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Practice Points


September 27, 2016

The False Claims Act and Escobar

The recent U.S. Supreme Court decision in Universal Health Services Inc. v. U.S. ex rel. Escobar has significant implications for all federal-government contractors and the outside counsel who represent them. The False Claims Act is a strong enforcement tool for punishing bad actors, but it also presents a serious risk to anyone doing business with the federal government. Full compliance with federal contracts can be especially difficult given the intricate mass of laws, rules, and regulations that govern federal contracting. Many of these are incorporated by reference or do not appear in the contract at all, and they may also be vague or contradictory. The stakes are also quite high as the False Claims Act can impose trebled damages in addition to fines.

Escobar contained two primary findings. First, it confirmed the theory of implied certification. This means that by submitting an invoice, the contractor automatically certifies that it is in compliance with all material requirements of the contract. No explicit representation of compliance is needed to trigger liability. The False Claims Act and implied certification are intended to safeguard public funds by ensuring that the government receives the full benefit of its bargain, but they can also ensnare a well-meaning contractor who simply fails to exercise sufficient caution.

The second finding in Escobar helps to limit the potentially extreme nature of implied certification liability. It defines a test for determining whether a term is “material” and thus predicates potential liability. There were numerous standards proposed in briefs by the parties and amici covering the entire spectrum of possibilities. The court settled on a test rooted in the behavior of the government. For a term to be deemed material the government must actually treat it that way. The classical definition of material—having a natural tendency to affect the decision—has been superseded in cases where the government is aware of contractor non-compliance. Per the opinion this is designed to be a rigorous standard and to prevent application of the False Claims Act to “garden variety breaches of contract or regulatory violations.” The court did not give us a bright-line rule to apply, but it did provide several examples: It is not sufficient that the non-compliance could possibly impact the government’s decision to pay. It is not even enough for the government to explicitly mark a term as material. On the other hand, if the government chooses to pay a type of invoice in full despite having knowledge that the contractor has not complied with a term of the contract, that is strong evidence that the term is not material.

This provides an incentive for federal contractors to be open with government contracting officers. By addressing problems with contract compliance early, the contractor reduces the chances of incurring False Claims Act liability and avoids the appearance of impropriety. This also increases the odds that the government will actually get what it is paying for. False Claims Act suits often arise late in the life of the contract, or even after the contract ends. By encouraging early self-disclosure, Escobar helps to ensure that non-compliance is addressed and resolved during the life of the contract rather than punishing a contractor for past actions as a deterrent to others.

It is also imperative that contractors exercise great care regarding performance and invoicing. A strong internal set of checks and balances beginning as early as the business-development phase is critical. Full understanding of requirements and applicable regulations during the proposal phase will help generate a pricing strategy that ensures profitability while supporting full contract performance. A strong audit function that spot-checks compliance during performance ensures that program staff continue to abide by the requirements. Finally, a careful screening of invoices to ensure that they are accurate and contain the required level of detail will help to prevent false or misleading statements to the government. Implied certification requires a misrepresentation to take effect, and the best means to avoid a False Claims Act case is not to make one.

Keywords: litigation, corporate counsel, Escobar, Universal Health, False Claims, and “FCA

Taylor Brown, PAE, Washington, D.C.


August 30, 2016

EEOC Will Not Tolerate Transgender Employee Discrimination

Recently, there has been significant attention focused on transgender individuals’ rights under state and federal law. Much of the debate has focused on the use of public restrooms in schools and stores. Transgender individuals’ rights, however, extend past the public sphere and into the workplace. Accordingly, employers should know their responsibilities with respect to transgender employees’ rights.

Title VII of the Civil Rights Act of 1964 prohibits sex discrimination. Whether it also prohibits discrimination based on sexual orientation or gender identity remains unclear. The U.S. Equal Employment Opportunity Commission (EEOC) has been clear, however, that it views sex-discrimination protections as encompassing sexual orientation and gender identity. As a result, the EEOC has actively pursued an end to such discrimination, particularly against transgender individuals. The EEOC recently stated that it will accept, investigate, and pursue charges from individuals who allege that they have been discriminated against because of their transgender (or gender identity) status or sexual orientation. The EEOC has also committed to addressing protections for lesbian, gay, bisexual, and transgender individuals in its Strategic Enforcement Plan.

In July 2015, the EEOC held for the first time that sexual-orientation discrimination is, on its face, sexual discrimination. (See Baldwin v. Dep’t of Transportation, EEOC Appeal No. 0120133080 (July 15, 2015)). In March 2016, the EEOC filed its first two lawsuits challenging sexual-orientation discrimination. Most recently, in July 2016, the EEOC sued a North Carolina fast-food restaurant, Bojangles Restaurants, Inc., for allegedly subjecting a transgender employee to a hostile work environment and retaliation based on her gender identity, in violation of Title VII. The suit alleges that the employee, a transgender woman, was subjected to numerous offensive comments about her gender identity and appearance, including statements that she should dress, talk, and conform her gestures to be more like a man. The complaint also asserts that the employee was fired after speaking with her area director about the harassment and refusing to transfer to another restaurant.

Despite the EEOC’s recent actions, case law remains unsettled with respect to Title VII’s scope. The Seventh Circuit, in its recent ruling that Title VII does not cover sexual orientation, left the invitation open for the U.S. Supreme Court to address the issue, noting that although the “writing is on the wall,” a determination that such discrimination is unlawful must come from the Supreme Court or new legislation. (See Hively v. Ivy Tech Comty. College, No. 15-1720 (7th Cir. July 28, 2016)).

In the meantime, based on the EEOC’s noted intention to end such discrimination, counsel should consider advising employers that they would be well-served to follow the guidelines outlined below.

  • Check state law and city ordinances. Several states, including Wisconsin, prohibit sexual-orientation discrimination under state anti-discrimination laws, and other states, such as Minnesota, Illinois, and Iowa, prohibit both sexual-orientation and gender-identity discrimination. In addition, many city ordinances include prohibitions against sexual-orientation and gender-identity discrimination. Employers should update their anti-harassment policies accordingly and incorporate those policies into regular anti-harassment trainings.
  • Affirmative Action Employers. President Obama’s Executive Order 13672 amended Executive Order 11246 to add sexual orientation and gender identity to the list of protected characteristics. As a result, federal contractors governed by Executive Order 11246 have an obligation to treat all applicants and employees without regard to their sexual orientation or gender identity. Employers should update their Affirmative Action program plans, policy statements, and handbooks accordingly.
  • Restroom use. Allow employees to choose the restroom that corresponds to their gender identity. Trending case law, many city ordinances, the Occupational Safety and Health Administration, and the EEOC agree that employees cannot be required to use a sex-specific restroom. Employers who have any concerns may install unisex restrooms or multiple-occupant, gender-neutral restrooms with lockable single stalls.
  • Name changes. Make necessary changes to company documents after an employee legally makes a name change, and use the employee’s preferred name and pronouns when referring to the employee in the workplace (regardless of legal name).
  • Benefits. Offer the same benefits to all employees, regardless of their gender or sexual orientation.
  • Dress code and grooming standards. Maintain these policies in a manner that does not discriminate on the basis of sex and apply them consistently across the workplace to avoid gender stereotypes.

  • While federal law in this area is unsettled, recent EEOC guidance makes clear that employers should be mindful to appropriately address issues related to transgender employee rights.

    Katheryn A. Mills, Godfrey & Kahn, S.C., Milwaukee, WI


    July 29, 2016

    Colorado Joins List of States Applying Heightened Pleading Standard

    Colorado recently joined the increasing number of jurisdictions requiring heightened pleading standards as articulated in the well-known cases Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal. On June 27, 2016 the Colorado Supreme Court decided Warne v. Hall. Hall had filed a complaint against the town of Gilcrest, Colorado and its mayor, Menda Hall. The district court had dismissed Warne’s complaint and amended complaint based on briefing arguing that the court should apply the “plausible on its face” standard from Twombly and Iqbal rather than the “no set of facts” standard articulated in earlier U.S. Supreme Court precedent. The Colorado Court of Appeals reversed, finding that the district court erred in not applying the lower “no set of facts” standard. The Colorado Supreme Court ultimately reversed, finding that Twombly and Iqbal represented an appropriate refinement of earlier precedent regarding pleading standards and noting that Colorado’s own pleading standards were closely derived from those set forth by the U.S. Supreme Court.

    For corporate counsel practicing in Colorado or facing suit in Colorado, the decision represents a shift that, in theory, will allow district courts to more aggressively weed out complaints that are baseless but that might otherwise have survived under Conley’s “no set of facts” standard. Accordingly, the decision provides corporate practitioners and their local counsel with another means to address suits against the companies they represent.

    Greg S. Hearing, Gordon & Rees LLP, Denver, CO


    July 21, 2016

    Greater Discretion for Treble Damages in Infringement Cases

    Before Chief Justice Roberts read the unanimous decision of the Court in Halo Electronics, Inc. v. Pulse Electronics, Inc., he joked that it was one of the few intellectual property cases that everyone could follow. The issue before the Court—whether the Federal Circuit’s Seagate test for finding treble damages ran afoul of the Patent Act—attracted a multitude of amicus briefs raising public policy concerns, including a possible chilling effect on patent innovation and an increase in patent “trolls.” But on June 13, 2016, the Court rejected these arguments and expanded judges’ discretion to award treble damages in these cases.

    The Old Standard

    In 2007, the Federal Circuit adopted the Seagate test to decide whether “damages up to three times the amount found” were appropriate under section 284 of the Patent Act. The two-prong test required that a patent owner show by “clear and convincing evidence” that: (1) “the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent” and (2) the risk of infringement was “either known or so obvious that it should have been known to the accused infringer.”

    If a decision applying the Seagate test was appealed, tripartite review was required. The objective recklessness prong was reviewed de novo, the subjective knowledge prong was reviewed for substantial evidence, and the ultimate decision of whether enhanced damages were appropriate was reviewed for abuse of discretion.

    Halo Electronics, Inc. v. Pulse Electronics, Inc.

    The Court’s decision in Halo highlights three primary issues with the Seagate test. The first issue regards the requirement of objective recklessness. Under the Seagate test, the district court could not consider treble damages, regardless of the overwhelming evidence of subjective intent, if there was no finding of objective recklessness. This finding can be particularly difficult when creative attorneys can construct an objectively reasonable defense after the fact. Turning to the statute, the Court explains that section 284 states that courts “may” grant enhanced damages. Because of the clear language and lack of authority that would constrain a judge’s discretion, the Court holds that the objectively reckless requirement of Seagate is “unduly rigid.”

    Second, the Court notes the paucity of statutory authority and historic practice of implementing a burden of proof of clear and convincing evidence in infringement cases, and thus, the preponderance of the evidence standard is appropriate for enhanced damages.

    Third, the Court rejects the tripartite review of Seagate appeals and replaces it with a review for abuse of discretion. The Court reasons that reviewing for abuse of discretion follows naturally from the decisions to give greater discretion to district courts.


    The go-forward implications are not entirely clear. Trial courts may award treble damages if a judge finds, by a preponderance of the evidence, that enhanced damages are warranted because of the culpable behavior of the patent infringer in the particular circumstances. While this significantly expands trial courts’ discretion, the Court cautions that “such punishment should generally be reserved for egregious cases typified by willful misconduct.”

    With the median damages award for a patent-infringement case well exceeding $5 million and the most extreme awards going for hundreds of millions of dollars, the impact of Halo on the patent community could be significant. Generally, with increased discretion comes greater inconsistency and lower predictability. The greater potential for treble damages may spur an increase in the number of patent-infringement suits, especially suits brought by patent “trolls”—individuals or companies that buy patents to use as a tool to sue or threaten other patent holders for alleged infringement.

    As major technology companies cited in their amicus briefs, greater discretion may have a pervasive chilling effect on innovation. The threat of treble damages alone may curb many innovators, particularly small-scale businesses, from challenging questionable patents or investing in specific technologies.

    The patent community will also likely see an increased vigilance around the development of new technologies and the use of existing patents. Although the Patent Act specifies that a lack of advice of counsel cannot be used to prove willful infringement, many developers may increase their reliance on legal experts’ opinions to protect themselves.

    Keywords: litigation, corporate counsel, treble damages, Halo Electronics, Seagate, patent infringement

    Laura Raden and Gavin Tisdale, Sutherland Asbill & Brenna LLP


    June 24, 2016

    Spokeo, Inc. v. Robins and Statute-Based Class Actions

    On May 16, the U.S. Supreme Court issued its much-anticipated opinion in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016). At issue in Spokeo was whether the plaintiff—in this case a putative class representative—had Article III standing to pursue his statutory claim despite alleging no actual injury. The Court did not decide whether the plaintiff in Spokeo had Article III standing, but it did find that the Ninth Circuit erred when it found that the plaintiff did have standing. Specifically, the Ninth Circuit failed to look at whether the plaintiff alleged a “concrete” injury separate and apart from a naked procedural violation.

    In Spokeo, the plaintiff brought his claim under the Fair Credit Reporting Act (FCRA). The FCRA allows for the recovery of statutory damages in the event that a company publishes incorrect credit information about a consumer. The plaintiff alleged that Spokeo had published incorrect information about him, including as to his age, financial status, and marital status. The plaintiff did not allege whether he had suffered any damage separate and apart from the FCRA violation. The Ninth Circuit found that the plaintiff alleged Article III standing, but the court did not look at whether the plaintiff pled a concrete injury.

