether paid by the hour, shift, day, week, salary, piece, commission, or otherwise, including any rates for overtime);
- allowances (if any, claimed as part of the minimum wage, including meal and lodging);
- the name of the employer, including any "doing business as" names used by the employer; and
- any other information the labor commissioner deems material and necessary.
The WTPA also requires that employers provide written notice to existing employees within seven dayswhenever there are changes to such information.
Judicial decisions in 2011 have also clarified certain obligations for employers, which could make revisions to an employee handbook necessary. For example, in Rogers v. County of Los Angeles, the California Court of Appeal issued an opinion that may require employers to offer accommodations, including additional leave, to employees who have already expended authorized leave for medical reasons. Further, the California Supreme Court recently heard oral argument in the matter of Brinker Restaurant Corp v. Superior Court and is expected to issue a decision offering long-awaited clarification of such issues as to whether employers are required to affirmatively compel employees to take meals or merely provide employees with the opportunity to take a meal break, and whether an employee's meal break must occur near the middle of the work period or whether it may be taken at the beginning or end of an employee's shift. These decisions stand to significantly impact the obligations of employers and the policies and procedures contained in their employee handbooks.
Employers derive a number of benefits from the distribution of a well-drafted, comprehensive, and up-to-date employee handbook. First, a well-drafted employee handbook can serve as an important employee relations tool. An employee handbook can bolster morale by communicating to employees that the organization takes employee grievances seriously. In this regard, an employee handbook can create a disincentive for employee lawsuits by making the employee feel an integral part of the organization.
Second, a comprehensive employee handbook can guide employee expectations. By setting forth the employer's policies and procedures, employees who are disciplined for infractions are less likely to feel unfairly treated should the need for disciplinary action arise. More importantly, affirmatively setting forth standards of conduct, overtime policies, employee duties of loyalty and ethics, and other policies can preemptively forestall infractions and contribute to workforce efficiency.
Finally, an up-to-date employee handbook can act as affirmative evidence that a company observes and complies with its legal obligations in the event that an employee does sue, especially in matters for which evidence of legal compliance will otherwise be scarce, such as compliance with rest period regulations.
Employers are urged to consult with counsel if they are unsure whether new employment laws in their state warrant drafting an updated employee handbook.
Keywords: employee handbook, California Labor Code, WTPA
December 22, 2011
Chancery Court Rejects Shareholder's Attempt to Open News Corp.'s Books
The Delaware Court of Chancery recently rebuffed a plaintiff's efforts to inspect defendant News Corporation's books under 8 Del. C. § 220, finding that the plaintiff's petition to review the defendant's records contradicted the demand futility allegations in plaintiff's separately filed derivative suit (the derivative action) against the news organization. The case, titled Central Laborers' Pension Fund v. News Corp., No. 6287-VCN, 2011 Del. Ch. LEXIS 188 (Nov. 30, 2011)(V.C. Noble) (the 220 action), arose from the Central Laborers' Pension Fund's demand that News Corporation open its books for an investigation of potential breaches of fiduciary duty in connection with News Corporation's proposed acquisition of Shine Group Ltd., and to determine whether a demand on the board would be necessary before commencing a derivative action to challenge the proposed acquisition. Id. at *1.
Shortly before filing the 220 action, Central Laborers filed the derivative action to contest the process and price of the proposed acquisition. Id. News Corporation moved to dismiss the 220 action, arguing that "the simultaneous filing of the [220 action and the] Derivative Action refutes any claim of a proper purpose for [Central Laborers'] inspection demand." Id. at *2.
In granting the defendant's motion to dismiss, Vice Chancellor Noble determined that the "stockholder plaintiff who files a Section 220 action immediately after its derivative action is acting inconsistently," because the stockholder effectively contradicts his certification in the derivative action that he already possessed the requisite information to file a complaint. Id. at *3. In chastening Central Laborers, the vice chancellor focused on the close temporal proximity of the 220 action to the derivative action and emphasized that the "currently-pending derivative action necessarily reflects [Central Laborers'] view that it had sufficient grounds for alleging both demand futility and its substantive claims without the need for assistance afforded by Section 220." Id. at *8. Because courts often stay discovery in derivative actions while resolving motions to dismiss, Vice Chancellor Noble emphasized that plaintiffs cannot use Section 220 as an end-run around the discovery stay. Id. at *4. Rather, Section 220 was adopted "to enable potential derivative plaintiffs to obtain the necessary information in advance of filing their derivative action." Id. (emphasis added).
Noble dismissed Central Laborers' reliance on King v. Verifone Holdings, Inc., 12 A.3d 1140 (Del. 2011). The vice chancellor distinguished Verifone, which held that a derivative plaintiff whose complaint had been dismissed for failure to plead demand futility was not, on account of the earlier filed derivative action, outright precluded from bringing a later filed claim under section 220. Id. at *5. Noble found that the starkly different procedural posture between Verifone and the instant case—here, the derivative action had not been dismissed and there was thus no "need or  reason for further pleading or efforts to gather important facts"—militated in favor of contrasting outcomes. Thus, Noble made clear that the Supreme Court's decision in Verifone did not signal its blanket approval of "a stockholder's simultaneous filing of both a derivative action and a Section 220 action." Id. at *6.
The vice chancellor's no-nonsense opinion and outright refusal to allow a plaintiff's inspection demand that immediately followed a derivative action will be well received in board rooms that are targets of derivative complaints.
Keywords: inspection demand, Delaware Court of Chancery, derivative action, demand futility
December 9, 2011
NLRB Requires Employers to Post Notice of Employees' Rights by January 31, 2012
Under a new rule promulgated by the National Labor Relations Board (NLRB), private-sector employers must post a notice advising employees of their rights under the National Labor Relations Act (NLRA). The rule applies to almost all private-sector employers—including those with a non-union workforce.
As of January 31, 2012, employers must display an 11-inch by 17-inch notice "in conspicuous places . . . including all places where notices to employees concerning personnel rules or policies are customarily posted." Employers must also distribute the notice through email or on an internal or external website if the employer regularly communicates similar notices and policies through such means. Additionally, employers must post the notice in other languages if at least 20 percent of the workforce is not proficient in English.
The poster must advise employees of their specific rights under the NLRA, including, among other things, the rights to organize a union, collectively bargain, discuss wages and other terms of employment with coworkers, and strike and picket. The posters must also inform employees of the various things that employers may not do under the NLRA.
Although the NLRB believes the posters are necessary to make employees aware of their rights under the NLRA, the rule has come under fire from several business groups. At least two lawsuits have been filed in federal court, arguing that the NLRB exceeded its statutory authority in promulgating the rule: National Association of Manufacturers, et al. v. National Labor Relations Board, et al., No. 1:11-cv-01629-AJB, U.S. District Court for the District of Columbia, Judge Amy Berman Jackson, presiding; and Chamber of Commerce of the United States, et al. v. National Labor Relations Board, et al., No. 2:11-cv-02516-DCN, U.S. District Court for the District of South Carolina, Chief Judge David C. Norton, presiding.
Cross-motions for summary judgment are currently pending in both actions. In addition, some members of Congress have introduced legislation in an attempt to repeal the new rule.
Nevertheless, the rule is still scheduled to take effect as scheduled on January 31, 2012. More information about the rule, including printable posters in 28 different languages, is available on the NLRB's website.
November 30, 2011
Data Hoarding and Budgeting Preservation Costs
Some corporations have the data equivalent of the Discovery Channel series, "Hoarding: Buried Alive." Their IT departments are wallowing in unneeded data—data that is costly to maintain, back up, migrate, track, review, and produce. Sadly, they are sometimes doing this on the basis of legal advice of the same lawyers who ought to be helping them, not crippling them.
The problem is essentially that lawyers are risk adverse, and, not being able to prove a negative (i.e., that the data is not relevant to any ongoing or reasonably foreseeable litigation), they tell IT and the business units that they can’t get rid of it. However, the correct legal standard is that unless information is known or should have been known to be relevant to ongoing or reasonably anticipated litigation or needs to be retained to meet statutory or business obligations, a company is not only free to discard whatever it so desires, but in fact ought to discard it.
The more unneeded data that is kept, the more risks there are of having data breaches and incurring enormous reputational injury and out-of-pocket notification costs. The unneeded data clutters databases and document repositories, making it more difficult to index and find relevant, current information. Housing off-line data also consumes very real and appreciable costs, especially for corporations that have literally thousands or tens of thousands of unneeded backup tapes.
The solution to this problem is to inventory legacy data that is not currently on records-retention schedules or legal holds, make reasonable efforts to establish the provenance of that data, and discard the data for which no one can establish business or legal reasons for keeping. Note that perfection is not required, only reasonable efforts. There is no reason to keep data that is so old that nobody knows what’s in it; you wouldn’t ever disclose it or search it, so why keep it?
Budgeting can be a key weapon in the effort to clean up unneeded data because sometimes people want to keep old data "just in case." Whether or not a business unit can articulate what the case is, they should take "ownership" of the data they want to retain—and this should include having budgetary responsibility for data storage costs, data breach obligations, and the costs of reviewing that data in the event it is ever swept up in discovery requests. This is basically an extension of what is now a well-established principle that business units ought to bear the costs of litigation associated with their lines of business.
The days when the legal department was the only department without a budget and was the only department that was always over budget are long gone in most corporations. Companies like DuPont and Shell have reined in litigation costs by allocating those costs against the business units on whose behalf the litigation was undertaken. It's a simple concept: When the whole company is absorbing all the costs of litigation, individual business units will make litigation decisions that wouldn't be made if they had to pay the whole bill. Similarly, the movement towards alternative fee arrangements is driven in large part by the desire to give outside counsel some skin in the game—to align their economic best interests with those of the corporation.
The same holds true for preservation: Companies will get a lot more attention and cooperation on dealing with data hoarding when they allocate the full costs of that hoarding against those who would keep data in perpetuity "just in case." Business units shouldn't complain about the high costs of legal review of documents when those documents should never have been retained in the first place.
— Anne Kershaw, A. Kershaw P.C., Tarrytown, NY
November 22, 2011
A Snapshot of "Trying the Losing Case for Appeal" at the Corporate Counsel CLE Seminar
“Trying the Losing Case for Appeal” will be presented on Friday, February 17 at 1:30 p.m. at the 2012 Corporate Counsel CLE Seminar in Carlsbad, California. An experienced panel of appellate judges, trial court judges, outside counsel, and inside counsel will discuss what to do about the losing case.
The written materials will include original writings by the panelists on relevant issues as well as some reference materials. The program will center on a fact scenario filled with landmines and triggers for topics of discussion.
We will begin with a discussion about the decisional process of trying a losing case—the internal discussion among client, inside counsel, and outside counsel. Issues such as public company versus private company, bet-the-company cases, reputation, and developing law will be featured.
The second part of the discussion will be about trying to make the losing case better in the hopes of winning. Tactics such as how to conduct voir dire in a losing case, opening statements, motions in limine, and jury instructions are important pieces to consider.
The third part of the discussion will concern tactics on losing issues—compromised witnesses, right on facts, wrong on the law, smoking guns, and closing arguments are all likely to be discussed.
Last, because our panel includes two former California appellate judges, we will be discussing the judges' views on making the best case for appeal and, interestingly, how alternative dispute resolution might be helpful on appeal.
— David Hamilton, Womble, Carylyle, Sandridge & Rice, Baltimore, MD
November 3, 2011
ACC Survey Reveals Trends in Corporate Legal Departments
The Association of Corporate Counsel recently revealed the results of its annual survey of chief legal officers. Compared to previous years, more of the 1,165 who responded said that they are planning to increase their legal departments in the coming year (37 percent). Similarly, fewer respondents said that their legal departments were affected by the economic downturn (54 percent versus 74 percent in 2009). Although legal officers are generally facing expanding duties and changing roles, the vast majority reported satisfaction with their career (92 percent).
The largest problem facing those who responded to the survey was keeping apprised of their company’s activities that may have legal implications (35 percent). Other areas of concern include too much work for their resources/budget (19 percent) and managing outside legal costs (18 percent). The top way in-house counsel attempt to manage expenses is through alternative fee arrangements with outside counsel (57 percent) followed by increased use of in-house paralegals, contract lawyers, or other administrative staff (43 percent).
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— Lance J. Ream, Gordon & Rees LLP, Denver, CO
November 1, 2011
Your Thoughts on Trolls, Grasshoppers, and Lowering Patent Litigation Costs
Chief Judge Randall Rader of the U.S. Court of Appeals for the Federal Circuit recently gave a speech in which he defined the terms “trolls” and “grasshoppers,” offered a way to help keep them in check, and introduced a model discovery order for use in patent cases. We’d like your thoughts on how well the proposed order is apt to meet its dual purposes of saving costs while allowing adequate discovery. But first, a few words about trolls, grasshoppers, and the model order.
In his speech at the Eastern District of Texas Bench and Bar, Chief Judge Rader defined a troll as a party that attempts to enforce a patent far beyond its actual value or contribution to the prior art and a grasshopper as an entity that refuses to license even the strongest patent at even the most reasonable rates. He suggested shifting attorney fees and costs to trolls and grasshoppers upon the filing of motions for fees and costs on the basis that the cases were “exceptional.” See 35 U.S.C. § 285 (“The court in exceptional cases may award reasonable attorney fees to the prevailing party.”); see also Eon-Net LP v. Flagstar Bancorp, 2011 WL 3211512 (Fed. Cir. 2011) (holding that one of the factors leading to awarding of sanctions under 35 U.S.C. § 285 was a history of filing nearly identical patent suits against a plethora of diverse defendants followed by settlement demands for amounts at a price that was far lower than cost to defend the litigation).
Chief Judge Rader also announced a model e-discovery order for patent litigation that targeted email discovery in several ways as summarized below.
- No general email discovery. General document requests would not include email or other forms of electronic correspondence (¶ 6).
- Second phase. Email production requests would be phased to occur after the parties have exchanged initial disclosures and basic documentation about the patents, prior art, accused instrumentalities, and relevant finances (¶ 8).
- Custodians, search terms, and time frame. Email production requests would identify custodians, search terms, and time frame (¶ 9).
- Five custodians, possibly five more; costs. Each requesting party would limit its email production requests to a total of five custodians per producing party for all such requests. The parties could jointly agree to modify this limit without the court's leave. The court would consider contested requests for up to five additional custodians per producing party upon showing a distinct need. Parties seeking email production requests beyond those agreed by the parties or granted by the court would bear all reasonable costs caused by such discovery (¶ 10).
- Five search terms, possibly more; costs. Each email request would be limited to five search terms per custodian per request with court to consider five additional terms upon a showing of distinct need. Terms that narrow the search ("AND") wouldn't count nor will terms that are variants of the same word (¶ 11).
If you have a patent litigation practice, we’d love to hear from you on how well you think the terms of the model order will work for your cases. Is imposing attorney fees and costs on intransigent trolls and grasshoppers workable? Take just a few minutes and complete the following survey; be sure to click “Done” at the end. We’ll share the results in a future posting.
Please note that your participation can help impact the development of sane e-discovery rules. For example, in his talk to the Eastern District of Texas Bench and Bar, Chief Judge Rader mentioned the survey that showed that less than 1 in 10,000 documents that were produced in discovery ever made it onto a trial exhibit list, and he cited the Judges' Guide to Cost-Effective E-Discovery, which contained the results of several surveys on cost-effective e-discovery processing techniques and tools.
— Anne Kershaw, A. Kershaw P.C., Tarrytown, NY
October 19, 2011
Dodd-Frank Update: FSOC Clarifies SIFI Designation Process
In the wake of considerable political and industry scrutiny, the Financial Stability Oversight Council (FSOC) released its proposed criteria for assessing the systemic risk of non-bank financial institutions. In recent months, the absence of such criteria was the subject of extensive bipartisan criticism, particularly given that non-bank entities such as insurers have not previously been subject to federal regulation. The FSOC proposal will now be open to public comment until December 12, 2011.
The manner in which the FSOC would implement the statutory mandate under Section 113 of Dodd-Frank has been a topic of considerable focus since the law was enacted in July 2010. The FSOC has the authority to require any enterprise, regardless of whether it is currently regulated by federal oversight, to be supervised by the Federal Reserve in circumstances where the FSOC determines that the enterprise poses "a threat to the financial stability of the United States." An earlier set of criteria proposed by the FSOC in January had been uniformly criticized as vague, forcing the FSOC to revisit its approach and develop a more detailed series of factors to be used in evaluating the risk quantum of non-bank companies.
Among the most watched aspects of Dodd-Frank, the designation of non-bank Systemically Important Financial Institutions (SIFI), represents what has been described as a "central" aspect of Dodd-Frank implementation. The FSOC proposal would create a three-stage framework for evaluating companies across industry sectors and would also attempt to harmonize the FSOC review process through a set of standardized criteria. The first stage would be to identify companies subject to further review using the criteria set forth below. The second stage would be for the FSOC to conduct an internal review based on information available from public and regulatory sources. The final stage would entail the FSOC contacting companies that the FSOC believes merit further review to obtain additional information. If, based on this three-stage process, the FSOC concludes a company may be a SIFI, the company will be provided the opportunity to submit written materials contesting the determination. After the three-stage review, the FSOC will vote on the recommended determination, and the company will have the right to request a hearing and request an additional vote of the FSOC at the conclusion of the hearing. The proposed rule can be found on the U.S. Department of the Treasury's website.
Importantly, the criteria established by the FSOC would have widespread application across industries, as the standards for review are closely linked to a company's use of the financial system as a proxy for risk. For example, the FSOC criteria for more detailed review and potential designation include any non-bank financial company with at least $50 billion in total consolidated assets that meet one of more of the following requirements:
- $30 billion in gross notional credit default swaps outstanding for which the non-bank financial company is the reference entity
- $3.5 billion in derivative liabilities
- $20 billion of outstanding loans borrowed and bonds issued
- 15 to 1 leverage ratio, as measured by total consolidated assets (excluding separate accounts) to total equity
- 10 percent ratio of short-term debt (having a remaining maturity of less than 12 months) to total consolidated assets
In the coming weeks, these criteria will face extensive review along with the timing and "phased" approach proposed by the FSOC for reviewing non-bank SIFIs. The stakes are significant for companies potentially facing the gauntlet of review, as a SIFI designation will carry with it a series of requirements for regulatory oversight, the development of wind-down of "funeral" plans, and the potential for forced capital raises or termination of business practices deemed too risky in the context of Dodd-Frank.
October 3, 2011
Feedback from the Judges
When judges who are well respected for their e-discovery opinions offer their thoughts, intelligent lawyers pay heed. Several judges participated in panels at the recent Legal Technology Leadership Summit sponsored by the nonprofit Electronic Discovery Institute (watch for information on next year’s Summit) and offered thoughts that may be of interest to corporate counsel.
Defensibility of Linear Review
During the ethics panel, one question was about the extent to which lawyers could ethically defend the use of technology-assisted review where document decisions are not based on a lawyer examining every document. U.S. Magistrate Judge David Waxse, (D. Kan.) posed the related question of how, given the various studies by TREC and others on the lack of consistency of manual linear review, could lawyers defend the use of manual review?
Failure to Use 502 Clawback Agreements as Malpractice
During the session on "Feedback from the Judges," U.S. Magistrate Judge Robert Johnston (D. Nev.) asked for a show of hands on how many parties were making use of F.R.Evid 502 clawback agreements and posed the question of whether, in light of the low cost of such agreements and the protection they offered, it wasn't tantamount to malpractice if a lawyer did not obtain one.
No IT Substitute for Lead Counsel
During the feedback session, Mag. Judge Elizabeth Jenkins (M.D. Fl.) noted that while it's fine to bring an IT expert to a hearing in her court, she really wants to hear from lead counsel who is an officer of the court and is the person to whom she looks to have problems resolved.
Obtaining Opposed Clawback Agreements
While 502 orders are usually discussed in the context of agreements of the parties to enter such orders, Judge Waxse noted that he has entered such an order even in the absence of the agreement of both parties. In Rajala v. McGuire Woods, LLP, 2010 WL 2949582, Judge Waxse (D. Kan.) entered a clawback order over the objections of the plaintiff, holding that he had such authority under F.R.Civ.P. 26(c)(1) and that McGuire Woods had met its burden to show a "particular and specific demonstration of fact, as distinguished from stereotyped and conclusory statements" that it is entitled to a protective order.
Mancia's Warnings about Kneejerk Discovery Requests and Boilerplate Objections
In the session on "Feedback from the Judges," both Magistrate Judge Waxse and Magistrate Judge Lorenzo F. Garcia (D. NM) advised the audience to read the opinion of Chief Magistrate Judge Paul Grimm in Mancia v. Mayflower Textile Services, Co., 253 F.R.D. 354 (D. Md. 2008), a wage and hour action. In that opinion, Judge Grimm, raised sua sponte the issues of overly broad "kneejerk discovery requests served without consideration of cost or burden to the responding party," and "the equally abusive practice" of "boilerplate objections."
He analyzed those practices in the context of F.R.Civ. P. 26(g)(1), which requires a reasonable inquiry before filing discovery requests or responses, and F.R.Civ.P. 33(b)(4) and 34(b)(2), which require particularity for objections. Grimm noted that the duty to make reasonable inquiry before filing discovery requests includes the duty to first confer with the opposing party, and that blanket responses that discovery requests are "overboard and unduly burdensome, and not reasonably calculated to lead to the discovery of material admissible in evidence," indicate either a failure to conduct a reasonable inquiry or a waiver of particularized objections. He wrote, "It would be difficult to dispute the notion that the very act of making such boilerplate objections is prima facie evidence of a Rule 26(g) violation."
Judge Grimm ordered the parties to confer and establish some range of potential outcomes of the case and to consider how much additional discovery would be needed in light of what had been done to date and the amount in controversy or what was at stake.
Corporate Takeaways from the Judges’ Comments
- At least one very influential Magistrate Judge appears receptive to technology-assisted review.