    In reversing and remanding the Ninth Circuit’s decision, the Supreme Court made the following holding, which will undoubtedly be quoted in motions to dismiss statutory claims all over the country in the years to come.

    Congress’ role in identifying and elevating intangible harms does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right. Article III standing requires a concrete injury even in the context of a statutory violation. For that reason, Robins could not, for example, allege a bare procedural violation, divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III.

    At 1549.

    The Ninth Circuit did not analyze the plaintiff’s allegations of injury-in-fact under this test, but it is likely that when it does so, it will find that the plaintiff lacks Article III standing. Indeed, the plaintiff in Spokeo did not allege any actual injury apart from the statutory violation.

    The practical implications of Spokeo will extend to similar suits filed under consumer statutes like the FCRA, the Fair Debt Collections Practices Act (FDCPA), and the Telephone Consumer Protection Act (TCPA), in situations where a plaintiff does not allege any separate injury. The holding should also apply to many data-breach claims where plaintiffs do not allege an injury, but only the prospect of a future injury.

    Unfortunately, Spokeo does leave some uncertainty. In some cases, the primary alleged injury (and only form of damages) arises from the alleged statutory injury but the plaintiff also alleges a separate, albeit arguably negligible, form of additional damage. For example, in a TCPA case, the plaintiff could allege damages incurred from printing an unauthorized fax. In a FCRA case, the plaintiff could allege damages incurred from an employer relying on incorrect information and denying him or her a job. While Spokeo will be instructive in those cases, the call is much closer.

    In any event, the Spokeo opinion, particularly the holding quoted above, should prove to be a useful argument for counsel facing many types of consumer claims, including in the data-privacy realm, and particularly in the class-action context.

    Keywords: Spokeo, Fair Credit Reporting Act, FCRA, standing

    Frank Nolan, Sutherland Asbill & Brennan LLP, New York, NY


    April 29, 2016

    DTSA Most Recent Reminder of Value Government Places on Whistleblowers

    On April 27, 2016, Congress passed the Defend Trade Secrets Act (DTSA), which President Obama is anticipated to sign into law in the next couple of weeks. Forbes magazine has already described the DTSA as, “The Biggest IP Development In Years.” While the DTSA’s most notable provision allows plaintiffs to bring federal civil lawsuits for the misappropriation of trade secrets, an equally important provision of the law reinforces the government’s reliance on whistleblowers to police corporate wrongdoing.

    Last year the Securities and Exchange Commission (SEC) sanctioned KBR, Inc. for attempting to prevent employees from reporting misdeeds to regulators by asking employees to sign a non-disclosure agreement that prohibited employees from discussing an internal investigation without prior approval of KBR’s legal department. SEC rules prohibit employers from taking measures through confidentiality provisions, employment agreements, and severance packages that may silence potential whistleblowers before they can reach out to the SEC. As with those SEC rules, after President Obama signs the DTSA into law, it will be added to the array of federal laws that protect the rights of whistleblowers.

    While the DTSA provides companies new ammunition to bring a federal trade-secret claim against employees that walk off the job with valuable trade-secret assets, the DTSA also contains a whistleblower-immunity provision that makes clear that employees will not be found liable for trade-secret misappropriation when reporting legal violations to the government. Moreover, the DTSA requires employers to notify their employees about the immunity provision, “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Trade-secret issues already arise when companies seek to hire and fire employees. The use of non-disclosure and confidentiality agreements is commonplace. The SEC’s sanctioning of KBR last year served as a reminder that employers are not to use non-disclosure agreements in a way that could be perceived as silencing employees’ ability to blow the whistle on an employer’s perceived misconduct. With the passage of the DTSA, employers will have a new affirmative duty to provide employees notice of the DTSA’s immunity provision. Should an employer not comply with the DTSA’s immunity provision, it may be prevented from recovering exemplary damages or attorney fees in an action brought under the law against an employee to whom no notice was provided.

    Accordingly, the DTSA serves as yet another reason why employers must constantly review employee contracts, non-disclosure agreements, and non-competes to ensure that the protections those agreements are meant to provide are enforceable.

    Keywords: litigation, corporate counsel, Defend Trade Secret Act, DTSA, whistleblower,trade secret misappropriation

    Brian C. Spahn, Godfrey & Kahn, S.C., Milwaukee, WI


    April 29, 2016

    Has Uber Misclassified Its Drivers as Independent Contractors?

    On April 21, 2016, Uber announced that it had reached a $100 million settlement with its drivers in class-action lawsuits pending in California and Massachusetts. Uber drivers alleged various federal and state-law wage-and-hour violations. If the settlement is approved, no determination will be made with respect to the ultimate issue: Has Uber misclassified its drivers as independent contractors? That question may not remain unanswered for very long as other Fair Labor Standards Act (FLSA) lawsuits are still pending against Uber, Lyft, and other similar companies across the country.

    At issue is whether drivers were denied minimum-wage and overtime protections afforded under the FLSA because they were misclassified as independent contractors. Uber’s $100 million settlement payment is a reminder as to the important distinction between an employee and an independent contractor, and how federal laws and regulations impact that distinction.

    Why the Distinction Matters

    Employees are afforded certain benefits and protections under the FLSA. The FLSA imposes minimum-wage, overtime-pay, recordkeeping, and other employment requirements on employers of private- and public-sector employees. Because independent contractors are not covered by the FLSA, principals are not required to pay independent contractors minimum wage and overtime compensation, and independent contractors do not have a cause of action against their principal for failure to satisfy FLSA requirements.

    Since January 2013, the U.S. Department of Labor (DOL) has prioritized the investigation of independent contractor misclassification through the “Misclassification Initiative.” As part of that initiative, in July 2015, the DOL issued an administrator’s interpretation declaring that “most workers are employees under the FLSA’s broad definitions.” According to the DOL, the FLSA’s broad definition of “employ” as “to suffer or permit to work” will not be satisfied by simply classifying a worker as an independent contractor.

    The New Economic Realities Test

    Historically, the primary method for determining a person’s employment status has been the “control test.” Under the control test, the most significant consideration was whether the purported employer had control over the worker’s performance or whether the worker generally performed his or her duties free from control.

    Based on the recent guidance from the DOL, however, the control test has given way to the “economic realities test.” Importantly, instead of focusing on the degree of control a business has over an individual’s work, courts have begun to focus on whether the worker is economically dependent on the employer or in business for himself or herself. A worker who is economically dependent on an employer is “suffered or permitted to work” and, thus, always an employee under the FLSA.

    When conducting the economic-realities test, the following six factors are often considered:

    • Is the work an integral part of the employer’s business?
    • Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
    • How does the worker’s relative investment compare to the employer’s investment?
    • Does the work performed require special skill and initiative?
    • Is the relationship between the worker and the employer permanent or indefinite?
    • What is the nature and degree of the employer’s control?

    Each factor should be analyzed in relation to one another, and no one factor is determinative. Specifically, as it relates to the “control” element, the DOL has stated that this factor should not predominate the analysis. The DOL has stated that it will not only consider the control exercised by the purported employer, but will also consider the control retained by the employer.

    The Uber Upshot

    Twenty-nine states have now joined the DOL’s Misclassification Initiative. In Fiscal Year 2015, the DOL Wage and Hour Division’s investigation resulted in the recovery of $74 million in back wages for more than 102,000 workers. As the DOL continues to investigate this issue, states such as California and Louisiana are concurrently pursuing state-law-based wage-and-hour violations arising from the misclassification of employees.

    In light of the DOL and states’ continuing focus on this issue and the broad ramification of the economic-realities test endorsed by the DOL, businesses must continually evaluate their contracts with workers to ensure compliance with state and federal labor laws. Uber’s $100 million settlement is undoubtedly a cautionary tale of what is at stake when employers must address the issue of worker classification.

    Keywords: litigation, corporate counsel, FLSA, worker classification, independent contractor

    Nina G. Beck, Godfrey & Kahn, S.C., Milwaukee, WI


    April 1, 2016

    Important Considerations When Preserving and Collecting ESI

    Much has been written regarding the importance of preserving evidence and making sure lawyers and clients appreciate the need to take steps when responding to discovery requests and/or subpoenas so to avoid claims of spoliation. Below are a few specific considerations requiring attention when counsel are asked to assist clients in responding to document requests and/or subpoenas involving electronically stored information (ESI). These considerations are meant as a guide to addressing ESI issues and are not an all-inclusive list as each situation is unique.

    1. Identify the Most Knowledgeable Information Technology (IT) Personnel.

    While it may go without saying, a thorough ESI preservation and collection effort is only possible if counsel rely on the appropriate information technology (IT) personnel. In many situations, that will involve working with the client’s internal IT staff. However, depending on the size and nature of the client’s business, it may involve working with external IT consultants. If not already known, counsel should immediately request information about the client’s business operations, organization, record-generation practices, and information-systems (IS) architecture to understand the company’s IT/IS systems and to facilitate the preservation and collection of potentially relevant data.

    2. Know Where Information Is Maintained.

    Working with the client’s IT staff or outside IT consultant, counsel must identify all locations where the company maintains IT infrastructure. Creating an ESI data map will assist counsel and the client as information is preserved, collected, and produced. It is important to identify the location for physical files, electronic files, voicemail, and other applications. Counsel need to understand how the company’s employees work. Do employees work at a central or multiple locations? Are employees allowed to work remotely? Do employees use personal computers or are they issued a company computer? A good understanding of the type of computer systems used by the company is key. A good ESI data map will identify network configuration and set up. Information should also be gathered on the operating system, workstations, laptops, portable storage devices, smartphones, and cloud storage.

    3. Understand the Client’s Retention and Destruction Policies.

    Does the company presently have a formal document retention policy? If yes, counsel should obtain that policy. If no, has the client explained the procedures the IT staff recommend to ensuring the general maintenance of email and electronic files? In addition, are email messages administratively deleted from the company’s server? Is there a purge schedule? Are files routinely deleted when employees leave or are they reassigned? Are emails or files “archived” off the system? If yes, what is maintained? And where? Understanding the client’s document retention and destruction policies is necessary so that counsel can evaluate and recommend what document-hold policies need to put in place. When litigation is pending or threatened, counsel must also ensure that an appropriate litigation hold memorandum is circulated to the appropriate document custodians.

    4. Identify the Custodians Whose ESI Needs to be Preserved and Collected.

    Based on the nature of the request, counsel should work with the client to identify a list of personnel whose information may need to be preserved, collected, and produced. In assembling that list, counsel should be prepared to defend how the list was assembled if questioned by opposing counsel and/or the government when responding to a subpoena. Moreover, depending on the nature of the matter, counsel will need to determine whether to seek the cooperation of particular employees in gathering their ESI or whether efforts need to be taken to collect the information without the employee’s knowledge.

    5. Establish a Defensible Review Procedure.

    Depending on the size and scope of potentially relevant ESI, counsel should evaluate procedures to facilitate review such as technology-assisted review (TAR) or whether to assemble a list of search terms aimed at both identifying responsive and potentially privileged information. As with the list of document custodians, counsel must be prepared to defend the process and analysis that went into document collection and review if no pre-collection agreement with opposing counsel has been reached.

    6. Produce Information in the Agreeable Format.

    Federal Rule of Civil Procedure 26(f)(3)(c) requires counsel in civil litigation to confer and discuss both preservation of ESI as well as the form or forms in which ESI is to be produced. Keeping in mind the format that ESI will ultimately be produced at the beginning of the preservation and collection process will help counsel avoid unnecessary delay and expense when it comes time to produce information.

    Brian C. Spahn and Bruce A. Knapp, Godfrey & Kahn, S.C., Milwaukee, WI


    March 31, 2016

    Act Early to Avoid Sanctions under Rule 37(e)

    The recent amendments to the Federal Rules of Civil Procedure expressly address the failure of litigants to preserve electronically stored information and the potential remedies as a result of the same. As amended, Fed. R. Civ. P. 37(e) provides:

    (e) Failure to Preserve Electronically Stored Information. If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court:

    (1) upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice; or

    (2) only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation may:

                (A) presume that the lost information was unfavorable to the party;

                (B) instruct the jury that it may or must presume the information was unfavorable to the party; or

                (C) dismiss the action or enter a default judgment.

    The rule provides for two levels of remedial measures depending upon the culpability of the spoliating party including cost-shifting and awards of attorney fees. While the obligation to preserve is not new, the comments to the rule make it abundantly clear that “reasonable steps” must be taken at the outset of litigation or when the threat of litigation becomes imminently clear. Fortunately, such efforts are measured in proportion to the claims and amount at issue. For in-house and outside corporate counsel, an ounce of prevention will build a strong record down the road. This includes taking affirmative steps to preserve potentially relevant information as soon as practicable. Practitioners must be aware of internal document-retention policies, automated deletion schedules, and other factors that may affect the ability to retrieve relevant documents including employee turnover and inadvertent destruction by parties unfamiliar with the litigation. For corporate practitioners, preservation letters, litigation holds, and instructions on how to preserve file materials should be distributed as soon as possible and, when appropriate, automatic document-retention policies should be altered. Taking these steps early will help to dispel and mitigate claims from opposing parties that reasonable steps were not taken to prevent inadvertent destruction.