- It's fine to bring an IT person to a hearing, but lead counsel should be able to explain issues to the court.
- Seek 502 claw-back agreements, even if they are opposed by the other party.
- Confer with opposing parties before submitting discovery requests.
- Don't rely on boilerplate objections. State particularized reasons or lose them. Without them, you can’t object under F.R.Civ.P. 33(b)(4) or34(b)(2).
- To argue proportionality, provide the court with some estimates of the value of the case.
Keywords: e-discovery, electronic discovery, claw-back agreement, clawback agreement
— Anne Kershaw, A. Kershaw P.C., Tarrytown, NY
August 15, 2011
Implications of Malpractice Case for Allegedly Mismanaging Contract Doc Review Attorneys
The malpractice claims in J-M Manufacturing Co., Inc. v. McDermott Will & Emery (Los Angeles Superior Court, Case No. BC462832) have kicked off a vigorous debate in the blogosphere due to the allegations that the law firm billed for contract review work that was not needed, performed poorly, or not performed at all. See, e.g., "Malpractice Suit Targets Quality of BigLaw’s Temporary Lawyers," in ABA Journal (ABAJ) online, Aug. 3, 2011; "E-Discovery Nightmare: Client Cites McDermott's Use of Contract Lawyers in Malpractice Case," Corporate Counsel, June 10, 2011; "The McDermott e-discovery malpractice case and contract attorneys: The Posse List weighs in," on The Posse List (TPL), a site targeting contract attorneys, it said that it received over 980 emails on its blog about the case. Several wrote, "the work is mind-numbing and monotonous."
According to the complaint, after the government told McDermott that its initial document production on behalf of J-M contained privileged records, McDermott resubmitted another production that still included 3,900 privileged documents out of a production of about 250,000 documents. For copies of the complaint and demurrer in the malpractice suit as well as pleadings from the underlying qui tam action, see www.AKershaw.com/j-m.
Whatever the ultimate truth may be in the J-M case, many of the various public postings about contract attorney review work in general (i.e. not directed at McDermott) should serve to put in-house counsel on notice that there could be issues with pre-production reviews using contract attorneys, e.g.
- Fraudulent time reporting, ABAJ, comment 14 (agencies allowing false timesheets), 34 (witnessed timesheet fraud), and 35 (billing every minute from arrival to departure).
- Minimal or poor supervision, ABAJ, comment 24 (15-minute conversation with temps at the beginning of the project), 27 (no list of known attorneys for privilege review), 35 (widely divergent training, difficult to understand what they were seeking to produce or protect); TPL (large number pointed out reviews in D.C. and New York where improper instructions on privilege were given by junior attorneys and/or case administrators who obviously gave didn’t know the difference between attorney-client privilege and the attorney work product doctrine).
- Poor quality control, ABAJ, comment 20 (low bids result in no selection process for reviewers) and 35 (writing on original documents, spilling food and drinks).
- Demeaning work conditions, ABAJ, comment 11 (treat like servants), 31 (one bathroom for 100 people), 37 (85 member staff on windowless first floor using one locked bathroom on ninth floor).
- Production quota, ABAJ, comment 35 (daily review quotas).
- Significant markups of contract review attorney billing rates, ABAJ, comment 11 (paying as low as $12/hr., billing over $350) and 47 (personally worked on case where temps billed as associates).
- Long work hours, ABAJ, comment 24 (12 hours/day, 7 days/week), 35 (12–16 hours a day), TPL (10–12 hours/day); see also "Lawyers Settle . . . for Temp Jobs," Wall Street Journal, June 15, 2011, which mentions long-hour work days.
- Reviewers being told to just look for specific terms, ABAJ, comment 37 ("I promise you, I was told to look for specific terms.").
Implications for In-House Corporate Counsel
The document reviews provided by your outside counsel may not suffer any of the infirmities alleged in the J-M complaint or in the numerous postings that have been made about the case or contract attorneys in general. On the other hand, they might. Do you want angry, malcontented attorneys handling your sensitive corporate documents? Consider amending your outside counsel guidelines to incorporate some of the following suggestions:
- Set maximum billable hours per day and require mandatory breaks. It is impossible from a human factor engineering standpoint to deliver quality review work for more than 8 or at the very most 10 hours a day on a sustained basis, especially without adequate rest breaks.
- Ask for the work history of contract attorneys reviewing your documents. Ideally the bulk of the reviewers would have a history with the law firm conducting the review.
- Require that contract people working on your projects be advised of your company tip hotline.
- Explicitly address whether the costs of contract attorneys will be marked up by the firm.
- Talk to the attorneys who are providing day-to-day guidance for the reviewers. Determine for yourself if they are conversant with the issues in the case and are able to discuss privilege, work product, and waiver intelligently.
- Have the firm advise whether basic cost saving technology is being used. Processes like duplicate consolidation, clustering or near-duping, and email threading can dramatically reduce review time. Review should never be conducted just to find a set of predefined search terms; software will do that faster, cheaper, and more accurately.
You might also consider whether the use of technology-assisted review could provide faster, cheaper, and more replicable results than manual review. To develop data to see how consistent the results are from current manual review, have multiple review teams review the same set of documents and measure the consistency of the results. The set of documents does not need to be large—perhaps as small as one or two thousand documents. Pick a set that includes a representative number of responsive, privileged, and redacted documents.
— Anne Kershaw, A. Kershaw P.C., Tarrytown, NY
August 15, 2011
D.C. Circuit Takes the SEC to Task in Vacating Proxy Access Rule
Traditionally, a company's proxy statement for a shareholder election of directors includes only candidates who were nominated by incumbent directors. To nominate a candidate different from those on the directors' ballot, a shareholder must separately file his or her own proxy statement and solicit votes from other stakeholders, thereby initiating a proxy contest.
In August 2010, the Securities and Exchange Commission adopted a controversial proxy access rule that provides shareholders an alternative path for nominating and electing directors. Under Rule 14a-11, a public company must include in its proxy materials "the name of a person or persons nominated by a [qualifying] shareholder or group of shareholders for election to the board of directors." 75 Fed. Reg. 56,682–83, 56,782/3 (2010).
In September 2010, the Business Roundtable and U.S. Chamber of Commerce petitioned for review of the SEC's order, claiming that (1) the SEC's promulgation of the Rule was arbitrary and capricious because the SEC failed to adequately assess the Rule’s impact on efficiency, competition, and capital formation, and (2) the Rule violated the First Amendment. On July 22, 2011, the U.S. Court of Appeals for the D.C. Circuit granted the petition and vacated the Rule, holding that the SEC's promulgation of the Rule was "arbitrary and capricious." Business Roundtable v. SEC, No. 10-1305, slip op. (D.C. Cir. July 22, 2011).
The Court found that the SEC "inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters."
In reaching its holding, the court criticized the SEC's adoption of the Rule on several grounds. First, the court chastised the SEC for not fully considering the adverse economic affects of the Rule. The opinion characterized the Rule's proxy access regime as a "management distraction" that would reduce "the time a board spends on strategic and long term thinking." The court dismissed the SEC's efforts to minimize these costs as "illogical" and "unacceptable."
Second, the court criticized the SEC's reliance on "insufficient empirical data," finding that the SEC did not "sufficiently support its conclusion that increasing the potential for election of directors nominated by shareholders will result in improved board and company performance and shareholder value."
Finally, the court chided the SEC for failing to address the risk that unions and public pensions might use the Rule to exact concessions unrelated to shareholder value from the company.
In addition to finding that these deficiencies rendered the Rule "arbitrary and capricious" on its face, the court found that the Rule was invalid as applied to investment companies, such as mutual funds.
The court did not reach petitioners’ claims that the Rule's proxy access regime is fundamentally unconstitutional, leaving open the possibility that a proxy access rule addressing the above defects could be implemented in the future. That the SEC can sort through the rubble and make another pass at the Rule is hardly a victory; the D.C. Circuit's harsh opinion is a significant setback for a proxy access initiative that was years in the making.
— Joe Woodring, Cooley LLP, San Diego, CA
August 12, 2011
Delaware Supreme Court Upholds $3.95M Sanction Award for Spoliation of Evidence
The Delaware Supreme Court recently addressed electronic discovery issues in affirming a $3.95 million sanction award issued by the Court of Chancery for spoliation of electronically stored documents and materials.
The underlying dispute in Genger v. TR Investors, LLC, No. 592, 2010 (Del. Supr., July 18, 2011), concerned a contest for control of Trans-Resources, Inc., and proceedings under 8 Del. C. § 225 to determine the valid membership of the board of directors. During the course of the litigation, the Delaware Court of Chancery determined that Arie Genger, Trans-Resources' founder, had caused the deletion of files stored on his work computer and, after deleting those files, directed a company employee to use special software to wipe the unallocated free space on his computer and on Trans-Resources' server, thereby making it impossible, even by use of forensic computer techniques, to recover any deleted files. As a sanction for Genger’s acts of spoliation, the Chancery Court ordered Genger to pay the opposing parties $3.95 million, which represented reasonable attorney fees and expert fees for litigating the spoliation matter.
Genger appealed to the Delaware Supreme Court, arguing that the Court of Chancery erroneously found that he caused material evidence to be spoliated. Using an "abuse of discretion" standard, the Delaware Supreme Court upheld the lower court’s decision. In its ruling, the Delaware Supreme Court offered a substantial discussion regarding the unallocated space on a computer's hard drive, how that unallocated space is affected by the deletion of documents, and how unallocated space interfaces with a duty to preserve electronically stored information. The Court stated:
We do not read the Court of Chancery's Spoliation Opinion to hold that as a matter of routine document-retention procedures, a computer hard drive's unallocated free space must always be preserved. The trial court rested its spoliation and contempt findings on more specific and narrow factual grounds—that Genger, despite knowing he had a duty to preserve documents, intentionally took affirmative actions to destroy several relevant documents on his work computer. These actions prevented the [shareholders] from recovering those deleted documents for use in the Section 225 [matter].
Regarding Genger's use of the wiping software, the Court noted that "there is no evidence or claim in this case[ ] that the use of the SecureClean program fell within Trans-Resources’ ordinary and routine data retention and deletion procedures." The Court went on to state that the outcome may have been different if the Company had a data retention policy whereby the wiping software was to be run on employees' computers on a regular basis. A link to the Court’s full opinion can be found here.
Genger serves as an important reminder of a company's obligations to preserve all potentially relevant evidence when faced with litigation. Even when not faced with litigation, company counsel should regularly consult with the company's IT department and/or outside counsel to ensure that all company data preservation and destruction policies are effective and up-to-date.
— Ryan E. Blair, Cooley LLP, San Diego, CA
June 15, 2011
Massachusetts Court Strikes Confidentiality Provision in Arbitration Proceeding
When confronted with sensational but often meritless claims, corporate defendants may be inclined to seek the shelter of confidential arbitration. The impetus for such a strategy lies in the twin goals of obtaining a fair adjudication on the merits while avoiding unwanted, and perhaps, misguided criticism in the court of public opinion that has the potential not only to tarnish a company's image, but to encourage other potential litigants. Corporate defendants considering confidential alternatives to litigation, however, need to be aware of several pitfalls that can lead to the public disclosure of arbitration proceedings, evidence, and results, as well as the use of the same by other litigants in non-confidential proceedings.
A recent ruling by the Massachusetts Superior Court highlights the difficulty corporate defendants face in relying on private arbitration as a means to keep sensitive information confidential. In Dever v. Oppenheimer, the court ruled that a blanket confidentiality agreement imposed by the arbitration panel to protect sensitive documents was contrary to public policy. There, the arbitration centered on Dever's claim that Oppenheimer fired him for cooperating with the Massachusetts Securities Division that was investigating an ex-broker accused of defrauding an elderly couple. After the arbitration panel awarded Dever $73,000, Dever sought to confirm and modify the award by striking the confidentiality provision. In support of his request that the arbitration award be stripped of its confidentiality provisions, Dever argued that the subject documents should be made public to clear his name of any wrong doing. Oppenheimer argued that the confidentiality provision was necessary to protect sensitive documents that contained embarrassing personal information.
In confirming and modifying the award, Judge McIntyre struck the confidentiality provision, concluding that it was contrary to public policy which favors open access to information, especially in the securities industry. As a result of the ruling in Dever, several sensitive documents were made public, including a draft settlement offer that Oppenheimer submitted to the Massachusetts Securities Division in which it admitted several email policy violations as well as several oversights in its handling of the broker's case.
The Dever decision underscores the courts' aversion to treating arbitration awards as confidential and demonstrates the potential for “public policy” arguments to unravel protections that may have been the primary motivation for entering into a "confidential" arbitration to begin with. Care needs to be taken to structure confidentiality provisions narrowly so that they will better withstand judicial scrutiny and to consider adding provisions to arbitration agreements on the front end that attempt to prohibit or limit a party's ability to seek to have the confidential proceedings made public. For more on this story, visit New England In-House.
— Darren VanPuymbrouck and Dan Nixa, Schiff Hardin, LLP
June 15, 2011
While Many Firms Resist, In-House Attorneys Embrace Document Review Technology
Amid rising discovery costs, in-house counsel are increasingly calling for the use of technology to conduct document review. Some firms have embraced such technology, but many remain skeptical and unwilling to move away from human review for fear of liability if the technology fails to identify key documents. According to the experts, these fears are unwarranted. Not only does document review technology save time and money, but it can actually be more effective than human review. Studies have shown that, when the same documents are reviewed by humans and programs that sort by relevance, the programs identified some relevant documents that the humans missed. However, the programs also returned a higher rate of non-relevant documents as well. For more on this story, visit Law 360.
— Lance J. Ream, Gordon & Rees LLP, Denver, CO
May 18, 2011
New York Adopts New In-House Counsel Rule
The New York Court of Appeals has adopted a new rule allowing out-of-state attorneys to serve as in house counsel to corporations and various other entities located in the State of New York.
Newly added Part 522 of the Rules of the Court of Appeals allows attorneys who are admitted to practice in other states to serve as in-house counsel to businesses, not-for-profit organizations and other entities in the State of New York without passing the New York bar exam.
This new rule has been well received. New York State Bar Association President Stephen P. Younger stated in a press release: "The new rule will make it easier for in-house attorneys and their employers to relocate to New York, enhancing the state's position as the business and non-profit capital of the world. This is a good measure for economic development in New York."
Chief Judge Jonathan Lippman similarly lauded the rule: "The new registration rules give New York a competitive edge in attracting corporations and other entities that in the past may have been reticent to locate here because of concerns over the unauthorized practice of law. Furthermore, the new rules will aid New York-admitted lawyers seeking similar admission in other states that require reciprocity."
In house counsel admitted under this new rule, however, will be limited to advising their employer on business-related legal issues. Like other attorneys in New York, they will be required to register with the Appellate Division and will be subject to New York's professional conduct and disciplinary rules.
— David R. Singh, Weil, Gotshal & Manges, LLP, New York
May 11, 2011
Hong Kong Refuses Enforcement of Mainland Chinese Arbitration Award
The Hong Kong court of First Instance has refused to enforce an arbitration award issued by the Xian Arbitration Commission on public-policy grounds where one of the arbitrators acted as both arbitrator and mediator in the case of Gao Haiyan and Another v. Keeneye Holdings Ltd and Another  HKEC 514.
While confirming there is nothing wrong in principle with an arbitrator acting as a mediator in the same proceedings (arb-med), the judge expressed serious reservations about the conduct of the arbitrator who acted as mediator in this case, holding that it would cause a fair-minded observer to apprehend a risk of bias.
The decision is a rare example of the Hong Kong court refusing enforcement of a foreign award on public-policy grounds. It has caused much interest among practitioners given the high degree of usage of arb-med in many jurisdictions, including Mainland China. Indeed, the new Hong Kong Arbitration Ordinance that comes into effect on 1 June 2011 allows mediator-arbitrators.
Under a share transfer agreement, Gao and his wife agreed to transfer shares to Keeneye. Gao subsequently alleged that the agreement was void on the grounds of duress and misrepresentation. Arbitration was commenced by Keeneye. The arbitral tribunal issued an award in favor of Gao, ordering the agreement to be revoked and making a non-binding recommendation that Keeneye pay Gao RMB 50 million. Gao then sought to enforce the award in Hong Kong against Keeneye. Keeneye applied to set aside the court’s order enforcing the award. Keeneye complained that the Tribunal was biased in granting the award because the secretary general of the arbitration commission and one of the arbitrators in the tribunal (the arbitrator nominated by Gao) had a dinner in the Xian Shangri-La hotel with one of Keeneye’s representatives three months before the award was issued. At the private meeting, Keeneye’s representative was told that the tribunal intended to issue an award in their favor but that Keeneye must pay compensation of RMB 250 million. Keeneye refused, and the tribunal subsequently issued the award in favor of Gao.
The current arbitration ordinance (Cap. 340) empowers the Hong Kong court to refuse enforcement of a mainland arbitral award if to do so would be contrary to public policy (section 40E). Keeneye argued that the private meeting was improper interference by the secretary general with the tribunal and that the tribunal had shown favoritism and malpractice in making the award as shown by the difference in the arbitration outcome. Gao, on the other hand, suggested that the procedure adopted by the secretary general and the arbitrator constituted part of a valid mediation process under the arbitration commission’s practice and procedure.
In deciding Keeneye’s application to resist enforcement of the award, the court focused on assessing whether the award was made in circumstances that would cause a fair-minded observer to apprehend a real possibility of bias on the part of the tribunal (Porter v. Magill  AC 357 (HL)).
Decision of the Hong Kong Court
Relying on Hebei Import & Export Corp v. Polytek Engineering Company Ltd. (1992) 2 HKCFAR 111, the leading authority in Hong Kong on the use of the public-policy ground for refusing enforcement of an award, the court held that what happened at the Xian Shangri-La hotel would give the fair-minded observer a palpable sense of unease. The court rejected the argument by Gao that the meeting at the hotel was tantamount to a mediation. Even if it were, the meeting was not conducted in such a way as to avoid the appearance of bias.
The court considered the competing public-policy considerations in this case:
1. Where the parties choose arbitration, they should be held to their choice and the resultant award enforced by the court.
2. It would be wrong to uphold an award tainted by an appearance of bias.
The court held that the second consideration must override the first—to do otherwise would bring the court into disrepute. Hence, as a matter of public policy, the court refused to enforce the award by the tribunal.
In practice, arb-med is rare in common-law jurisdictions including Hong Kong. But it is commonly used in resolving disputes in other jurisdictions including mainland China. The judgment highlights the risks involved in an arbitrator acting as mediator.
Brandt Chan and Partners is regulated by the Law Society of Hong Kong, and is to become associated with SNR Denton upon regulatory approval.
May 9, 2011
Corporate Counsel Urge Reform to Rules of Professional Conduct
In 2009, the ABA formed the Ethics 20/20 Commission to review the ABA Model Rules of Professional Conduct in light of increased technology and globalization within the legal industry. A group of outside general counsel recently proposed that the ABA adopt a different set of rules for "sophisticated clients," such as large corporations with in-house law departments and multi-million-dollar legal budgets. According to this group, which received support from the Association of Corporate Counsel, sophisticated clients should have the ability to negotiate over aspects of representation such as conflicts of interest and issues of liability. Under the current rules, for example, a lawyer is required to fully supervise all aspects of a case and accept all liability stemming from it. Even if the client wants to, it cannot negotiate the risk. This creates obstacles where the client may want to outsource certain work, such as e-discovery. The group of general counsel also called for more uniformity among state bar rules regarding lawyer mobility, multijurisdictional practice, and the unauthorized practice of law. They point out that the current approach is not only inconsistent from state to state, but increasingly at odds with rules in the United Kingdom, Europe, Australia, and Canada, which provide more certainty and flexibility. The Ethics 20/20 Commission will continue to solicit comments until September. Its recommendations are due in May 2012, and the ABA House of Delegates will vote on them in August 2012. Law.com has more on this story.
— Lance J. Ream, Gordon & Rees LLP, Denver, Colorado
May 3, 2011
Law Firms Remain Wary of Alternative Fee Arrangements
A recent survey reveals that most corporate counsel are now using alternative fee arrangements to manage their spending on outside counsel and plan to use more in the future. Additionally, unlike law firms, they do not view flat and capped fees as true alternative fee arrangements. Instead, they tend to define alternative fee arrangements as contingency fees and success-based bonuses. Most law firms remain resistant to these riskier arrangements, which may impact their cash flow. At least one recently dissolved Am Law 100 firm points to its exposure to contingency fees as a reason for its demise. However, some firms are benefitting from alternative fee agreements. Thirty-one percent of the firms surveyed report that they receive higher profits from alternative fee agreements than from traditional hourly billing. Law firm consultants say that to make alternative fees work, firms need to increase their focus on budgeting and financial planning. Visit Law 360 for more on this story.
— Lance J. Ream, Gordon & Rees LLP, Denver, Colorado
April 27, 2011
Recent Opinions Broadly Apply December 2010 Amendments to Rule 26
It has been nearly six months since amendments to Rule 26 protecting draft expert reports and most communications between counsel and testifying experts as work product went into effect, and courts have begun construing the applicability and scope of the amendments. Thus far, courts are applying the amendments broadly.
In Virginia, a magistrate judge recently held that amended Rule 26 applies to a case even though the lawsuit was filed before the December 1, 2010, implementation date for the new rules. This decision was based on a joint request by the parties that the amended rules be applied, and the parties had not started any expert discovery. As such, the judge found no reason that the amended rules shouldn’t be applied. This decision is in line with the view of many commentators on amended Rule 26, who have consistently suggested that it should apply to all cases pending in the system without regard to filing dates. See CIVIX-DDI, LLC v. Metropolitan Regional Info Systems, No. 2:10cv433, 2011 WL 922611 (E.D. Va. March 8, 2011).