    Greg S. Hearing, Gordon & Rees LLP, Denver, CO


    March 31, 2016

    Satisfying the Duty to Investigate Applicable Insurance Policies

    In 2015, the Tenth Circuit Court of Appeals in Sun River Energy v. Nelson affirmed an award of sanctions against outside counsel for failing to disclose a directors-and-officers policy potentially providing coverage for securities counterclaims asserted by the defendants. Both in-house counsel and outside counsel were aware of the policy but assumed that it would not provide coverage because no directors or officers were named in the counterclaims. However, neither undertook an extensive investigation of the policy’s provisions and the policy was not disclosed until some 18 months after the initial disclosure deadline. Opposing counsel moved for sanctions, which the district court approved against both in-house and outside counsel personally.

    On appeal, the Tenth Circuit noted outside counsel obligations under Fed. R. Civ. P. 26(g) to make accurate and complete investigation of disclosures and noted the failure of outside counsel to meaningfully review the policy. On the other hand, the court reversed the sanction award against the in-house attorney, finding that while he later entered an appearance in the case, he was not responsible for the inaccurate disclosure at issue.

    For both in-house and outside corporate counsel, the court’s holding raises the issue of what amounts to adequate and complete investigation for disclosures or discovery responses certified by counsel. An implication of the holding is that outside counsel must actually review potentially applicable policies, or alternatively, verify that in-house counsel have, in fact, reviewed the policy and confirmed its scope and applicability.

    Greg S. Hearing, Gordon & Rees LLP, Denver, CO


    February 29, 2016

    Saving Money with FRCP 26's New Proportionality Standard

    Over the past three decades, changes in technology have precipitated changes in the legal profession. Written correspondence progressed to emails; phone calls reduced to text messages. With this evolution, the potential of information discoverable in lawsuits has grown exponentially. The growth of electronically stored information (ESI), in turn, brought with it a slew of unique issues. The vast majority of ESI in most cases is irrelevant and producing it is costly and burdensome. Adapting to the needs of the profession, the Rules Committee addressed this very issue in 2015 by amending Federal Rule of Civil Procedure 26 (Rule 26).

    In short, the committee amended Rule 26(b)(1) to limit the scope of discovery to relevant, non-privileged information that is proportional to the needs of the case. Lawyers rejoiced. Spending countless hours producing and reviewing tens of thousands of documents in low-worth cases ostensibly became a thing of the past. But there are two sides to this story: what the rule says, and how judges interpret and apply it.

    It has now been a little over two months since the 2015 amendments to the Federal Rules took effect, and magistrate-judge opinions regarding the Rule 26 are beginning to surface. Although it is still far too early to predict the practical impact of the amendments, one thing is clear—better data-retention policies make for better proportionality arguments. Indeed, the committee notes provide that parties should consider reliable technology as a means to reduce costs in cases involving large volumes of ESI.

    Among the factors a judge considers in determining the proportionality of discovery, only one can be directly manipulated by the parties: the burden imposed on litigants versus the likely benefit to the resolution of the dispute. (The other factors judges consider in determining proportionality of discovery include: the importance of the issues at stake; the amount in controversy; access to relevant information; the resources of the parties; and the importance of discovery in resolving the conflict. See Fed. R. Civ. P. 26(b)(1). ) Magistrate judges’ early interpretations of this rule indicate that self-imposed burdens are unpersuasive. During the 2016 ALM LegalTech conference in New York, U.S. Magistrate Judge James C. Francis made this very point. “If you have been cavalier about your information governance and you have hordes of information that have not been properly vetted . . .  I’m going to be much less sympathetic because the burden you created is more or less self-imposed.”

    Accordingly, a well-crafted data-retention policy is critical to saving costs in discovery; magistrates are unmoved by the costs created by deficient (or nonexistent) policies. A well-written policy will likely make for a stronger argument in limiting proportional discovery. At the very least, it will create a stronger negotiating position when crafting the scope of discovery with opposing counsel. It is important to remember, though, that a policy is only as effective as it is implemented.

    Michael Paretti, Snell & Wilmer, Las Vegas, NV


    February 29, 2016

    Dialing In: TCPA Hot Issues for 2016

    2015 saw a continued wave of class-action filings under the Telephone Consumer Protection Act (TCPA). However, unsettled law continues to place a compliance burden on companies that communicate with consumers by phone or text.

    The Federal Communications Commission (FCC) captured headlines with the release of an omnibus declaratory order in July 2015, purporting to clarify uncertain rules but leaving many issues as uncertain as ever. And the order is now facing a legal challenge in a federal appellate court.

    The six hot issues identified below set the stage for the TCPA in the coming year.

    1. Will the FCC’s Omnibus Order Survive Legal Challenge?

    More than a dozen parties have filed appeals challenging the FCC’s July 10, 2015, TCPA declaratory ruling and order. The pending appeals, which have been consolidated before the U.S. Court of Appeals for the D.C. Circuit, have been filed by a wide range of business interests challenging various aspects of the FCC’s order, including (1) the problem of reassigned cell phone numbers; (2) the definition of autodialer; (3) the standards for consent and revocation; and (4) issues unique to financial institutions and healthcare providers.

    2. The Definition of “Autodialer”

    Recent decisions demonstrate that courts struggle to apply this term to the facts of particular cases. The FCC’s order failed to provide meaningful guidance on what equipment would not constitute an autodialer, other than to offer the unhelpful truism that a rotary dial phone is not an autodialer. The uncertainty over the definition of autodialer affects the scope of the TCPA and makes it difficult for businesses using automated communications to ensure compliance and manage litigation risk.

    3. The Supreme Court’s Impact on TCPA Class Actions

    In January 2016, the U.S. Supreme Court held in Campbell-Ewald v. Gomez, 135 S. Ct. 2311—a TCPA class action—that an offer of judgment that would fully compensate the named plaintiff (and putative class representative) does not moot the class action. The Court left open, however, the question of whether a tender of actual payment might have a different effect. In Robins v. Spokeo, 135 S. Ct. 1892, the Supreme Court will resolve the issue of whether a plaintiff who alleges a statutory violation but who fails to allege a concrete injury in fact has standing to pursue allegations based on a breach of that statute.

    4. Direct and Vicarious Liability Issues

    The standard for third-party liability under the TCPA is a critical issue for any company that communicates with customers or potential customers using agents, third-party vendors, franchisees, or other multi-party arrangements. For unsolicited calls and texts, the plain language of the TCPA assigns direct liability to the party actually making or initiating the call, and a number of court decisions have applied vicarious-liability principles to other parties involved in the communications. For unsolicited fax transmissions, several courts have held that an advertisement sent on behalf of a company whose services are advertised may in some circumstances lead to direct liability of the company under the TCPA, even if the company did not send the fax itself.

    5. Will the FCC Resolve Issues Not Addressed by the July 2015 Order?

    The FCC’s 2015 omnibus order addressed a wide range of issues, but other questions remain unanswered. Will the FCC clarify the standards for certain calls made by energy utilities? Will the special rules defined for financial services and healthcare companies be extended to other industry segments? Will the FCC continue to grant exemptions from liability for solicited fax advertisements sent before April 2015 without an opt-out notice?

    6. Will Congress Stem the Tide of Runaway Class Action Liability?

    In 2015, Congress created an exception from TCPA liability for collection calls for federally insured student loans. Will Congress consider addressing the disproportionate class-action risk posed by the TCPA?

    With the wave of TCPA litigation expected to continue in 2016, the developments in these key areas, among others, will shape the TCPA landscape. With many different industries being targeted by class-action plaintiffs’ lawyers, a strong TCPA compliance program is essential to help avoid TCPA lawsuits and potential liability.

    Lewis S. Wiener, Wilson G. Barmeyer, Kristine M. Ellison, Sutherland Asbill & Brennan LLP, Washington, D.C.


    February 29, 2016

    Five Key Steps to Take If Your Company Experiences a Cybersecurity Attack

    What do the largest companies in the world, as well as the St. Louis Federal Reserve, the IRS, and the White House have in common? Each of them has experienced notable cybersecurity breaches and consequently had to respond. Cybersecurity attacks happen to companies of all sizes across many different sectors, and the effects of such attacks can be harmful to an organization’s reputation and bottom line. When a cybersecurity attack inevitably occurs, here are five steps that in-house counsel may consider taking to minimize detrimental effect.

    1. Preserve the Data

    After a cybersecurity attack, in-house counsel may consider recommending that their corporate client preserve all data surrounding the attack. This information may be necessary to determine the cause of the breach and to provide information to employees, customers, business partners, and government agencies about the attack. Some actions to consider that will aid in data preservation include disconnecting infected machines, calling forensic experts to image infected machines, saving log files, pulling needed backups out of rotation, saving keycard data and surveillance tapes, starting a real-time packet capture, and forcing employees to change passwords.

    2. Recommend Appointing One Individual to Lead Response to the Cybersecurity Attack

    Consider recommending that the company that experienced the breach appoint one individual to head the incident response team. For privilege purposes, the individual leading the incident response team will ideally be either the general counsel or another attorney in a position to coordinate across organizational units. The team may include people from the following functions: legal, information technology, executive management, public relations, risk management, customer service, compliance, and building security/facilities (if physical security is involved).

    3. Take Steps to Prevent Future Harm or Mitigate Existing Harm

    If the breach is active or ongoing, take steps to prevent or contain the data breach. Consider identifying how the cybersecurity attack exploited the company’s vulnerabilities, and consider implementing remediation actions to address how the breach occurred. These mitigation efforts may be viewed favorably in the face of future enforcement actions, litigation, and class actions and may minimize monetary and data loss to clients.

    4. Collect Evidence to Determine What Caused the Cybersecurity Attack

    In-house counsel may recommend beginning an investigation to determine the source of the cybersecurity attack. If criminal activity is suspected, consider whether law enforcement should be involved in the collection of evidence. Potential investigatory actions include: conducting interviews with company personnel, determining whether information and data were lost in the breach, determining who may exploit the information lost in the breach, and investigating whether the initial breach may have provided access or opportunities for additional exposure of data.  

    5. Notify Relevant Parties

    Companies that have been breached should consider notifying parties affected by the breach. These parties may include customers, business partners, and government agencies. If personally identifiable information (PII) has been compromised, counsel will need to determine the best way to communicate with consumers. Companies may be bound by state and federal laws and regulations that describe who must comply with the law; definitions of PII; what constitutes a breach (e.g. unauthorized acquisition of data); and requirements for notice (e.g. timing, method of notice, people to be notified). Companies that have experienced a breach may consider notifying business partners if the breach affects existing relationships or results in potential contract breaches.

    If criminal activity is suspected, consider notifying law enforcement. Further, government regulators may also need to be notified. Financial institutions, in particular, are subject to regulations by the Financial Industry Regulatory Authority and the Securities Exchange Commission, which may require disclosure of cybersecurity breaches. Public companies may be required to disclose material information regarding cybersecurity breaches to investors. Consider if insurance providers, banks, or credit-card processors, among other parties, also need to be notified. Regardless of what parties are notified, all forms of communications need to be documented in detail.

    Despite the prevalence of cybersecurity attacks, implementing these five key steps following a cybersecurity breach may limit exposure to litigation and regulatory actions, as well as decrease reputational and financial harm to the corporation and its clients.

    Brian Rubin and Amy Xu, Sutherland Asbill & Brennan LLP, Washington, D.C.


    February 25, 2016

    Colorado's "Amazon Tax" Upheld

    In a recent opinion from the Tenth Circuit Court of Appeals, Colorado’s so-called Amazon tax was upheld in the latest chapter of a five-year legal battle. In 2010, Colorado enacted legislation imposing notice and reporting requirements on retailers that sold goods to Colorado residents without collecting sales tax. The Colorado legislation required retailers to provide notice to in-state customers of their obligation to remit use tax for items purchased over the Internet, and additionally required an annual report to the Colorado Department of Revenue. The Direct Marketing Association challenged the law in both state and federal court, which yielded prior opinions from the Tenth Circuit as well as the Colorado Supreme Court. Following those opinions, the district court and Tenth Circuit were confronted with the questions of whether the Colorado law violated the bounds of the Dormant Commerce Clause.

    On February 22, 2016, the Tenth Circuit held that Colorado’s statutory scheme does not discriminate nor unduly burden interstate commerce. The ruling paves the way for Colorado, and other states, to impose notice and reporting requirements on out-of-state retailers selling goods within the state. For corporate counsel representing e-retailers, the ruling (subject to further appeal) marks the beginning of additional state-by-state compliance obligations that will affect annual corporate compliance.

    Greg S. Hearing, Gordon & Rees LLP, Denver, CO


    January 26, 2016

    DOL Releases New Standards for Joint Employment

    Litigation under the Fair Labor Standards Act (FLSA) remains one of, if not the most, active area of litigation in the country. Last week, the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL) issued an administrator’s interpretation establishing new standards for determining joint employment under the FLSA and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA) that likely will lead to more alleged violations of both statutes on “joint employer” theories. All companies should examine relationships with workers, even those the company does not directly pay, to determine any potential risks if a joint-employment finding is made.

    The WHD interpretation flatly rejects the common-law definition of “employment,” which exclusively focuses on the amount of control that an employer exercises over an employee. The interpretation criticizes the common-law approach as unduly narrow, arguing that it neglects the “broader economic realities of the working relationship.”

    The interpretation seeks to clarify the difference between horizontal and vertical joint employment, and states that the FLSA’s and MSPA’s regulations provide complementary guidance on joint employment. The interpretation explains that horizontal joint employment exists where “the employee has employment relationships with two or more employers, and the employers are sufficiently associated or related with respect to the employee that they jointly employ the employee.” To analyze whether the employers are sufficiently related, the Interpretation created a non-exhaustive list of factors to consider, including:

    • Who owns the potential joint employers (i.e., does one employer own part or all of the other or do they have common owners)?
    • Do the potential joint employers have any overlapping officers, directors, executives, or managers?
    • Do the potential joint employers share control over operations (e.g., hiring, firing, payroll, advertising, overhead costs)?
    • Are the potential joint employers’ operations intermingled (for example, is there one administrative operation for both employers, or does the same person schedule and pay the employees regardless of which employer they work for)?
    • Does one potential joint employer supervise the work of the other?
    • Do the potential joint employers share supervisory authority for the employee?
    • Do the potential joint employers treat the employees as a pool of employees available to both of them?
    • Do the potential joint employers share clients or customers?
    • Are there any agreements between the potential joint employers?

    The interpretation offers several examples of horizontal joint employment, including when a waitress works for two restaurants operated by the same entity or where two orchards have an agreement to share workers and a harvester picks produce at both.

    Vertical joint employment exists where a worker has an employment relationship with one entity (the “intermediary employer”) but the economic realities show that he or she is economically dependent on, and thus employed by, another entity involved in the work (the “potential joint employer”). In determining whether vertical joint employment exists, the interpretation notes that a threshold question is whether the intermediary employer is an employee of the potential joint employer. If so, then any employee of the intermediary employer is automatically an employee of the potential joint employer (referred to in some states as “look-through rule”). If not, the interpretation shifts to a second inquiry, which examines the employee’s relationship with the potential joint employer, and focuses specifically on the economic realities of the working relationship. The interpretation points to an MSPA regulation that provides a set of factors to apply during an economic-realities analysis in vertical joint-employment cases, which includes:

    • directing, controlling, or supervising the work performed;
    • controlling employment conditions;
    • permanency and duration of relationship;
    • repetitive and rote nature of work;
    • work integral to business;
    • work performed on premises; and
    • performing administrative functions commonly performed by employers.

    The interpretation notes that without explicitly relying on the regulation, several courts have considered similar factors in deciding FLSA cases. The interpretation admonishes courts that only or primarily address the potential joint employer’s control, criticizing it as “inconsistent with the breadth of employment under the FLSA.”

    The interpretation warns that it is becoming increasingly more common for a worker to be jointly employed by two or more employers. As a result, employers should: (1) expect that their relationships with workers in which multiple entities are involved will receive greater scrutiny going forward; and (2) closely examine these relationships, even where the company does not directly pay the workers, to assess potential findings of joint employment.

    Katherine Dumeer and Matt Gatewood, Sutherland Asbill & Brennan LLP, Washington, D.C.


    January 26, 2016

    Offer of Complete Relief to Named Plaintiff Does Not Moot Class Action

    Last week, the U.S. Supreme Court resolved a circuit split when holding in Campbell-Ewald Co. v. Gomez¸ No. 14-857, that an unaccepted Rule 68 offer of judgment that would fully satisfy a named plaintiff’s individual claim does not moot individual or class claims. The Court left open the question of whether actual payment in some form, rather than merely offering to pay a settlement or judgment, would lead to the same result.

    In the underlying case, the plaintiff received a single, unsolicited recruitment text from a marketing consultant hired by the U.S. Navy. The plaintiff responded by filing a putative class action against the consultant, which alleged a violation of the Telephone Consumer Protection Act (TCPA). Before the plaintiff moved for class certification, the marketing consultant made a Rule 68 offer of judgment to the plaintiff for $1,503—$3 more than the maximum amount of treble statutory damages the plaintiff could recover for a single violation of the TCPA. Rule 68(a) provides that “a party defending against a claim may serve on an opposing party an offer to allow judgment on specified terms, with the costs then accrued.” In this case, however, the plaintiff declined the offer. Thereafter, the defendant moved to dismiss the plaintiff’s claim, arguing that the claim was moot because it already had offered the plaintiff full and complete relief under the TCPA. The district court denied the motion.

    On appeal, the U.S. Court of Appeals for the Ninth Circuit agreed. The Ninth Circuit held that an unaccepted Rule 68 offer does not moot a plaintiff’s individual claims or putative class claims. 768 F.3d 871 (9th Cir. 2014). Although the mootness ruling was consistent with Ninth Circuit precedent, several other federal circuit courts of appeals had held otherwise.

    The Supreme Court agreed with the Ninth Circuit and held that an unaccepted offer of judgment does not moot a plaintiff’s individual claim or the claims of a putative class. The Court embraced the reasoning of Justice Kagan’s dissent in Genesis HealthCare Corp. v. Symczyk, 133 S. Ct. 1523 (2013)—a case examining the effect of a Rule 68 offer in the collective action context under the Fair Labor Standards Act—in characterizing the unaccepted offer as a “legal nullity, with no operative effect.” Accordingly, the rejection of a Rule 68 offer of judgment leaves the case as a live controversy in the same position as it would have been had the defendant never made the offer.

    In deciding only the specific issue before the Court, Justice Ginsburg, writing for the majority, declined to opine on the hypothetical situation in which “a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.” Justice Thomas concurred with the judgment on that basis, agreeing that a mere offer does not end the case; he suggested, however, that his analysis may be different if an actual tender of the funds occurred.

    Chief Justice Roberts dissented, advocating for a rule that a complete offer made pursuant to Rule 68 moots the action. According to Justice Roberts, “[w]hen a plaintiff files suit seeking redress for an alleged injury, and the defendant agrees to fully redress that injury, there is no longer a case or controversy for purposes of Article III.” In such circumstances, “the plaintiff cannot demonstrate an injury in need of redress by the court.”

    The Court also held that the petitioner’s status as a government contractor did not allow it to raise derivative sovereign immunity as a defense against a putative class-action claim under the TCPA. The Court concluded that when the contractor’s actions are alleged to have violated both federal law and the government’s explicit instructions, the contractor does not have the benefit of this protection. According to the Court, the Navy relied on the contractor’s representation that the list of recipients for text message solicitations included only individuals who had opted in to receive them.

    Kristine Ellison, Lewis Wiener, and Wilson Barmeyer, Sutherland Asbill & Brennan LLP, Washington, D.C.


    December 29, 2015

    The UIDDA and How It Affects the Out-Of-State Subpoena Process for State Cases

    In an effort to streamline the onerous, time-consuming process of conducting out-of-state discovery for state court cases, the Uniform Law Commission developed the Uniform Interstate Depositions and Discovery Act (UIDDA). Promulgated in 2007, the UIDDA has been adopted by the majority of states and provides a standardized means for litigants to take depositions and obtain discovery from individuals and entities located out of state. The UIDDA harmonizes the out-of-state subpoena process for state court cases with Federal Rule of Civil Procedure 45.

    When seeking out-of-state discovery in a state court proceeding, a litigant must first obtain a subpoena from the state court where the case is venued. The litigant must then present that subpoena to the clerk in the county in which the discovery is sought. Thereafter, the clerk shall promptly issue a local subpoena for service upon the person or entity from whom discovery is sought. It is important to note that the subpoena must comply with all state rules and statutes related to discovery.

    The UIDDA repeals the law in those states where discovery is sought that still require a commission or letter rogatory from a trial court before a deposition can be taken in those states. Under the UIDDA, a subpoena request does not constitute a court appearance and, therefore, the out-of-state litigant is not required to be licensed in the state. Therefore, one does not need to be admitted pro hac vice or obtain local counsel when requesting a subpoena pursuant to the UIDDA. However, a local state license is required to file, respond, or appear in court related to an application to enforce, quash, modify, or obtain a protective order concerning a subpoena issued pursuant to the UIDDA.

    As of January 1, 2016, the following states and territories have adopted some form of the UIDDA:

    Alabama, Alaska, Arizona, California, Colorado, Delaware, District of Columbia, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Montana, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, U.S. Virgin Islands, Utah, Vermont, Virginia, Washington, and Wisconsin.

    In addition, legislation to adopt the UIDDA has been introduced in Arkansas and Ohio.

    It remains critical to check the requirements of both the state and locality where your case is venued and the state and locality where you seek to conduct discovery because some states have adopted slight variations of the Model UIDDA and other states have only recently adopted the UIDDA (or will in the coming months). If the state in which you are attempting to obtain a subpoena has adopted the UIDDA, the process will be more efficient and less expensive than it once was.

    Keywords: litigation, corporate counsel, pharmaceutical, preemption, impossibility, Levine, clear evidence

    Adam R. Prinsen, Godfrey & Kahn, S.C., Madison, WI


    December 22, 2015

    Lay Opinions vs. Expert Testimony under the Federal Rules of Evidence

    The Federal Rules of Evidence governing lay opinions and expert testimony—Rules 701 and 702 respectively—set forth the standards for admissibility of both categories of evidence. When testimony is “expert” in nature, it must comport with the stringent standards articulated by the U.S. Supreme Court in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). However, the distinction between lay opinions and expert testimony is not a bright line. Courts throughout the country have come to different conclusions about the scope of permissible lay opinions and what constitutes expert testimony.

    Under Rule 701, a lay witness may provide an opinion that is (1) rationally based on the witness’s perception; (2) helpful to clearly understanding the witness’s testimony or to determining a fact in issue; and (3) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702. Expert testimony, in contrast, is only permissible if a witness is “qualified as an expert by knowledge, skill, experience, training, or education” and the proffered testimony meets four requirements: (1) The expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (2) the testimony is based on sufficient facts or data; (3) the testimony is the product of reliable principles and methods; and (4) the expert has reliably applied the principles and methods to the facts of the case. Experts may testify “in the form of an opinion or otherwise”—it is entirely appropriate for an expert to testify generally about principles, methods, or other information and leave the ultimate inference or “opinion” to the finder of fact.

    Various circuits have come to different conclusions regarding the scope of permissible lay-opinion testimony. Some courts take a broad view of lay-witness opinions. For example, in U.S. v. Jayyousi, 657 F.3d 1085 (11th Cir. 2011), the Eleventh Circuit permitted an FBI agent to testify as to the meaning of alleged code words used between codefendants even though the calls were predominantly in Arabic and the agent did not speak the language. Taking a narrower view of Rule 701, the Sixth Circuit reached a different result in a case involving similar facts. In U.S. v. Freeman, 730 F.3d 590 (6th Cir. 2013), the Sixth Circuit Court of Appeals reversed and remanded a trial court’s decision to permit an FBI agent’s lay-witness testimony interpreting phone calls between codefendants. The agent had provided voice identifications and substantive interpretations of the meaning of various statements contained in the calls. The court focused on the fact that the agent lacked firsthand knowledge sufficient to lay a foundation for a lay-witness opinion under Rule 701(a).

    One important issue that lawyers must consider when assessing whether reliance on lay or expert opinions will be necessary in a particular case is the disclosure requirements in Federal Rule of Civil Procedure 26(a)(2) that apply to expert testimony. Rule 26(a)(2) requires expert reports from retained experts. Conversely, lay-witness opinions typically need not be disclosed in advance of trial or supported by formal reports. However, given the fine line some courts draw between lay-witness opinions and expert testimony, lawyers must review the authority in their particular jurisdiction early in the case. To avoid any uncertainty, attorneys should consider either disclosing lay-witness opinions or pursuing an agreement with opposing counsel as to the exact nature of the disclosures required for specific testimony to be elicited in the case. Such disclosures or agreements will ensure that important testimony that counsel hopes to rely on is not excluded on the eve of trial.

    Given the nuance between lay and expert testimony, an early assessment of what, if any, opinions witnesses may offer at trial is critical. Similarly, an understanding of how your particular court interprets the scope and requirements for lay opinions and expert-witness testimony is essential when developing your case strategy.

    Keywords: litigation, corporate counsel, Daubert, expert testimony, and lay opinions

    Kerry L. Gabrielson, Godfrey & Kahn, S.C., Madison, WI


    November 30, 2015

    How the December 1 FRCP Changes Affect Document Production and Failure to Preserve

    On April 29, 2015, the U.S. Supreme Court adopted proposed amendments to the Federal Rules of Civil Procedure that aim to (1) inject proportionality into the discovery process, (2) require parties to be transparent and cooperative in their discovery responses, and (3) increase active case management of discovery by the judiciary. These rules will go into effect on December 1, 2015. The change to Rule 1 of the Federal Rules of Civil Procedure sets the stage for the theme of cooperation that the new rules aim to promote. Rule 1 adds language that states: “the rules should be construed, administered, and employed by the court and the parties to secure the just, speedy, and inexpensive determination of every action and proceeding.” Emphasizing early case management by the court and hopefully reducing costs over the long run, Rule 16 adds language about considering preservation of electronically stored information (ESI) in the scheduling order. In the same grain, Rule 26 has emphasized proportionality in the discovery process by moving the proportionality factors to the beginning of the rule. The factors that parties should consider are: “Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit . . . .” These factors have always been present in Rule 26, but by moving them to the top of the rule, the amendment emphasizes the need for parties to consider them before making discovery requests. Additionally, the standard that discovery is relevant if it has a possibility to lead to the discovery of admissible evidence has been removed and replaced with language that states that discovery need not be admissible, which ultimately limits the scope of discovery to what is permitted by Rule 26.