Another case pending in Texas addressed a more controversial aspect of the amendments to Rule 26, i.e., whether protection from disclosure under the work-product rule for communications between the expert and the attorney extends to communications with others. In this situation, the testifying expert had one-on-one conversations with a consulting expert, and email communications and draft versions of the testifier's expert report were exchanged between them. Communications reflecting facts and data considered by the testifying expert had been produced, but the adversary sought production of all other communications as well. The magistrate judge ruled that, because the consulting expert was acting under the direction of counsel, the work-product protection applied and the remaining communications were not discoverable. See National Western Life Insurance Company v. Western National Life Insurance Company, No. A-09-CA.711 LY, 2011 WL 840976 (W.D. Tex., March 3, 2011).
These decisions are good news for corporate counsel who are hopeful that the recent amendments to Rule 26 will increase efficiency to the process of developing and presenting expert testimony—the underlying intent of the rule change.
— Bob Craig, Charles River Associates, Houston, TX
April 20, 2011
Firm Billings Facing Increased Scrutiny Following TARP Review
A recent report by the Special Inspector General for the Troubled Asset Relief Program (TARP) revealed that a number of law firms submitted questionable invoices to the United States Department of Treasury for TARP-related work. The Special Inspector General issued the report after auditing professional service fees paid under TARP, including over $27 million in legal fees. The report points to block billing, vague and inadequate descriptions of work, and inclusion of administrative charges as some of the problems found in the legal invoices. The Special Inspector General also issued a host of recommendations, including establishing detailed requirements for how firms should prepare legal invoices. Legal consultants say the report serves as a reminder that law firms must be proactive in establishing clear billing policies. Law 360 has more on this story.
— Lance J. Ream, Gordon & Rees LLP, Denver, CO
April 6, 2011
This year's Corporate Counsel Committee CLE Seminar included a View From The Bench program featuring distinguished judges who provided practical and candid advice for winning high-stakes corporate litigation. The panel included Judge Mary S. Scriven, United States District Judge for the Middle District of Florida; Judge Donald G. Wilkerson, United States Magistrate Judge for the Southern District of Illinois; and Judge Jeffrey E. Streitfeld, Circuit Judge in the Seventeenth Judicial Circuit of Florida. The panelists covered a range of topics, including written advocacy, tactics for settling cases, and jury selection. The following is a sampling of the key takeaways.
Judge Scriven emphasized the importance of clear and concise written advocacy. She noted that in many high-stakes cases, while counsel and their client may be willing to spend substantial amounts of time and money on jury consultants and trial preparations, not nearly enough attention is paid to written advocacy. She emphasized that many high-stakes cases are resolved on summary judgment where the parties’ briefs are the prime avenue for advocacy. Judge Scriven explained that written advocacy in many cases is overlong, unfocused, and riddled with grammatical and typographical errors. She urged the audience to focus on the precise issues that the court must resolve and to do so in as concise a manner as possible. In fact, she said that if counsel can keep briefs to 5 pages in length, or, if necessary, no more than 10, it can greatly enhance the precision and clarity of the legal and factual arguments. Other panelists noted that in complex cases where briefs of 20 pages or more are necessary, it is very helpful to have a focused introduction that summarizes all of the key arguments in a concise fashion.
Judge Wilkerson commented that mediation, ideally with a judicial officer, can be an extremely effective way of resolving even high-stakes cases. He gave examples from his extensive experience with cases that appeared difficult to settle, but which ultimately were resolved through mediation with a judge or other mediator. Other panelists remarked that, in some circumstances, private mediators can also be very effective so long as both parties trust and respect the mediator. All parties agreed that a judicial officer can often be extremely effective in helping to settle even hotly contested high stakes cases.
Judge Streitfeld emphasized that in business cases in his court, including many of the highest-valued tobacco cases, jury selection can play a pivotal role. He emphasized that it is critical to select carefully jurors who are not likely to be biased against a corporate party’s viewpoint. He noted that, while it is impossible to be certain what a particular juror is going to do, taking a gamble on a juror with specialized knowledge and possible influence over other jurors because of that knowledge can be very dangerous and can backfire. Rather than trying to hit a home run with a particular juror, it is more important to protect against striking out with a juror who might have specialized knowledge and turn out to be unsympathetic to a party’s case. Judge Scriven and Judge Wilkerson noted that jury selection in federal court is usually much less involved than jury selection in many state courts. Nevertheless, they echoed the notion that jury selection can be quite important and that taking risks with jurors who might be particularly influential can be very dangerous.
For additional lessons from the panelists, check out the program's written materials by clicking here.
— Lawrence Rosenberg, Jones Day, Washington, D.C.
March 31, 2011
It was another lively exchange of ideas between in-house and outside counsel during the Litigation Management Roundtable at the Committee's 2011 Annual CLE Conference in Naples, Florida. Not able to attend? Not a problem. The following are five takeaways that you can use in your practice. The Committee would like to recognize the three panelists who provided their insights during the roundtable: Taa Grays with Met Life, Zander Shapiro with Bank of New York Mellon, and Tiffani Lee with Holland & Knight.
Communication with In-House Counsel
Timely and proactive communication from outside counsel was on the minds of many of the in-house participants. When they received updates without asking for them, they felt their outside counsel were on top of the situation. Emphasis was also placed on bringing bad news to the attention of the client as soon as possible. Bad news does not get better with time. By all means, avoid surprises. Early communication about client objectives and expectations is key to success in the representation. Understanding the client's industry and business operations as well as its mission statement are important to the proper delivery of legal services by outside counsel.
In-house participants suggested that outside counsel keep emails short and to the point and that lengthy, analytical emails be used only when necessary. Emails addressing a single point or making a concise, clear request for input are the most effective. Descriptive subject lines were highly recommended. It was also suggested that short preview emails be sent to give in-house counsel a heads up before substantive conference calls, rather than simply calling and catching the in-house attorney cold on the subject.
Emphasis was placed on accurate budgeting. It was stressed that it is as important not to be too high with a budget as it is to avoid being too low. Outside counsel fees that consistently come in significantly below budget can cause problems between the legal department and their business clients. In the corporate world, budgets matter.
Reducing Legal Expenses
In-house counsel are feeling pressure to accomplish more with the same number of people. Some legal departments are using technology to improve work flow while others are bringing traditional outside counsel work in-house—more often transactional work than litigation. Matching cost to risk and being selective in the key work performed on the case were important tools to controlling expense. Outside counsel mentioned the continuing trend of corporate clients requesting that billing rates be held flat.
Recent survey results show that the growth of the use of AFAs is slowing, indicating that where AFAs are a good fit, they have already been adopted by clients and their counsel. The survey results also made it clear that AFAs are not the choice for all clients. This was representative of the experience discussed in Naples. Participants in the roundtable recognized that the billable hour still had a significant place in the legal market and that AFAs work better for more predictable or repetitive legal work. Some participants had noted success in setting fixed fees for stages of more complex matters. It was agreed that the key to the success of AFAs was a high level of trust between the client and outside counsel. The ultimate goal of any fee arrangement is for the client to be paying for value.
— Larry Kristinik, Nelson Mullins Riley & Scarborough, LLP, Columbia, SC
March 31, 2011
Delaware Court Denies Request for Report Relating to Internal Company Investigation
On March 25, 2011, Vice Chancellor Donald F. Parsons Jr. of the Delaware Court of Chancery denied a shareholder's request for information relating to the circumstances surrounding the departure of Hewlett-Packard Co.'s (HP) former CEO, Mark V. Hurd, who left the company in August 2010 amid allegations of sexual harassment.
In Espinoza v. Hewlett-Packard Co., C.A. 6000-VCP (Del. Ch. Mar. 25, 2011) (Parsons, V.C.), an HP shareholder brought an action under Section 220 of the Delaware General Corporation Law seeking an investigative report created by HP's outside counsel, Covington & Burling LLP, concerning HP's internal investigation of Hurd's allegedly inappropriate conduct towards Jodie Fisher, a former HP consultant. Section 220 allows shareholders to access the books and records of Delaware corporations provided they meet certain criteria, including a proper purpose.
According to the Section 220 complaint, plaintiff's stated purpose was to ascertain why the HP board of directors allowed Hurd to resign rather than fire him for cause and why the board found that he violated HP's standards of business conduct but not HP's sexual harassment policy. Because Hurd was allowed to resign, he was able to collect a severance package worth an estimated $35–40 million, which would not have been available if HP had fired him for cause.
During oral argument, HP's counsel asserted both attorney-client privilege and work product privilege over the Covington & Burling report, and argued that overriding these privileges would chill companies' self-policing efforts. Vice Chancellor Parsons agreed, rejecting plaintiff's contention that such privileges can be overcome where a plaintiff demonstrates that he or she has an obviously colorable claim. He also appeared to give weight to HP's contention that the Covington & Burling report did not contain the kind of information plaintiff was seeking and that the same information could be found elsewhere. As such, Vice Chancellor Parsons denied plaintiff access to the Covington & Burling report.
The ruling also means that Hurd, who joined the action as a third-party intervenor, can appeal Vice Chancellor Parsons' earlier March 17, 2011, ruling that a letter in the case record should be unsealed. The letter, received by Hurd while he was still HP's CEO, allegedly details Fisher's sexual harassment allegations. Hurd is seeking to keep the letter confidential. Vice Chancellor Parsons' March 17, 2011, ruling ordered the letter unsealed, because the public interest in the letter was enough to overcome Hurd’s privacy interest. In his ruling on March 25, 2011, however, Vice Chancellor Parsons stated his intention to modify his March 17, 2011, ruling so that the letter remains sealed until 10 days after an appeal to the Delaware Supreme Court is filed.
— Ryan E. Blair, Cooley LLP, San Diego, CA
March 22, 2011
Goldman Sachs Selected for 2011 Pro Bono Award
Last month, the ABA Section of Litigation's Corporate Counsel Committee held its annual meeting at the Naples Grand Resort & Spa in Naples, Florida. In what has become a highlight of the Annual Meeting, the Committee presented its 13th Annual Corporate Counsel Committee Pro Bono Award. This year, the esteemed Pro Bono Award was presented to the Pro Bono Program at Goldman Sachs & Co.
The Committee created this award to showcase noteworthy corporate pro bono programs, both as a way to thank companies for their pro bono commitments and to inspire other companies to follow suit. Goldman Sachs's program is superlative and certainly one to be followed. The Goldman Sachs Pro Bono Program was formally launched in 2007 to provide opportunities for Goldman Sachs lawyers and other legal staff to offer pro bono legal assistance to individuals, charitable organizations, and non-profit entities with limited means. Goldman Sachs's Pro Bono Program is supported at the highest levels of the firm and is part of the fabric of their mission, which entails both extensive in-house participation and significant outreach to involve outside counsel in a wide range of projects, going far beyond the usual scope of an in-house pro bono program. The Pro Bono Committee projects at Goldman complement the long-standing tradition of philanthropy and public service that the company has cultivated. Beyond the financial investment in its philanthropic programs, the firm commits its most valuable assets: the time and expertise of its people. In engaging Goldman Sachs employees with over 1,000 academic and nonprofit community partners through a variety of public service programs, the firm leverages its relationships and the talent within the firm to realize a broad and meaningful impact in the global community.