    With the emphasis on cooperation and proportionality the new amendments also make changes to Rule 34 that alter the prior rule by requiring the party responding to requests for production to (1) provide greater specificity in objections; (2) produce responsive documents within a “reasonable time” (a new requirement to impose a date certain on production); and (3) give an express confirmation in its response whether documents are being withheld based on any stated objection. Finally, Rule 37(e) is changed in its entirety and the new rule initially considers the best way to get the information requested to the other party, rather than jumping to immediate sanctions. If the fact finder finds that the party intentionally destroyed evidence, and that the loss of this evidence will prejudice the party, the court may impose harsher penalties such as instructing the jury that it may consider all of the lost evidence to be unfavorable to the party, or may dismiss the action in its entirety.

    This is not a comprehensive review of all of the changes in the rules, but covers the primary changes and provides a road map for navigating the new amendments that every litigator should consider moving forward. Both the courts and the parties will have to work together if the rules are going to prove successful.

    Megan Rose, Gordon & Rees LLP, Denver, CO


    November 30, 2015

    Upcoming Amendments to FRCP 26: What Every Litigator Needs to Know

    On December 1, 2015, several important changes to Federal Rule of Civil Procedure 26 go into effect. These changes may have long-lasting effects on discovery in federal cases. Proper implementation can help parties streamline the discovery process. Failure to heed the new rule may lead to costly discovery disputes. Below are four things every litigator should know.

    Discovery Redefined (Slightly)
    Perhaps the most noticeable revision to Rule 26 is the addition of proportionality factors to the scope of discovery. The revision qualifies the broad scope of discoverable evidence in discovery, limiting it to the proportional needs of the case. Considerations will include the factual and legal questions at issue; the amount in controversy; the party’s respective resources and access to the requested information; the importance of the discovery resolving the issues at hand; and whether the burden of production outweighs the cost of production.

    These changes may not be as extensive as commentators originally perceived. As the committee recognized, proportionality has been included in Rule 26(b)(2)(C)(iii) since 1983. Prior rule changes, however, inadvertently minimized its role as a limitation on the scope of discovery. According to the committee, this amendment reemphasizes the importance of proportionality to discovery requests. The committee stressed that this amendment is not intended to allow parties opposing discovery to refuse production of discoverable information through a boilerplate objection, nor restrict access to discoverable information. Instead, the amendments are intended to provide explicit focus on considerations already implicit in former Rule 26(b)(2)(C)(iii) and revised Rule 26(b)(1).

    “Not Reasonably Calculated?”—Not Anymore
    In conjunction with the addition of proportionality factors, the committee also removed the “reasonably calculated” language from former Rule 26(b)(1) relating to what constitutes discoverable information. According to the committee, this language has often been misapplied by practitioners to limit the scope of discoverable information. Its removal aims to encourage litigants to focus on the proportionality factors of Rule 26(b)(1). In its place, the committee added the more direct statement that “information within the scope of discovery need not be admissible in evidence to be discoverable.”

    “Early” Discovery Now Available
    The amendments also add a mechanism for parties to engage in early document discovery. Under revised Rule 26(d)(2), parties may deliver document discovery under Rule 34 prior to the Rule 26(f) conference, provided that at least 21 days have passed since the receiving party has been served with the summons and complaint. While the relaxation of the discovery moratorium is designed to facilitate focused discovery discussions during the Rule 26(f) conference—particularly as they related to electronic discovery—the response deadline remains unchanged. Under the revised rule, the receiving party’s response deadline is triggered by the Rule 26(f) conference, not the date the discovery is delivered. The committee emphasized that this softened deadline should not affect the decision of a party or the court to allow additional time for a party to respond to the discovery requests if necessary.

    Making Explicit What Was Once Implied
    Several other changes to Rule 26 make explicit what was once implied. Rule 26(c)(1)(B) is amended to include an express recognition of the ability of protective orders to allocate expenses for discovery between the parties. Rule 26(f)(3) is amended in parallel with Rule 16(b)(3) to add two items to the discovery plan, addressing issues relating to preservation of electronic discovery and court orders under Federal Rule of Evidence 502. Rule 26(d)(3) is renumbered and amended to recognize that parties may stipulate to a case-specific sequence of discovery.

    Keywords: litigation, corporate counsel, Rule 26, discovery, proportionality

    Michael Mather, Godfrey & Kahn, S.C., Milwaukee, WI


    November 25, 2015

    How the December 1 FRCP Amendments Affect E-Discovery Policies

    A notable theme of the December 1, 2015, amendments to the Federal Rules of Civil Procedure is the increased focus on the identification, preservation, and production of electronically stored information (ESI). These changes are first reflected in Fed. R. Civ. P. 16(b)(3)(B) which, as amended, now specifically addresses the preservation of ESI. While most parties are familiar with the current requirement to discuss the discovery and disclosure of ESI, the new rule, in conjunction with the revisions to Rule 37, places an emphasis on the early identification and preservation of ESI at the outset of the case.

    For both inside and outside counsel, the revised rules place an increased emphasis on the early identification of potential ESI. The commentary to the amendments makes it exceedingly clear that courts should penalize parties that fail to adequately identify and preserve ESI at the outset of the case. Preservation letters and early sequestration of backup media will be essential. For corporate parties with internal IT departments, it will be essential for in-house counsel to develop an understanding of the company’s storage, retention, and backup policies in the event of litigation. By contrast, counsel representing smaller corporate entities will want to determine at the outset of the case whether the client can easily identify potentially responsive information or whether third-party support is needed to search, cull, and review potentially responsive data. Either way, the amended rules make clear that when it comes to preservation, time is of the essence.

    Greg Hearing, Gordon & Rees LLP, Denver, CO


    November 24, 2015

    Four Things Every Practitioner Needs to Know About New FRCP 34

    The amendments to Federal Rule of Civil Procedure 34 go into effect on December 1, 2015 and place a number of new requirements on a party responding to requests for production. These amendments address a number of problems in discovery practice, particularly objections that provide little, if any, information about the bases or consequences of those objections. The Advisory Committee Notes state that the amendments aim to “reduc[e] the potential to impose unreasonable burdens by objections to requests to produce.” To avoid running afoul of amended Rule 34, practitioners responding to document requests should consider each of the following.

    1. Be Specific

    In response to oft-criticized boilerplate objections, amended Rule 34(b)(2)(B) requires that a party must “state with specificity the grounds for objection.” Gone are the days of objecting to a document request as “vague and ambiguous,” “overbroad,” or “unduly burdensome” without further explanation. According to the Committee Notes, the new provision adopts the language from Rule 33(b)(4) and “eliminat[es] any doubt that less specific objections might be suitable under Rule 34.” As a result, an “overbroad” objection that ignores that “some part of the request is appropriate” is inadequate. That is, a responding party may now be required to explain with specificity what is and is not overbroad about a request.

    2. Be Prepared

    Amended Rule 34(b)(2)(B) further addresses the common practice of providing copies of materials rather than permitting inspection. The response must now state that copies will be produced in lieu of inspection. The production “must then be completed no later than the time for inspection specified in the request or another reasonable time specified in the response.” Previously, a party might respond to a request by stating that documents would be produced without specifying a date for that production. The amended rule prohibits such an open-ended response. Because the amended rule and the Committee Notes are silent as to what constitutes a “reasonable time,” it will be left to the parties and, inevitably, the courts to decide. Practitioners who litigate document-heavy cases must be prepared to collect and review documents quickly, which may increase the early costs of discovery.

    3. Be Frank

    Paired with the specificity and timing requirements in amended Rule 34(b)(2)(B) is amended Rule 34(b)(2)(C)’s requirement to be frank about withholding documents based on objections. Seeking to reduce confusion and uncertainty, the amended rule requires that an objection must “state whether any responsive materials are being withheld on the basis of that objection.” Because the amended rule does not require the equivalent of a privilege log, this requirement is not as burdensome as it may appear. A party satisfies the amended rule by explaining the limitations of the search for responsive and relevant materials. Nevertheless, practitioners should be ready to engage in “an informed discussion of the objection” when documents have been withheld.

    4. Be Timely

    Though somewhat overshadowed by the other changes to the rule, amended Rule 34 also recognizes the change to Rule 26(d)(2) that permits a party to “deliver” document requests to a party before the Rule 26(f) conference, but more than 21 days after service of the summons and complaint. With the amendment to Rule 26(d)(2), practitioners will need to pay close attention when calculating the deadlines for a document request delivered before the Rule 26(f) conference. Amended Rule 34(b)(2)(A) clarifies that the “delivery” of a request does not start the time to respond if delivered prior to the Rule 26(f) conference. Rather, the party must respond to a document request delivered prior to the Rule 26(f) conference within 30 days of the Rule 26(f) conference.

    David Konkel, Godfrey & Kahn, S.C., Milwaukee, WI


    October 30, 2015

    Nearly 80 Years Later, "Happy Birthday" Lyrics Now Public Domain

    “Happy Birthday to You” is arguably one of the most well-known songs of all time. American citizens are indoctrinated with the lyrics at infancy and hear them ad nauseam through old age. Due in part to the song’s popularity, the Clayton F. Summy Co. filed to copyright the song in 1935. Warner/Chappel Music purchased Summy’s successor-in-interest in 1988 and has been enforcing the copyright claim to “Happy Birthday” ever since. It is estimated that Warner/Chappell earns about $2 million a year from the song. Over the years, the copyright has prevented everything from authors writing the lyrics in their books to directors using the song in films. But in September 2015, that all changed.

    Judge George H. King, Chief Judge of the U.S. District Court for the Central District of California, ruled on September 22 that Warner/Chappell’s copyright to the “Happy Birthday” lyrics was invalid in Rupa Marya, et al v. Warner/Chappell Music Inc., Case No. CV 13-4460-GHK. In his 43-page opinion, Chief Judge King addressed everything from the origin of the song to the intricate legal merits of Warner/Chappell’s copyright claim. Importantly, the court noted the distinct copyrightable elements of a musical work. “As a musical work, “Happy Birthday” has at least two copyrightable elements—the music and the lyrics—and each element is protected against infringement independently.” Think of singing the ABCs to the tune of “Twinkle Twinkle Little Star”—identical melodies with entirely different lyrics. The same is true for “Happy Birthday to You,” and its alleged predecessor “Good Morning to You.”

    Chief Judge King found both “Good Morning to You” and “Happy Birthday to You” to predate Summy Co.’s 1935 copyright. For decades after the song was published, the original authors did not try to obtain federal copyright protection. “They did not take legal action to prevent the use of the lyrics by others, even as Happy Birthday became very popular and commercially valuable.” It wasn’t until 1934, nearly four decades after the authors first wrote the song, that they formally asserted their rights to the “Happy Birthday”/”Good Morning” melody. They never made a claim to the lyrics.

    Based on these facts, the court ruled in favor of the plaintiffs, finding that because “Summy Co. never acquired the rights to the Happy Birthday lyrics, Defendants, as Summy Co.’s purported successors-in-interest, do not own a valid copyright in the Happy Birthday lyrics.”

    While it is still uncertain how the court will handle the roughly $2 million per year the defendants collected in licensing fees, this case serves as a reminder of the importance of a valid copyright over intellectual property, as well as an interesting conversation topic the next time you inevitably hear the tune.

    Michael Paretti, Snell & Wilmer, Las Vegas, NV


    October 30, 2015

    Top Ten Considerations to Achieve Effective Corporate Internal Investigation

    Investigations serve as a foundation for successful management of potential enforcement actions and/or prosecutions and mitigating potential penalties. This list is meant as a guide to counsel conducting investigations and is not all-inclusive as every situation is unique.

    10. Listen for the Whistle
    Laws such as Dodd-Frank and the Affordable Care Act have elevated whistleblowers’ status. Recent SEC enforcement actions and fines related to the use of confidentiality agreements demonstrate the importance of taking steps to ensuring that clients’ internal policies do not impede an employee’s ability to report wrongdoing. Companies should develop internal processes that encourage employees to report concerns internally before contacting government agencies.

    9. Develop a Plan
    An effective investigation starts with a plan that addresses key considerations—What is the investigation’s scope? How extensive is the alleged misconduct? Who, where, and when did the misconduct originate? Who knew what and when? The investigation should be broad enough to determine exactly what misconduct may have occurred. At the same time, the investigation’s scope must be managed so to limit disruptions to business operations and ensure confidentiality.

    8. Identify Where Information Is Located
    Immediate steps must be taken to determine where relevant information resides, and how it can be preserved, retrieved, and reviewed. Custodians should be identified who can assist in locating repositories of relevant information—in both hard copy and electronic format. Information technology personnel, and in many cases independent forensic experts, should be involved to ensure that all electronically stored information is properly searched.

    7. Preserve, Preserve, Preserve
    As soon as the company is on notice of potential wrongdoing, it must take steps to preserve relevant information. A document-retention memorandum should be circulated to all custodians who may possess relevant information. The document hold ensures that all relevant information is preserved at the earliest possible moment, which is essential if the company is ever subject to a government investigation. Failure to preserve documents may result in obstruction-of-justice charges.

    6. Know Your Client
    Will the investigation be undertaken by management or independently by the board of directors or board committee? The engagement letter should clearly identify the client. Clarity on this issue is necessary to preserving the attorney-client privilege and attorney work-product privilege as counsel will need to provide specific disclosures, often referred to as Upjohn warnings, when conducting interviews.

    5. Employ an Effective Interview Strategy
    Counsel should be well-versed in what the documents reveal (and what requires further explanation) prior to conducting interviews. As interviews often provide the best insight into critical issues, steps should be taken to encourage candor in the witness. Proper preparation is the key. Interviews should be sequenced in a way that allows counsel to gather information from less culpable employees first before confronting more culpable witnesses.

    4. Details, Details, Details
    No details should be minimized, as their importance may not be realized immediately. Best practice is to conduct interviews with a note taker who will memorialize the interview. Accurate and detailed interview memoranda will assist counsel in preparing either written or oral investigative reports.

    3. Keep It Confidential
    Counsel should realize that the factual landscape is likely to evolve as facts are learned. Maintaining confidentiality minimizes the risk of disseminating inaccurate information. It will also help counsel avoid waiving privilege. Dissemination of information should occur only on a “need to know” basis.

    2. Prepare for Attention
    The media may come calling. Any media statement must be crafted to avoid harming the company’s legal status. “No comment” is typically ill-advised as it allows the media to spin the story. The message should be honest and emphasize that the company is committed to learning the facts.

    1. Carefully Assess the Most Appropriate Reporting Mechanism
    Reporting results of an investigation should be avoided until you are confident that all relevant information has been gathered and analyzed. Do not report outside the company until internal reporting protocol is complete. Exposure to the company may be impacted by when and how facts are communicated, and to whom. Accordingly, a well-thought-out strategy is critical.

    Brian Spahn and Sean Bosack, Godfrey & Kahn, S.C., Milwaukee, WI


    September 30, 2015

    NCAA's Compensation Rules Not Exempt From Antitrust Scrutiny

    In July 2009, after discovering his likeness was being used in a video game, former UCLA basketball standout Ed O’Bannon sued the National Collegiate Athletic Association (NCAA), alleging antitrust violations, in Edward C. O’Bannon v. NCAA. In the class action suit, the former first-round NBA draft pick argued that former student-athletes should be entitled to financial compensation for the NCAA’s commercial use of his or her name, image or likeness (NIL). On August 8, 2014, the district court entered judgment for O’Bannon and the plaintiffs, concluding that the NCAA’s rules prohibiting student-athletes from receiving compensation for the use of their names and likenesses were an unlawful restraint on trade in the college education market. The NCAA appealed, and on September 30, 2015, the Ninth Circuit Court of Appeals issued an order affirming in part, and reversing in part, the district court’s decision. The Ninth Circuit agreed with the district court that the NCAA’s rules were subject to antitrust law and had significant anticompetitive effects within the college education market by fixing the “price” that recruits pay to attend college. At the same time, the court also struck down a plan approved by the district court that would have allowed student-athletes to receive payment beyond education costs for the use of their NIL.

    On appeal, the NCAA argued not only that the plaintiffs’ Sherman Act claim failed on the merits but also that the Ninth Circuit was precluded from even reaching the merits because (1) the U.S. Supreme Court held in NCAA v. Board of Regents of the University of Oklahoma that the NCAA’s amateurism rules are “valid as a matter of law,” (2) that the NCAA’s compensation rules are not covered by the Sherman Act at all because they do not regulate commercial activity; and (3) that the plaintiffs lacked standing because they had not suffered an “antitrust injury.” The court rejected each of those arguments. Most significantly the court rejected the contention that the Board of Regents case stood for the proposition that the NCAA’s rules are presumed valid or exempt from antitrust scrutiny. Rather, the court held that the NCAA’s rules must be analyzed under the rule of reason, as the district court had done, and that even a restraint with a procompetitive purpose can be invalid under the rule of reason if a substantially less restrictive rule would further the same objectives. In short, at least in the Ninth Circuit, the NCAA must prove the validity of its rules rather than rely on a presumption.

    On the merits, the court applied the three-step framework of the rule of reason: (1) the plaintiff must show that a restraint causes significant anticompetitive effects in a relevant market; (2) the defendant must then provide evidence of the restraint’s procompetitive effects; and (3) the plaintiff must then show that any legitimate objectives can be met through substantially less restrictive means. Relying on the district court’s factual findings, the Ninth Circuit agreed that the NCAA’s compensation rules have a significant anticompetitive effect on the college education market and that those rules also serve the procompetitive purposes of integrating academics and athletics and preserving the popularity of the NCAA’s product by promoting amateurism. The court then concluded that the district court did not err in finding the plaintiffs’ proposed alternative of allowing NCAA member schools to give scholarships to cover the full cost of attendance would be a substantially less restrictive alternative, but it reversed the district court’s ruling to the extent it would have allowed students to receive direct cash payments, not tied to their education expenses, for use of their NIL, because such payments are contrary to the amateur nature of college sports.

    The Ninth Circuit’s opinion marks a departure from previous cases in which other courts of appeal have given substantial deference to NCAA rules based on the expansive view that the Supreme Court “blessed” those rules in the Board of Regents case. The ruling also effectively prohibits the NCAA from reversing its August 2014 decision to allow schools to issue scholarships for the full cost of attendance. Perhaps most significantly though, the Ninth Circuit’s decision provides the NCAA with another ruling affirming its current amateurism model and another hurdle for those advocating greater financial compensation to student-athletes.

    Casey G. Perkins, Snell & Wilmer, Las Vegas, NV


    September 30, 2015

    EPA's Clean Power Plan: Challenges to Reducing Carbon Emissions

    On August 3, 2015, the U.S. Environmental Protection Agency (EPA) issued the Clean Power Plan (CPP), establishing carbon dioxide emission guidelines for existing electric utility units (EGUs) under section 111(d) of the Clean Air Act. The CPP requires all states to submit their plans to implement the emission guidelines by September 6, 2016.

    EPA’s Proposed Template for Compliance
    The CPP focuses on the interconnected nature of production and delivery of electricity, noting that EGUs could achieve emission reductions by applying three “building blocks” that meet the statutory standard “best system of emission reduction”:

    • Improving heat rate at existing coal-fired steam EGUs;

    • Shifting electricity generation from high-emitting coal-fired steam EGUs to lower-emitting natural gas combined cycle generation; and

    • Shifting generation from fossil fuel-fired EGUs to new, zero-emitting renewable energy generation, such as onshore wind, photovoltaic solar, geothermal and hydropower.

    Promoting Clean Energy Generation
    The emission guidelines are clearly designed to prompt a movement away from high-emitting EGUs relying on coal toward, lower-emitting generation and even zero-emission renewable generation.

    The guidelines also provide for use of “emission rate credits,” allowing states that act to reduce carbon emissions, using either renewable energy generation or energy efficiency efforts, to receive such rate credits. The credits could be used by states to meet their own emission reduction targets or can be sold to other states.

    Positive and Negative Implications
    There is significant uncertainty surrounding implementation of the CPP. Although states have initial authority and flexibility in determining implementation of the emission guidelines, it is clear that renewable energy generation is heavily favored while coal-fired generation is not.

    The CPP could benefit developers of clean energy renewables as it will likely be easier to obtain the power purchase agreements necessary for project financing. Utilities that invest and upgrade their facilities, develop lower-emitting generation, or expand transmission and distribution capacity could also benefit.

    However, the CPP may force rural energy generation cooperatives relying on coal-fired technologies to prematurely shutter their facilities. This outcome could create a serious multibillion-dollar debt problem for nonprofit electricity providers and the federal agency that made the loans to build such cooperatives.

    Indeed, rural co-ops serve close to 42 million people in the U.S., frequently in high-poverty areas that rely on generating the least-expensive energy possible, which are often coal-fired technologies. The National Rural Electric Cooperative Association expects the CPP to cause one-fifth of EGUs operated by co-ops to cease operation.

    The U.S. Department of Agriculture’s Rural Utilities Service is the primary financier of such co-ops, investing nearly $7 billion in energy generation assets related to coal. The National Rural Electric Cooperative Association states that co-ops would potentially have $4.5 billion of stranded Rural Utilities Service debt under the CPP.

    Until state and federal compliance laws are in effect, it is premature to contemplate whether debt financing or forgiveness will be necessary. The state and federal governments should begin considering exactly how the rural and poorer populations will afford access to renewable energy EGUs, and how depressed states will deal with the demand for cleaner energy generation.

    Jessica Moyeda, Snell & Wilmer, Las Vegas, NV


    September 24, 2015

    Victims of Data Breach Have Standing to Sue, Seventh Circuit Reaffirms

    In 2013, hackers breached the data systems of Neman Marcus, allegedly exposing 350,000 customers to possible credit fraud and identity theft. In Remijas et al. v. The Neiman Marcus Group LLC, the class of customers brought suit against the retail giant, arguing its security systems were deficient and it failed to mitigate damages by timely alerting customers of the breach.

    Specifically, the plaintiffs argued that Neiman Marcus exposed them to both fraudulent charges and a heightened risk of identity theft. The U.S. District Court for the Northern District of Illinois dismissed the case in March 2014, finding that the plaintiffs did not have a concrete injury to establish standing. However, in July 2015, the Seventh Circuit Court of Appeals overruled the district court in a precedential decision, holding that such injuries qualify for constitutional standing. The Seventh Circuit found that “it is plausible to infer that the plaintiffs have shown a substantial risk of harm from the Neiman Marcus data breach.”

    In August, Neiman Marcus asked the Seventh Circuit to reconsider its decision, relying on the 2013 U.S. Supreme Court case of Clapper v. Amnesty International, 133 S. Ct. 1138 (2013). In Clapper, the challengers alleged the injury of having to take costly steps to keep their conversations private from government intrusion. The Supreme Court ruled in favor of the retailer, holding that the challengers did not satisfy the injury requirement for constitutional standing because the challengers’ assertions that they were potential targets of surveillance was too speculative and based on a chain of events that might never occur.

    Earlier this month, the Seventh Circuit denied the motion of Neiman Marcus to rehear the data-breach case and distinguished Clapper, finding that unlike potential government snooping, a data breach can directly and foreseeably result in identity fraud—concrete injuries sufficient to establish standing.

    With cyber-attacks becoming increasingly prevalent, the Seventh Circuit’s holding may have vast impacts on data-breach law for corporations, and opens the door for more data-breach class-action litigation. This opinion is a good reminder of the importance of cyber security systems, protections, and procedures to protect against and minimize damages in the event of a data breach.

    Michael Paretti, J.D., Snell & Wilmer, Las Vegas, NV


    September 23, 2015

    Companies Must Consider Yates Memo When Responding to Alleged Misconduct

    One of the most difficult decisions that a company must make when it discovers misconduct is whether to disclose it to the government in the hopes of receiving credit for cooperation. The decision just got a little more complicated by virtue of a recent announcement by the U.S. Department of Justice (DOJ). Now, to receive credit for cooperation, a company must not only disclose the misconduct, but also name the specific employees who were responsible. If the company fails to do so, it will receive zero credit for the cooperation.

    Deputy Attorney General Sally Quillian Yates outlined the new policy in a memorandum addressed to high-level DOJ officials and U.S. Attorneys across the country. The document—now known as the “Yates Memo”—certainly got the attention of in-house lawyers and corporate executives, as newspapers across the country featured stories about it.

    On the surface, the Yates Memo is not a radical departure from previous DOJ policy. The DOJ has long stressed the importance of companies supplying as much information as they can about individual wrongdoing when cooperating with a government investigation. The “all or nothing” approach, however, is new.  Under the Yates Memo, if a company “declines to learn” facts about culpable individuals, or learns that information and does not provide it to the government, the company will not receive any credit for cooperating.

    Stung from criticism that it did not do enough to prosecute individuals who contributed to the financial crisis, the DOJ attempts to correct that perceived imbalance with the Yates Memo. The DOJ set forth six guiding principles in the memo for its investigation and prosecution of individuals responsible for corporate misconduct:

    1. Companies must provide “all relevant facts” about specific individuals involved in corporate misconduct to receive any credit for cooperation.

    2. Government investigations should focus on individuals from the outset.

    3. Criminal and civil prosecutors should be “in routine communication with one another” about the liability of individual wrongdoers.

    4. An agreed resolution with the government will not protect individuals from liability “absent extraordinary circumstances.”

    5. Prosecutors cannot resolve cases against companies without a “clear plan” also to resolve cases against culpable individuals, or a written explanation to their superiors for why individual charges will not be pursued.

    6. Civil attorneys for the DOJ also should focus on cases against individuals, and make decisions regarding which cases to bring based on factors beyond an individual’s ability to pay.

    The Yates Memo raises a host of thorny questions for companies when responding to alleged wrongdoing, such as:

    • If companies have discovered wrongdoing, but are concerned that they may not have sufficiently identified the culpable actors, will they balk at disclosing the wrongdoing to the government for fear that they will not receive any credit for doing so?
    • Will companies find it more difficult to secure cooperation from their own employees during internal investigations?
    • How should in-house counsel effectively serve the best interests of the company while maintaining working relationships with senior executives whose conduct may be under scrutiny?
    • How will the DOJ balance this new pronouncement with its previously expressed policy not to force companies to disclose privileged information as a condition of cooperation?
    • How does the new policy apply to individuals who had no knowledge of the wrongdoing, but may be culpable under the responsible-corporate-officer doctrine? (i.e., so called “Park liability” under United States v. Park, 421 U.S. 658 (1975), and its progeny).
    • How do the criminal grand-jury secrecy rules affect the directive that criminal and civil prosecutors should “routinely” communicate with each other?
    • Will companies find it more difficult and time-consuming to reach a global resolution with the DOJ?