A recent tangible example of Goldman Sach's approach is its partnership with the firm's "10,000 Small Businesses" initiative. Through its "10,000 Small Businesses" program, Goldman invested $500 million in pro bono efforts. The program focuses on hosting legal clinics for participating small business owners. These clinics provide one-on-one legal advice related to a broad array of issues and are specifically tailored to address each business owner's particular legal concerns. Goldman Sachs attorneys and legal staff partnered with attorneys from Weil, Gotshal & Manges LLP in New York City and Latham & Watkins LLP in Los Angeles to host four clinics during the past year, with plans to host additional clinics in those cities and in all future "10,000 Small Businesses" locations (including New Orleans, which was recently announced). Consequently, Goldman Sachs people not only help small businesses, they also engage other law firms in joining pro bono projects.
Additionally, the Goldman Sachs Pro Bono Program regularly partners with a number of other legal entities in New York City, including the New York City Bar Association, The Brooklyn Bar Association, New York Lawyers for the Public Interest, and Lawyers Alliance for New York. Recent clinics held in partnership with these organizations have focused on a variety of constituencies in the New York metropolitan area, including veterans, small business owners, micro-entrepreneurs, and recent immigrants. The Goldman Sachs Legal Department Pro Bono Committee recently hosted and coordinated a highly successful legal clinic for small business owners as part of the firm's celebration of Hispanic Heritage Month in October 2010. Working in partnership with the Hispanic Federation, Puerto Rican Bar Association, New York City Bar Association, and Orrick, Herrington & Sutcliffe LLP, nearly 30 small business owners received advice and counsel from more than 25 lawyers and legal staff.
Goldman Sachs's pro bono initiatives are plenty and enumerate far beyond these accomplishments. What the legal profession stands to learn from Goldman Sachs is the benefit, power, and broad outreach that is accomplished when corporations collaborate with their already established business partners, to wit, their outside law firms. In the case of Goldman, it is clear that it has accomplished many a great thing at a high level.
Fortunate for the legal community and the community at large, Goldman Sachs does not stand completely alone. Namely, the Committee in past years has bestowed its prestigious Pro Bono Award on some very noteworthy companies. Past recipients of the Pro Bono award include Caterpillar, Inc., Monsanto, Dow Corning, McDonald's, William Wise (GC of Analog Devices), Sears, Roebuck and Co., 3M, Bell South, Johnson & Johnson, Exelon, Merck & Co., and Aetna Inc.
Goldman Sachs exemplifies the best of the legal profession. The Corporate Counsel Committee publicly thanks Martin Schmelkin, managing director and associate general counsel of Goldman Sachs, who was on hand to receive the award on behalf of the company. The Committee also expresses its sincere respect and congratulations to each of Goldman's many volunteers for their tremendous past contributions and expected future contributions to the community around us.
— Theresa Brown-Edwards, Potter Anderson & Corroon LLP, Wilmington, Delaware
March 10, 2011
Flipping Coins, Manual Review, and Producing ESI
Before there was e-discovery and the term ESI, parties reviewing and producing documents did the best they could with a manual review system—basically Scout's honor. There was no reason to measure how well it was working (or not) because there was no alternative to measure against. When alternatives to manual review became available—e.g., encompassing electronic search capabilities, "find similar" features, and predictive coding—interested parties naturally started measuring how well electronically assisted document review worked—or not. The alternative to measure against was, of course, manual review, and the revelation was, lo and behold, manual review does not work well.
Studies performed on the replicability of manual review—i.e., having multiple review teams review the same records for the same purposes—suggest that the odds of both teams finding the same document to be responsive are roughly comparable to a coin toss, ranging from about 48 percent to 62 percent, depending on the study. Parties using manual review alone are paying nearly double over a review based on predictive coding, with no marked improvement in quality relative to the increased price tag. Predictive coding is a process where review decisions made on a subset of the records in a collection are applied to the whole collection without necessarily examining each of them. A recent survey by the eDiscovery Institute shows that the use of predictive coding can cut review costs by 45 percent on average. In a separate EDI study regarding the replicability of predictive coding decisions, predictive coding selected about the same percentage of records selected by the initial manual review team as compared to other subsequent manual review teams.
For corporations the good news is that technology-assisted review can cut legal review bills by half. For outside counsel who are uncomfortable with change (and have grown accustomed to the revenue generated by manual document review), the bad news may be that change and reduced billing are on the horizon.
In addition, while the focus in these studies is cost, corporate counsel may be as concerned with data security risks and the potential associated costs. When lawyers use inefficient review technologies, they end up using more reviewers, and the more people reading the documents, the greater the risk of some sort of loss of confidentiality or data privacy on those records.
What Does This Mean for Corporate Counsel?
Pay close attention to how your records are being selected for review and production. Processes like deNISTing, duplicate consolidation, email threading and predictive coding can when used in conjunction with each other cut review costs by 90 percent or more. This also means that the cost of loss of confidentiality or data privacy associated with manual review can be 10 times higher than technology-assisted document review.
If you don't believe the cited studies, do your own studies. If you're spending hundreds of thousands of dollars on document review, take 1,000 or so records and have them reviewed again by different reviewers and compare the results. When you do this, don’t take 1,000 records that are clearly relevant or 1,000 that are clearly irrelevant; use a mix of relevant and irrelevant records.
Keep a standard set of records that you can use to test the performance of outside counsel. Track those results over time.
Nothing will change if everybody is afraid to say that the emperor has no clothes. It's not that lawyers are doing a bad job with the manual review process; rather, the manual review process itself is bad. Get involved in educational activities and share your results.
If you aren't sure whether you have the requisite knowledge in the area of electronic discovery, you can take a technical competency quiz anonymously on the eDiscovery Institute's website. It is self-scoring and will give you feedback on any answers you might miss. For further information on the topics discussed in this posting you could also download the "Judges' Guide to Cost-Effective E-Discovery" at no charge.
Keywords: electronic discovery, e-discovery, predictive coding, technology assisted review, linear review, manual review
— Anne Kershaw, A. Kershaw P.C.//Attorneys and Consultants, Tarrytown, NY
February 16, 2011
Are an Employee's Emails Sent from an Employer's Computer Privileged?
The California Court of Appeal recently weighed in on this controversial issue. In Holmes v. Petrovich Development Company, LLC, it held that emails sent to an attorney from the client's employer's computer are not privileged. According to the court, an attorney-client communication does not lose its privileged character solely because it is communicated electronically and others may have access to its content. However, the emails in question did not constitute confidential communications because they violated the employer's computer policy, which limited computer use to company business and were subject to monitoring by the employer. The client's employer previously advised her that there would be no privacy in the use of its computers. Because the emails were not confidential, they were not privileged under California's Evidence Code.
— Lance J. Ream, Gordon & Rees LLP, Denver, CO
February 9, 2011
E-Discovery Cost Control 201: Consolidate Email Threads
E-discovery costs are best controlled by making sensible strategic discovery decisions on the very first day the matter comes in and then leveraging technology to improve efficiencies. This article continues our discussion regarding reliable technical options you can implement to improve efficiencies.
Consolidating duplicates across custodians so that only one copy of each document or email is reviewed for responsiveness, confidentiality, or privilege reduces the volume of ESI by 38 percent on average.
Even further saving can be realized by using technology to present all the emails in a conversation or thread to reviewers at the same time. Most people set up their email so that when they reply to or forward an email, the content of that earlier email is displayed at the bottom of the reply, which causes successively longer emails as the thread continues.
Having all of the related emails together at the time of review allows reviewers to read them more efficiently and make consistent, informed decisions. Without such consolidation, reviewers are making determinations as to responsiveness and privilege without knowing the subsequent use of an email—and that use could completely alter the initial determination on that email.
Consider the following email thread that contains three emails.
Using threading, the initiating email and the first reply could be either ignored completely or just cursorily examined to determine if for some reason the last email in the thread did not accurately reflect the contents of the earlier emails. Some email threading systems will perform that check. Evaluating the emails collectively provides extensive savings in the time required to complete the review and shows better results. In this example, reviewing just the last email would cut the work and the review bill for those emails by 50 percent.
A survey of leading electronic discovery providers conducted by the E-Discovery Institute, a 501(c)(3) non-profit research organization, showed that consolidating emails by threads saved on average 36 percent beyond the savings achieved by deduping. (See "Report of Kershaw-Howie Survey of E-Discovery Providers Pertaining to Threading.")
Corporate counsel should be pleased to learn that not only does email threading reduce cost and speed processing, it also improves the quality of the review decisions, particularly privilege decisions. One of the potential dangers of email is that a recipient can forward otherwise privileged content to someone whose receipt of it could result in a waiver. This can be hard to spot if emails are presented and reviewed in a haphazard fashion, but it is far easier to spot with email threading. Furthermore, grouping emails in threads helps assure that all of them are accorded the same treatment if warranted (e.g., all emails containing privilege content can be listed on the privilege log).
Some courts require that a party listing an email as privileged make a privilege log entry for that email plus any of the earlier emails whose contents were included within that email. In the example above, if the reply to the initial reply was listed on the privilege log, there would have to be three entries: one for that email itself, one for the first reply, and another entry for the initiating email, because both the initiating and the first reply emails were included within that email. Having the technology to group emails by threads could reduce the complexity and burden of preparing such logs. (Of course, the best privilege log solution is to obtain a FRE 502 stipulation and protective order incorporating privilege logging by subject matter rather than by item at the very outset of the case. Stay tuned for more on FRE 502 in future articles.)
For more information on threading and other cost-reduction strategies and technologies, refer to "Judges' Guide to Cost-Effective E-Discovery," by Joe Howie and Anne Kershaw with a foreword by Hon. James C. Francis IV, U.S. Magistrate Judge for the Southern District of New York. The guide is available free of charge.
— Anne Kershaw, A. Kershaw P.C.//Attorneys and Consultants, Tarrytown, NY
January 28, 2011
E-Discovery Sanctions on the Rise
Court-ordered sanctions for e-discovery abuses have reached an all-time high, according to a recent survey published in the December 2010 issue of the Duke Law Journal and authored by Dan H. Willoughby Jr., Rose Hunter Jones, and Gregory R. Antine. The survey examined all 401 federal cases prior to January 1, 2010, in which e-discovery sanctions were requested. Of those 401 cases, the survey identifies 230 cases (about 57 percent) in which courts ordered discovery sanctions. However, the survey provides a deeper, more comprehensive look into these numbers. Briefly summarized, the survey found:
- The number of e-discovery sanction cases and awards more than tripled between 2003 and 2004, and the numbers continue to rise. According to the survey, there were more e-discovery sanction cases (97) and more e-discovery sanction awards (46) in 2009 than in any prior year. In fact, there were more e-discovery sanction cases in 2009 than in all years prior to 2005 combined.
- The two most common grounds for the court to impose sanctions were (1) a party's failure to preserve electronically stored information (ESI), and (2) a party's failure to produce evidence.
- In five cases, the court ordered monetary awards of over $5 million, and four other cases had awards of over $1 million.