    Whatever the long-term repercussions of the Yates Memo for DOJ enforcement, there are immediate consequences for companies responding to alleged misconduct. If companies want to get any credit for disclosing wrongdoing to the government, it is not enough simply to determine what happened and to make sure it does not happen again. Companies also must focus on who was responsible. While this has always been an important aspect of any thorough internal investigation, the Yates Memo certainly gives the determination of individual culpability renewed emphasis.

    Eric J. Wilson and Sean O'D. Bosack, Godfrey & Kahn, S.C., Milwaukee, WI


    August 31, 2015

    Scrutiny of Class-Counsel Fee Awards Continues

    On August 27, 2015, class counsel for current and former CVS employees in Ceja-Corona v. CVS Pharmacy Inc., filed a motion seeking a reduction in their previously requested attorney fees. CVS had agreed to a $900,000 settlement to compensate class members for “off-the-clock” work time. In late July, U.S. magistrate judge Stanley A. Boone of the U.S. District Court for the Eastern District of California refused counsel’s fee request, which sought 30 percent of the common fund secured for the class. Judge Boone had previously warned counsel for the class that additional evidence would be required to overcome the 25 percent benchmark regularly used in common fund cases and suggested that final approval would only be granted in that amount. The revised fee request seeks 25 percent of the total settlement.

    Judge Boone’s scrutiny of counsel’s fee request is the latest in a long line of recent precedent addressing the appropriate fee to be paid to class counsel. As the Seventh Circuit noted last year, intense judicial scrutiny is required as a check on the commonly inflated attorney fees requested by class counsel. As Judge Posner noted in Eubank v. Pella Corp., 753 F.3d 718 (7th Cir. 2014), many class-settlement proposals “flunk the ‘fairness standard’” and rely on inflated claims of class participation or inflated claims of the total benefit to the class. Following the Eubank decision, and its call for intense scrutiny of the bases for class-counsel fee awards, a number of other decisions have followed in which fee awards receive sharp scrutiny from the reviewing court. In resolving complex class actions, counsel for the parties, and in particular class counsel, must be prepared to heavily defend the foundation of the requested fee award to secure final approval of the class settlement.

    Greg S. Hearing, Gordon & Rees LLP, Denver, CO


    August 21, 2015

    KBR Narrowly Escapes (Again) Ruling That It Waived Privilege

    The D.C. Circuit Court of Appeals recently issued In re KBR et al.,whichaddressed the scope and limitations of the attorney-client privilege and work-product doctrine in the context of internal investigations and litigation that may follow. In re KBR et al., No. 05-1276, slip op. (D.C. Cir. Aug. 11, 2015). The KBR decision highlights issues counsel must consider when determining how, if at all, to use the results of an investigation during litigation.

    On August 11, 2015, the D.C. Circuit ruled for a second time that the district court inappropriately ordered Kellogg Brown & Root (KBR) to produce documents related to its internal investigation into whether KBR inflated costs and accepted kickbacks on military contracts. The court opined that:

    If allowed to stand, the District Court’s rulings would ring alarm bells in corporate general counsel offices throughout the country about what kind of descriptions of investigatory and disclosure practices could be used by an adversary to defeat all claims of privilege and protection of an internal investigation.

    In re KBR et al., No. 05-1276, slip op. at 24.

    Harry Barko, a KBR employee, filed a False Claims Act (FCA) complaint alleging that KBR defrauded the government by inflating costs and accepting kickbacks related to military contracts. Barko sought documents related to the internal investigation KBR had conducted pursuant to the company’s code of business conduct.

    The district court ruled that KBR waived the attorney-client privilege and work-product protection twice—first, when KBR allowed its corporate designee to review documents generated during the investigation in preparation for a Rule 30(b)(6) deposition; and second, when KBR placed the internal investigation’s findings “at issue” by stating in a footnote to its summary judgment brief that, following its investigation, it had not reported a violation of the Anti-Kickback Act as it was obligated to do under the Federal Acquisition Regulations had the investigation revealed inflated costs or acceptance of kickbacks.

    The court ruled that the lower court inappropriately applied Federal Rule of Evidence 612’s balancing test, which provides that an adverse party may be entitled to a writing used to refresh a witness’s memory. The court noted that such an application of FRE 612 “. . . would allow the attorney-client privilege and work product protection covering internal investigations to be defeated routinely by a counter-party noticing a deposition on the topic of the privileged nature of the internal investigation.” Slip op. at 11.

    Whether KBR waived the attorney-client privilege and work-product protection by referencing the investigation in its summary-judgment brief, however, posed “a more difficult question.” The district court had determined that KBR’s use of the internal investigation’s contents created an implied waiver because KBR, “actively sought a positive inference in its favor based on what KBR claims the [internal investigation’s] documents show.” Slip op. at 6. “Under the common-law doctrine of implied waiver, the attorney-client privilege is waived when the client places otherwise privileged matters in controversy.” Id. at 12.

    Here, KBR referenced that it had conducted an internal investigation and did not report any wrongdoing to the government. KBR’s footnote, the district court concluded, amounted to an implied waiver as KBR had, “impliedly disclosed opinion work product, that is, ‘the substantive conclusion of its [internal] investigation.’” Id. at 16. (emphasis in original).  

    The D.C. Circuit emphasized, however, that context matters. KBR’s footnote was in the fact section, not in an argument or claim concerning the privileged documents’ contents. In addition, as KBR was the movant for summary judgment, all inferences were to be drawn against KBR. Accordingly, because KBR did not rely on its investigation in arguing in favor of summary judgment and because the district court was prevented from making any inference in KBR’s favor, the D.C. Circuit ruled that the district court erred in implying a waiver of privilege based on KBR’s footnote.

    In essence, KBR narrowly escaped a ruling that it waived privilege. The court’s ruling raises several questions. For example, would the outcome have been different had KBR’s footnote been contained in the argument section of its brief?  What if KBR was responding to summary judgment with the benefit of all inferences? The KBR decision demonstrates that counsel must be careful how to rely on the results of internal investigations during litigation. Reference to an internal investigation or its results during litigation is risky. The opinion illustrates that arguing that a court should rely on an investigation’s finding is likely to lead to a conclusion that the privilege and/or work product protection has been waived. 

    Brian C. Spahn, Godfrey & Kahn, S.C., Milwaukee WI


    August 17, 2015

    Ninth Circuit Addresses Preemption in Recent Labeling Cases

    The Ninth Circuit Court of Appeals recently addressed preemption in the context of food and cosmetic labeling.

    Food Manufacturers Can Label Honey as “Honey”
    In June, the Ninth Circuit issued an opinion in Brod v. Sioux Honey Ass’n Cooperative and upheld a district court’s finding that federal law preempts California law to the extent that California law prohibits de-pollinated honey from being labeled and sold as “honey.” 2015 WL 3942982 (9th Cir. 2015).

    The plaintiffs brought a claim against Sioux Honey Association Cooperative alleging that Sioux Honey violated California law by selling See Bee Clover Honey, which is de-pollinated, as “honey.” The Northern District of California dismissed the action as preempted by federal law.

    The Federal Food, Drug, and Cosmetic Act (FDCA), as amended by the Nutrition Labeling and Education Act, preempts state food-labeling laws that impose requirements that are “not identical” to federal labeling regulations. 21 U.S.C. § 343-1(a)(3). Under federal law, de-polinated honey must be labeled with the “common or usual name of the food, if any . . .” because de-polinated honey is not “a food for which a definition and standard of identity has been prescribed by regulations as provided by section 341” of title 21 of the U.S. Code. The district court decided that the “common or usual name” of de-pollinated honey is “honey,” and the Ninth Circuit agreed. In reaching its conclusion, the district court considered dictionary definitions, state standards of identity, and voluntary U.S. Department of Agriculture regulations.

    Thus, the court explained that California law prohibits manufacturers from labeling and selling de-pollinated honey as “honey,” while federal law requires manufacturers to label de-pollinated honey as “honey.” Given the conflict, the Ninth Circuit held that the district court did not err in finding that California’s law is preempted.

    California Cosmetic-Labeling Claims Not Preempted by FDCA
    In April, the Ninth Circuit held in a cosmetic-labeling class action that the FDCA did not expressly preempt state causes of action predicated on federal cosmetics-labeling laws and that the primary-jurisdiction doctrine was appropriately invoked by the district court. In Astiana v. Hain Celestial Group, et al., a group of consumers brought a putative nationwide class action against cosmetic-products manufacturers Hain Celestial Group and JASON Natural Products (Hain) alleging that the manufacturer’s use of the word “natural” on its products was false and misleading. 783 F.3d 753 (9th Cir. 2015). Hain moved to dismiss the plaintiffs’ state-law claims asserting that they are preempted by the FDCA. The Northern District granted the motion to dismiss and the plaintiffs appealed. Judge McKeown wrote for the Ninth Circuit.

    The opening lines of the opinion made it clear where Judge McKeown stands on “all natural” labels on cosmetic products:

    A product labeled “all natural” or “pure natural” likely evokes images of ground herbs and earth extracts rather than chemicals such as “Polysorbate 20” or “Hydroxycitronellal.” This class action alleges that false or misleading product labels duped consumers seeking natural cosmetics into purchasing products that were chock-full of artificial and synthetic ingredients. Although the underlying question of what constitutes a “natural” cosmetic poses a fascinating question, it is not the one we answer.

    Judge McKeown then turned to the issue of whether federal preemption prevents the district court from deciding when a “natural” label on cosmetic products is false or misleading. The court ultimately held that the FDCA does not expressly preempt state causes of action predicated on federal cosmetic-labeling laws. The FDCA proscribes any cosmetics labeling that is “false or misleading in any particular.” The more specific preemption language prohibits any state or local government from “establish[ing] or continu[ing] in effect any requirement for labeling or packaging of cosmetics that is different from or in addition to, or that is otherwise not identical with” federal rules.

    Citing Supreme Court precedent in Medtronic, Inc v. Lohr and Bates v. Dow Agrosciences LLC, the court explained that the FDCA bars states from imposing new or additional labeling requirements. However, the FDCA is silent with regard to states’ ability to provide remedies for violations of federal law. Because the language of the FDCA is “virtually identical” to the statutory text at issue in Lohr and Bates, the court concluded that the FDCA does not preempt state laws that allow consumers to sue cosmetics manufacturers that label or package their products in violation of federal standards.

    Greg Boulos, Carlton Fields Jorden Burt, Miami, FL


    August 7, 2015

    Violent Conduct Excluded Employee from Being "Qualified Individual" under ADA

    The U.S. Court of Appeals for the Ninth Circuit issued its ruling last week in Mayo v. PCC Structurals, Inc. (PCC) in favor of the employer, affirming the lower court’s grant of summary judgment, holding that an employee’s death threats and violent conduct excluded him as a “qualified individual” under the Americans with Disability Act (ADA), and thus prevented the employee from establishing a discrimination claim under the ADA.

    The case involved PCC, a metal-casting company, and Timothy Mayo, a former employee of PCC who welded aircraft parts. Mayo began working for PCC in 1987 and was diagnosed with major depressive disorder in 1999. He had been able to control his depression with medication and treatment. However, in 2010, Mayo and other coworkers began having trouble with a supervisor who they claimed bullied them. Mayo and other coworkers subsequently filed complaints, which led to an interview between Mayo and PCC’s director of human resources.

    After the meeting, Mayo began making threatening comments to his coworkers. These comments included statements on how Mayo would shoot his supervisor with a shotgun. The remarks were graphic in detail, including the specific time and method of carrying out his plan. Mayo was suspended and reported to the police. On the evening of his suspension, a police officer visited Mayo’s home to speak with Mayo regarding the threats. Mayo repeated the threats. When asked if he planned to go to PCC and start shooting people, Mayo responded, “Not tonight.”

    Mayo was then voluntarily taken into custody because the officer considered Mayo to be a danger to himself and others. Mayo was released after six days, and subsequently took two months leave under the Oregon Family Leave Act and the Family Medical Leave Act. During that time, Mayo underwent treatment and was deemed a non-violent person. Ultimately, however, PCC terminated Mayo at the end of his leave.

    Mayo later filed a complaint alleging an ADA violation. The U.S. District Court for the District of Oregon granted summary judgment for PCC, holding that Mayo was not a “qualified individual” due to his violent threats and therefore was not entitled to protection under the ADA.

    The Ninth Circuit, agreeing with the First and Seventh Circuits, affirmed summary judgment. To make out a prima facie case of discrimination under the ADA, the plaintiff must show that: “(1) he is a disabled person within the meaning of the statute; (2) he is a qualified individual with a disability; and (3) he suffered an adverse employment action because of his disability.” The court held that the ability to handle stress and interact with coworkers is an essential function of almost every job. The court found that Mayo was not a “qualified individual” because of his deadly threats, with chilling detail, in disproportionate response to his supervisor’s actions. The court noted that any other decision would undoubtedly put the employer in the difficult position of appropriately responding to threats or potentially putting its workforce at risk.