- In 36 cases, courts awarded dismissal, which the authors deem "the most draconian of sanctions." In the majority of these cases, the courts held that a party engaged in a pattern of misconduct that often included the failure to preserve ESI and misrepresentations about ESI to other parties or the court.
- While sanctions imposed on a party's counsel remain relatively rare, courts are more frequently imposing such sanctions; seven firms were sanctioned in 2009.
The results of this survey reveal that courts are becoming increasingly focused on e-discovery issues, particularly with respect to the obligation of each party to preserve and not destroy ESI. The article should serve as a reminder of the need to develop, and, if necessary, modify document preservation policies and procedures, particularly when a company faces litigation.
You can download the full survey here.
— Ryan E. Blair, Cooley LLP, San Diego, CA
January 7, 2011
E-Discovery Cost Control 101: Identify Duplicates
Controlling e-discovery costs starts with an easy- to-understand concept: Control the number of duplicate emails and files that are examined. Preproduction reviews for purposes of determining relevance, privilege, and confidentiality are often the single largest budget element in modern litigation. Using deduping (i.e., duplicate consolidation) correctly—across the entire data population—can reduce the volume of records to be examined by 38 percent on average versus only a 21 percent reduction for deduping contained within the records of individual custodians.
The following chart depicts the results of a 2009 survey by the Electronic Discovery Institute (EDI) on the savings that can be achieved by different approaches to deduping. "Report on Kershaw-Howie Survey of E-Discovery Providers Pertaining to Deduping Strategies." The report is available at Electronic Discovery Institute, as is an article about the ethical implications of that survey, "Ethics and E-discovery Review," by Patrick Oot, Joe Howie and Anne Kershaw, ACC Docket, Jan/Feb 2010, published by the Association of Corporate Counsel.
The responses to EDI's survey demonstrated that consolidating duplicates across custodians was significantly better in terms of reducing volume than only looking for duplicates within the records of single custodians.
The implication to corporate counsel is clear: If your outside counsel doesn’t consolidate duplicates across custodians, you are probably spending 27 percent more on document review than necessary. (Deduping across custodians leaves 61.9 percent of the original volume while deduping just within individual custodians leaves 78.6 percent. This is 27 percent higher than the across-custodian volume (16.7/61.9).)
The technology for identifying and consolidating duplicate records while also preserving also source information has been widely available since at least 1992, yet EDI’s deduping survey also found that across-custodian deduping was used in just half of all projects.
So what is the problem? Anecdotal information suggests that the lawyers in charge don’t take the time needed to understand how the process works and its reliability. The notion that unique information (such as the source or custodian) will be removed as part of the deduping process is outdated and misguided, yet it is heard over and over again in firms throughout the country. In point of fact, the names of all the custodians who had copies, along with the folder path information for each copy, can be preserved and saved in a separate file or included in a "sources" field in the document review system.
One important fact to note is that deduping or consolidating for review purposes does not mean that the original files will be somehow destroyed. They just won’t all be shown to different reviewers.
The failure to deduplicate not only results in legal bills for examining virtually identical records, but it also results in inconsistent review decisions (e.g. one reviewer marks a record as nonresponsive while a second reviewer produces a second copy and a third reviewer redacts a third one). Furthermore, the larger review volume inevitably leads to larger groups of people than necessary reviewing sensitive corporate records—a seldom-recognized confidentially concern.
So, what's the takeaway? Reduce litigation costs, improve consistency, and lower confidentiality concerns by making sure your outside counsel and e-discovery vendors are using across-custodian deduping. It's a basic and easy-to-implement cost-savings technology that is readily available. It also provides a foundation to use other technologies and processes that will be discussed in future articles.
— Anne Kershaw, A. Kershaw P.C.//Attorneys and Consultants, Tarrytown, NY
December 14, 2010
Amendments to Federal Rule 26 Promise to Reduce Corporate Litigation Costs
Effective December 1, 2010, the Federal Rules were amended to protect nearly all communications between counsel for a party and testifying experts as work-product. Under new Fed. R. Civ. P. 26(b)(4)(C), the only unprotected communications between counsel for a party and testifying experts required to submit disclosures under Rule 26 are those relating to (i) compensation, (ii) facts or data provided by counsel and considered by the expert, and (iii) assumptions provided by counsel and relied on by the expert. Under new Fed. R. Civ. P. 26(b)(4)(B), draft expert reports are also protected as work-product.
These are significant changes for practitioners. Under the 1993 amendments to Rule 26, a party was required to disclose not only the materials upon which a testifying expert relied, but also all "data or other information considered" by the expert in forming his or her opinion. Under this rule, communications between counsel and testifying experts were discoverable. Given this rule, counsel often jumped through hoops to keep written communications with testifying experts to a minimum so as not educate opposing counsel about weaknesses in the expert's opinions or inadvertently create impeachment material.
The new amendments to the Federal Rules of Civil Procedure promise to reduce overall litigation costs. Because most communications with testifying experts will be privileged, counsel will not need to go to the same extraordinary lengths to avoid a paper trail. Exchanging draft expert reports (and edits thereto) via email can reduce costs associated with lengthy phone calls or in-person meetings, including travel expenses. Furthermore, the amended rule provides counsel more latitude to discuss strategy, theories, and trial preparation with testifying experts, reducing the need to hire separate consulting witnesses to protect these discussions from disclosure. This should result in significant cost savings.
These amendments to Rule 26, however, should not be viewed as an invitation to throw caution to the wind in communications with testifying experts. In complex cases, there is often the risk of successive or parallel state court litigation and communications between counsel for the party and the testifying expert may not be privileged in state proceedings—in which the Federal Rules of Civil Procedure do not apply. Even in federal court, the work-product privilege may, in some exceptional circumstances, be overcome on a showing of "substantial need” and “undue hardship." Accordingly, while written communications with testifying expert no longer need to avoided altogether, counsel must still exercise judgment in deciding what to put in writing and how to phrase written communications.
These recent amendments to Rule 26 and practical pointers for managing expert witness fees will be discussed in greater detail during the "Hidden Treasures: Extracting True Value From Expert Witness" panel at the upcoming Corporate Counsel Committee CLE Seminar in Naples, Florida. To find out more about this and other exciting porgrams at the Corporate Counsel Committee CLE Seminar, or to register for the conference, click here.
— David R. Singh, Weil, Gotshal & Manges, New York, NY
November 9, 2010
Salaries for In-House Attorneys Down Slightly
Median salaries for in-house attorneys ranged from $64,100 for recent law school graduates to $341,300 for chief legal officers in 2010, according to ALM's Law Department Compensation Benchmarking Survey. The results, reported in a series of articles at Law.com's Corporate Counsel website, show a decline in salaries for most positions of in-house counsel.
Chief legal officers suffered almost a 4 percent decline. Those attorneys without significant management responsibilities, whether "legal greenhorns" or senior attorneys, saw declines in total compensation of more than 3 percent. Division general counsel, however, saw nearly a 9 percent increase.
Law.com Corporate Counsel has analysis and the full results.
— Daniel Morris, SNR Denton US LLP, Kansas City, MO
November 8, 2010
Implementation of SEC's Proxy Access Rules Stayed Pending Court Review
On September 29, 2010, the U.S. Chamber of Commerce and the Business Roundtable filed a petition in the U.S. Court of Appeals for the District of Columbia Circuit seeking review of the U.S. SEC's adoption on August 25, 2010 of new Rule 14a-11 and amendments to certain of its other proxy rules that collectively would have required most publicly traded companies, commencing in early 2011, to include in their proxy materials director nominees put forward by a shareholder or a group of shareholders who have owned three percent or more of a company's stock for at least three years.
The plaintiffs' petition alleges, among other matters, that in adopting proxy access rules, the SEC acted arbitrarily and capriciously by
- failing to appraise the cost that proxy access would impose on American corporations, shareholders, and workers at a time the U.S. economy can least afford it
- ignoring evidence and studies highlighting the adverse consequences of proxy access, including that activist shareholders would use the rules as leverage to further their agendas
- claiming to be empowering shareholders, but actually restricting shareholders' ability to prevent special interest shareholders from triggering costly election contests
- claiming to be effectuating state law rights but giving short shrift to existing state laws, while creating ambiguities regarding the application of federal and state law to the nomination and election process
The plaintiffs also assert that the SEC's adoption of Rule 14a-11 violated both the Administrative Procedure Act and the First and Fifth Amendments to the U.S. Constitution, and did not properly assess the rule's effect on efficiency, competition, and capital formation.
Concurrently with the submission of their petition to the Court of Appeals, the plaintiffs also filed a motion with the SEC to stay the implementation of the proxy access rules pending the court's review. On October 4, 2010, the SEC, without commenting upon the merits of the plaintiffs' petition, issued an order that stayed Rule 14a-11 and the other proxy rule amendments adopted on August 25, 2010, pending a ruling by the Court of Appeals. Although the plaintiffs had not sought review of Rule 14a-8, which deals with shareholder proposals, the SEC also stayed the amendments to that rule, noting that these amendments were designed to complement Rule 14a-11, and citing the potential for confusion if they were to become effective while Rule 14a-11 was stayed.
On October 8, 2010, the plaintiffs and the SEC jointly filed a briefing schedule with the Court of Appeals that contemplates oral arguments in March or April 2011 and a decision by the summer of 2011. This schedule, if approved by the Court of Appeals, will delay the availability of proxy access to shareholders beyond the 2011 proxy season.
— SNR Denton US LLP
November 2, 2010
Survey Shows In-House Law Departments Cutting Spending on Outside Counsel
A recent survey of 252 companies reveals that in-house law departments decreased their overall spending on litigation for the first time in 10 years. In particular, spending on outside counsel went down by 5 percent in the U.S. and 6 percent worldwide. Efforts to reduce such spending are expected to continue while companies focus on optimizing their internal resources. In fact, internal legal spending increased by 1 percent in the United States and worldwide, and two-thirds of the law departments surveys either added to their legal staffs or kept them same. Law360 has more on this story.
— Lance J. Ream, Gordon & Rees LLP, Denver, CO
November 1, 2010
Communications Relating to a Reduction in Force Are Not Privileged
On September 30, 2010, the United States District Court for the Eastern District of Tennessee ruled in Leazure v. Apria Healthcare, Inc., No. 1:09-cv-224, 2010 WL 3895727 (E.D. Tenn. Sept. 30, 2010) that internal company communications with a company's in-house counsel relating to a reduction in force (RIF) were not protected by the attorney-client privilege or work product doctrine.
In Leazure, the plaintifffiled a wrongful termination suit against Apria Healthcare, Inc. (Apria) after he was included as part of the RIF at the company. Plaintiff sought a number of documents, which Apria argued were protected by the attorney-client privilege or the work product doctrine.
The court began its analysis by reviewing the law regarding the applicability of attorney-client privilege to in-house counsel. The court first stated that the corporate capacity of the client and the fact that the attorney is “house counsel” does not render the privilege unavailing. The court went on to state, however, that for the privilege to apply, the in-house attorney must not only be functioning as an advisor, but any advice given must be predominantly legal, as opposed to business, in nature.
Regarding the work product doctrine, the court stated that application of the doctrine centers on whether the document created by in-house counsel was prepared "in anticipation of litigation." The court further stated that a court must answer two key questions in determining whether the doctrine applies: "(1) whether a document was prepared 'because of' a party's subjective anticipation of litigation, as contrasted with ordinary business purpose; and (2) whether that subjective anticipation was objectively reasonable." The court noted that "[d]ocuments created for an ordinary business purpose by an attorney functioning as a business advisor will not be considered as having been created in anticipation of litigation, even if one could foresee that the document would become relevant if litigation were eventually commenced."
In applying the above principles to the case at hand, the court held that the documents bearing on the RIF, which included the selection of the plaintiff as the employee to terminate in the RIF, the reasons why plaintiff was selected, and when the RIF was to occur are "part of the normal process of determining who is to be terminated in a RIF and when and how to carrying out a RIF; they are normal HR functions." The court also noted that Apria failed to submit an affidavit by its in-house counsel explaining or clarifying his role in the RIF and the nature of the advice given to Apria employees.
Leazure stands to remind in-house lawyers to use caution in communicating with employees regarding personnel decisions and other HR matters, as such communications could be discoverable if employment-related litigation later ensues.
— Ryan E. Blair, Cooley LLP, San Diego, CA
October 28, 2010
Networking on an International Level
The globalization of business has resulted in a unique set of legal challenges for companies that face cross-border disputes or have issues requiring legal expertise in specific foreign jurisdictions. In the past, the usual solution for complex international legal issues was hiring a large multinational law firm with offices all over the globe. While many large international law firms are equipped to deal with legal issues that arise in foreign countries, most of these firms have a presence in only a limited number of countries due to the costs associated with operating multiple offices. As a result, even when a company hires a large multinational law firm to handle a legal issue with questions arising in multiple jurisdictions, the company and its lawyers can be left scrambling to answer questions that are outside the expertise of the lawyers within the firm. To combat this problem, a company may benefit from hiring a law firm that is a member of a global alliance of law firms.
Law firms from around the world recently convened in Toronto, Canada, to strengthen TAGLaw. Founded in 1998, TAGLaw is a worldwide network of independent law firms that have undergone a rigorous screening process to become members of the network. With over 7,500 attorneys in over 80 countries and 120 different jurisdictions, TAGLaw has a global reach that exceeds even the largest multinational law firm. When a law firm within this network has a client that requires legal knowledge in a foreign country, the law firm can rely on a fellow member of the network to provide prompt answers and advice. By quickly being able to obtain competent counsel in over 80 different countries, TAGLaw members are able to avoid costly and frustrating delays for their corporate clients. The legal advice that is secured through this global alliance is provided by foreign law firms that are knowledgeable with the legal systems of the particular jurisdictions in which they practice. These local firms do not have to learn any new information to get up to speed on the foreign jurisdiction. The lawyers who practice at these firms are not only knowledgeable about their own legal system, but they are able to provide invaluable guidance about the culture and business norms of their own countries.
— Matthew B. Byrne, Gravel and Shea, P.C., Burlington, Vermont
New European Court Ruling: In-House Counsel–Employee Communications Are Not Privileged
On September 14, 2010, the European Court of Justice ruled in Akzo Nobel Chemicals et al. v. Commission (Case C-550/07 P) that communications between in-house counsel and company employees are not privileged in European Union anti-competitive activity investigations.
Akcros Chemicals, a subsidiary of Akzo Nobel, was the target of a European Commission anticompetitive activity investigation. During the course of the investigation, officials showed up at one of Akros’ facilities and seized documents, including emails exchanged between an Akcros general manager and an in-house attorney admitted to the Netherlands Bar.
Akzo Nobel and Akcros challenged the power of the European Commission to seize communications relating to legal advice given by in house counsel to a corporate employee and sought return of the documents, arguing that they were protected by the "legal professional privilege" (the European analogue to the attorney client privilege). The Court of First Instance (now the General Court) rejected this challenge and Akzo Nobel and Akcros appealed this judgment.
Declining to reverse a 1982 decision, AM&S Europe v. Commission (Case 155/99), the European Court of Justice affirmed. It emphasized that communications between a client and in-house counsel are not privileged because "[a]n in house lawyer, despite his enrolment with a Bar or Law Society and the professional ethical obligations to which he is, as a result, is subject, does not enjoy the same degree of independence from his employer as a lawyer working in an external law firm does in relation to his client" and consequently "is less able to deal effectively with any conflicts between his professional obligations and the aims of his client.”
While this decision may not be a break from the status quo—the court ruled similarly in AM&S Europe nearly 30 years ago—it should at least serve as a reminder to in-house lawyers to be circumspect in their communications with corporate employees on matters that could potentially give rise to scrutiny by the European Commission in an anticompetion investigation.
Legalweek.com has more on this story, including how the Akzo Nobel decision may impact in-house counsel compensation.
—David R. Singh, Weil, Gotshal & Manges, New York, NY
In-House Lawyers and the Multi-Jurisdictional Trap
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Highway to the Danger Zone: Lockheed Martin Names New General Counsel
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You Have Nobody to Blame but . . . In-House Counsel
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In-House Counsel International Salary Survey
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Like Enron on Steroids
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Congress Seeks to Eliminate the Heightened Pleading Requirements Laid Down in Twombly and Iqbal
Last summer, Senator Arlen Specter (D-Pa.) introduced S. 1504, which is designed to eliminate the heightened pleading requirements a complaint must meet as set forth in the Supreme Court's recent decisions in Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal. The bill, entitled the “Notice Pleading Restoration Act of 2009,” seeks to revert to the pleading standards in place prior to the date of the decision in Twombly.
Twombly and Iqbal were designed to prevent plaintiffs with largely groundless claims from obtaining a right to seek expensive discovery from defendants in an effort to obtain an “in terrorem increment” of settlement value. Discovery often represents an enormous expense for companies, and plaintiffs seek to take advantage of this expense by leveraging it into a settlement that is often less expensive for the corporation. For cases that survive challenges to the pleadings, the decision to settle is often less a factor of the merits of the case and more a factor of the expense of discovery. By requiring that plaintiffs’ factual allegations “raise a right to relief above the speculative level,” which are, at a minimum, “plausible,” the Supreme Court sought to curb the filing of frivolous suits. The Twombly and Iqbal decisions were applauded by companies, as they require plaintiffs to do more than simply make unsupported allegations and legal conclusions to survive summary dismissal at the outset. Some members of Congress are seeking to eliminate the heightened requirements placed on complaints, and this is an issue that companies should follow closely.
Given some of the issues that arose in Congress in the second half of last year, S. 1504 did not move through the Senate. However, Senator Whitehose has recently introduced a working draft of an amended S. 1504 (now entitled the “Notice Pleading Restoration Act of 2010”), which largely tracks the version introduced by Senator Specter. According to the findings in Senator Whitehouse's version, the Twombly and Iqbal decisions are inconsistent with the Federal Rules of Civil Procedure as well as congressional expectations. Another interesting piece in the findings is the statement that amendments to the Federal Rules of Civil Procedure should occur through legislative action and not “through judicial decisions.” This statement indicates that there may be somewhat of a power struggle between Congress and the Supreme Court over the ability to alter the rules that govern civil litigation.
The decisions in Twombly and Iqbal have been two of the most important decisions in recent memory given their impact on civil litigation as a whole. This attempt by certain members of Congress to eliminate the benefits of the decisions will certainly be followed closely by the legal community as its potential impact on civil litigation looms large.
–Keith Gibson, Weil, Gotshal & Manges
Legislation Would Overrule Twombly and Iqbal Motion to Dismiss Standards
In Nationwide Mutual Insurance Co. v. Fleming, 924 A.2d 1259 (Pa. Super. Ct. 2007), the Pennsylvania Supreme Court narrowly construed the attorney-client privilege through a very strict application of the requirement that the communication be from client to attorney in finding that there was no privilege protection for a memorandum prepared by an insurer’s in-house counsel. This decision creates the risk that unsolicited legal advice from an in-house attorney to company management could be discoverable. Among other things, the decision overlooks the fact that attorney advice and client input are often inextricably intermixed and that in-house counsel are exposed to a continuous stream of client communications.
In Fleming, the defendants sought the disclosure of a memorandum addressing agent defections authored by an attorney in Nationwide’s Office of General Counsel. Id. at 1262. The memorandum had been sent to a total of 15 officers, managers, and attorneys with the company. Id. The memorandum related to Nationwide’s efforts to devise a multi-faceted process to deal with agent defections and also outlined counsel’s opinion as to the likely outcome of current and pending litigation. Id.at 1267–68. The memorandum concluded that the litigation was unlikely to be successful for Nationwide and that the primary purpose of the litigation would be to send a message to other employees contemplating defection.
Construing the Pennsylvania attorney-client privilege statute, the court held that privilege protects from disclosure “only those communications made by a client to his or her attorney . . .”Id. at 1264 (emphasis in original). Applying this requirement, the court stated that privilege protects confidential communications “from an attorney to his or her client only to the extent that such communications contain and would thus reveal confidential communications from the client.” Id.
In analyzing the memorandum, the court recognized that it “is not a communication from a corporate client to counsel, but rather is a communication from counsel to a group of managers of a corporate client.” Id. at 1269. Because the memorandum “d[id] not disclose any confidential communications made by Nationwide,” the court concluded that the memorandum was not protected by the attorney-client privilege and had to be disclosed.Notably, the work-product doctrine was not asserted as a basis to avoid disclosure even though pending litigation was mentioned.
Fleming was appealed to the Pennsylvania Supreme Court, where amicus briefs were filed by both the Association of Corporate Counsel and the Pennsylvania Defense Institute. After hearing arguments in March of 2008, the Pennsylvania Supreme Court issued its opinion on January 29, 2010, almost two years later, and affirmed the lower court’s decision. See Nationwide Mut. Ins. Co. v. Fleming, 2010 Pa. LEXIS 40 (Pa. Jan. 29, 2010). The affirmance, however, was by an equally divided court with two justices voting to affirm, two voting to reverse, and two not participating in the decision. In separate opinions, it was argued that the lower court decision should be (1) affirmed because a waiver had occurred as a result of the voluntary disclosure of two related memoranda and without any discussion of the elements of privilege (see id. at *13–15), and, alternatively, (2) reversed because the memorandum did in fact reflect knowledge gained from management and derived from the in-house attorney’s familiarity with the business (see id. at *19–25).
–D. Larry Kristinik Nelson, Mullins, Riley & Scarborough, LLP
Ford's Legal Department Stays Strong with Fewer Lawyers
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Consultants Expect 2009 Law Firm Profits to Be a 'Mixed Bag'
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Debevoise Sues Client to Collect a $6 Million Bill
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AIG GC Reportedly Threatens to Resign if Pay Czar Cuts Compensation
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GCs Demand That Firms Staff Part-Time Attorneys on Cases
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Pfizer GC Pushes for Flat Fees and Gets Them
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