    In its conclusion, the court was mindful that depression and mental illness are serious conditions that affect millions of Americans. However, their opinion recognizes that an employer must, in some instances, do what is necessary to protect its workforce against potentially violent employees.

    Aleem A. Dhalla, Summer Associate, Snell & Wilmer, Las Vegas, NV


    July 31, 2015

    The Importance of Pre-Litigation Preservation of Evidence

    The case of Quraishi v. Port Authority of N.Y. demonstrates the importance of pre-litigation preservation of evidence and making sure both counsel and the client have a correct understanding of the client’s preservation measures to avoid claims of spoliation. Quraishi v. Port Authority of N.Y., Case No. 13 Civ. 2706(NRB), 2015 WL 3815011 (S.D.N.Y. June 17, 2015).

    In Quraishi, a woman slipped on what appeared to be a brown liquid substance at the Port Authority in New York and sued for damages sustained in that slip in fall. The plaintiff sent an evidence-preservation letter 35 days after the accident requesting that the defendants preserve video footage of the entire day. In discovery, the defendants produced a 48-minute video showing the accident. During a discovery conference, defense counsel stated that his client informed him that the surveillance tapes looped over after 30 days and that this footage was the only footage saved. The plaintiff then deposed the individual who defense counsel stated had provided this information. That individual denied any knowledge of who made the video, how far back surveillance tapes could be kept, and whether additional footage existed. The defendants also claimed no knowledge of who preserved the footage or who operated the surveillance system on the day of the accident in response to written discovery. The defendants did state in response to written discovery that the surveillance systems could save at least 60 days of video footage, not 30 days, meaning that the footage would not have been destroyed at the time plaintiff sent the evidence-preservation letter.

    The plaintiff filed a motion for sanctions, accusing the defendants of spoliation. A party seeking spoliation sanctions must establish three elements: (1) The party with control over the evidence had an obligation to preserve the evidence at the time it was destroyed; (2) the party had a “culpable state of mind” when it was destroyed; and (3) the evidence was relevant.  

    With respect to the first element, the court found that the defendants had a duty to preserve at the time of the accident, as courts have routinely found a defendant is put on notice when a serious accident occurs on its property. The question was then posed as to whether saving the 48 minutes of footage was sufficient. The court answered that question in the negative as the plaintiff had sent an evidence-preservation letter and the footage saved showed nothing as to how the liquid got on the floor, how long it had been there, and if any of defendant employees had seen it.

    Turning to the second and third elements, the court found that the defendants’ failure to undertake any effort to preserve additional footage from the day of the accident was grossly negligent. A showing of gross negligence in and of itself may be sufficient to support a finding of relevance, i.e., that the evidence destroyed was unfavorable to that party, without any extrinsic evidence showing relevance. Accordingly, the court stated that it would “instruct jurors that they may, but are not required to, find that additional surveillance footage would have shown that the brown liquid existed on the ground for a sufficient period of time for defendants to have discovered and cleaned or otherwise remedied it.”

    This case exemplifies why clients (and attorneys) need to take their evidence-preservation duties seriously. The defendants ignored an evidence-preservation letter and provided inaccurate information to their own attorneys regarding the footage and what their evidence-retention policies were. The defendants then gave contradictory information regarding the footage during discovery. As a result, the court found that the defendants’ conduct warranted sanctions. The case serves as a reminder to undertake the necessary measures to preserve evidence or be subject to sanctions.

    Jennifer Braster, Naylor & Braster, Las Vegas, NV


    July 27, 2015

    BOA Sued for Alleged Misrepresentations Regarding Residential Loans

    Seven years after the 2008 residential-mortgage crisis and Great Recession, their effects continue to impact today’s residential-lending market. On June 26, 2015, U.S. Bank, as trustee for a securitizied pool of home loans identified as Lehman XS Trust, Series 2007-7N, filed suit in New York state court against Bank of America and others for alleged misrepresentations and warranty breaches made in the sale of the pool of residential mortgages.

    Specifically, U.S. Bank asserts that Countrywide breached various representations and warranties made under a 2007 warranties and servicing agreement, in part by failing to buy back the loans as the agreement required and failing to pay the trust for $178 million in losses incurred as a result of Countrywide’s alleged misrepresentations. U.S. Bank seeks an order compelling Bank of America, as successor-in-interest to Countrywide Home Loans, Inc., to buy back the loans or repay it for the losses, in addition to a declaratory judgment that Bank of America must comply with its contractual obligations.

    Bank of America is facing similar claims in a December 2014 lawsuit, also in New York state court, filed by bond insurer Ambac Assurance Corp. Ambac insured approximately $1.68 billion of securities backed, in part, by mortgages from Countrywide’s home-loan unit. Seeking at least $600 million in damages, Ambac’s suit claims Countrywide lied about the mortgages complying with conservative underwriting guidelines and representing that the mortgages were solid investments.

    Bank of America contends that the suit must be dismissed because, in part, Ambac cannot demonstrate justifiable reliance upon any alleged representation, as Ambac had access to offering documents containing the relevant disclosures and failed to properly investigate the loans.

    These lawsuits are a glaring reminder that the mortgage crisis continues to impact lenders, insurers, and potentially the residential lending market as a whole.

    Kendal L. Weisenmiller, Dickinson Wright PLLC, Las Vegas, NV


    July 27, 2015

    Feds Finalize Birth-Control-Mandate Opt-Out

    On July 10, 2015, the U.S. Department of Health and Human Services (HSS) finalized the process to allow religious nonprofits to opt out of the Affordable Care Act’s birth-control mandate. The HHS issued an order spelling out detailed policies for religious nonprofits and closely held for-profit corporations to avoid covering contraceptives for employees.

    Religious nonprofits can now notify the HHS, instead of their insurers, in writing, of their religious objections to the mandate. The notice must only include: the name of the organization and why it qualifies for an accommodation, its objection to the mandate based on sincerely held religious beliefs, the plan name and type (whether student health plan or church plan), and contact information. The HHS says this notice represents the “minimum information necessary” to determine which entities are covered by the accommodation.

    This process was created in response to a 2014 U.S. Supreme Court order shielding the Christian university, Wheaton College, from notifying its insurance plan of objections to the mandate. Before the Wheaton College ruling, entities were required to fill out a government form to apply for the exemption. With these new guidelines, entities can fill out the form or simply send their request in writing.

    Four circuit courts—Third, Fifth, Seventh, and D.C.—have all ruled that the opt-out process is permissible under the Religious Freedom Restoration Act and does not overly burden religious groups. Regulators acknowledged hearing opposition to the new guidelines but said there is no less intrusive way to enforce the mandate. Four certiorari petitions are currently pending to the U.S. Supreme Court.

    The majority in the Wheaton College case, issued three days after Burwell v. Hobby Lobby, relied on Hobby Lobby to exempt religious nonprofits from submitting the government form. The dissent in the case argued that the form itself was simple and did not burden the school’s religious exercise.

    These new guidelines extend the same accommodations to closely held for-profit corporations, which won leeway to be exempt from laws its owners religiously object to after last year’s Hobby Lobby decision. The new guidelines also set out criteria that apply to for-profit corporations.

    Based on the number of entities challenging the mandate in litigation, the HHS and related departments estimate at least 122 nonprofits and 87 closely held for-profits will seek the exemption, but the departments admit that these numbers are likely an underestimation.

    Alexi Layton, Snell & Wilmer, Las Vegas, NV


    July 20, 2015

    A Good Reminder to Always Double-Check Subpoenas

    When it comes to form pleadings or documents, such as subpoenas, it is very easy to make a simple mistake that may cause unnecessary delay in a case. The matter of HCAPS Conroe Affiliation Inc. v. Angelica Textile Servs. Inc. reminds attorneys to always double-check subpoenas before issuing. Case No. 3:15-cv-60-N-BN, 2015 WL 3867923 (N.D. Tex. June 22, 2015). In HCAPS, a party served a subpoena commanding both the production of documents and deposition at the party’s attorney’s office in Dallas, Texas.

    However, unfortunately for that party, the subpoenaed entity did not regularly transact business within 100 miles of the attorney’s office, as its principal place of business was in Nashville, Tennessee, and its Texas office was in Houston. The court quashed the subpoena because it did not comply with Fed. R. Civ. P. 45(c), which states that a subpoena may command production of documents “at a place within 100 miles of where the person . . . regularly transacts business,” and may command a person to attend a deposition only if “within 100 miles of where the person . . . regularly transacts business in person.” The court indicated it would not have quashed the document production had the subpoena allowed the subpoenaed party to produce documents in lieu of appearing pursuant to Fed. R. Civ. P. 45(d)(2)(A). Because the subpoena required the party to produce documents at the attorney’s location in Dallas, Texas, it violated the geographical limits, and the court quashed the subpoena with respect to both the requested document production and deposition.

    The case serves as an excellent reminder to always double check where the entity or individual resides. Confirming that information before issuing and serving the subpoena will avoid an unnecessary delay in the discovery process and attorney fees in defending against a motion to quash.

    Jennifer Braster, Naylor & Braster, Las Vegas, NV


    June 29, 2015

    SCOTUS Upholds Disparate-Impact Theory; Big Blow to Developers and Lenders

    On June 25, 2015, in Texas Department of Housing and Community Affairs v. The Inclusive Community Project, Inc., the U.S. Supreme Court sanctioned, for the first time, the use of statistical evidence to support unintentional-discrimination claims brought under the Fair Housing Act. This ruling allows plaintiffs to assert racial-discrimination claims against developers and lenders, without establishing any element of intent. Plaintiffs can assert that while the complained-of housing practice was not intended to discriminate, it had a disproportionately adverse effect, or “disparate impact,” on a protected minority group.

    This 5–4 decision surprised many and, generally, is a significant blow to developers and lenders, and other entities typically subject to these types of claims. However, the ruling did implement one significant hurdle: requiring plaintiffs to prove, early on, that a specific policy or practice caused the disparate impact. The Court noted that disparate-impact liability must be sufficiently narrow to allow defendants the ability to make practical business decisions, profit-related determinations, and other business choices necessary to maintain a vibrant and free-market economy. The Court stated that private policies are not contrary to disparate-impact requirements unless they are “artificial, arbitrary and unnecessary barriers.”

    Additionally, while this decision is limited to claims brought under the Fair Housing Act, litigants and interested parties anticipate that the holding will embolden plaintiffs to assert similar disparate-impact claims brought under the Equal Credit Opportunity Act.

    Going forward, developers, lenders and other interested entities must carefully scrutinize their policies and practices to ensure that, even if unintentional, they do not have any disparate impact upon a protected class of citizens and must otherwise serve a reasonable nondiscriminatory interest.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    June 29, 2015

    "Crude Managerial Style" Insufficient to Establish Discrimination

    On June 15, 2015, in Rickard v. Swedish Match North America, Inc., Case No. 14-1264, the U.S. Supreme Court declined to hear the Eighth Circuit’s ruling that a Swedish Match North America, Inc. manager’s crude comments and “contemptible” behavior toward an older employee were insufficient to constitute age or sex discrimination.

    After Donald Rickard retired, citing health issues related to the stress of his hostile work environment, he filed suit for hostile work environment, disparate treatment, and retaliation, among other claims. Rickard’s lawsuit asserted that his manager, Donald Payne, referred to Rickard as an “old man” and was overly critical of his work. Rickard alleged that Payne squeezed his nipple while simultaneously stating “this is a form of sexual harassment.” Additionally, Rickard claimed that Payne took Rickard’s towel, rubbed it on his crotch and then returned it to Rickard.

    An Arkansas federal judge granted summary judgment in favor of the employer, Swedish Match, which decision was appealed to the Eighth Circuit. The Eighth Circuit held that while Payne’s behavior was contemptible and he used a “crude managerial style,” his conduct did not have a significant impact on Rickard’s employment and was insufficient to establish conduct “motivated by sexual desire.”

    Rickard asserted that the Eighth Circuit decision failed to consider several of its prior rulings that recognized similar homosexual actions as sexual harassment. Yet, ultimately, the Supreme Court’s denial of Rickard’s cert petition confirmed the Eighth Circuit’s decision that this and similar conduct does not rise to the level necessary to establish employee discrimination claims.  

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    June 17, 2015

    SCOTUS Issues Ruling on Pregnancy-Discrimination Case

    On March 25, 2015, the U.S. Supreme Court issued its ruling inYoung v. United Parcel Service, Inc.(UPS), a case involving the Pregnancy Discrimination Act (PDA). The PDA is included as part of Title VII and consists of two clauses. The first clause, not at issue here, states that the “terms ‘because of sex’ or ‘on the basis of sex’ include, but are not limited to, because of or on the basis of pregnancy, childbirth, or related medical conditions.” This opinion addressed the second clause, which states that “women affected by pregnancy… shall be treated the same for all employment-related purposes… as other persons not so affected but similar in their ability or inability to work.”

    In Young v. UPS, the plaintiff was a UPS driver, responsible for pickup and delivery of air packages, generally, but not always, under 20 pounds. After multiple miscarriages, the plaintiff became pregnant and her doctor imposed activity restrictions, limiting her to lifting no more than 20 pounds during the first 20 weeks of her pregnancy, and no more than 10 pounds thereafter. However, UPS allegedly continued to require Young to lift up to 70 pounds for her position and told her she could not work with the restriction.

    At that time, UPS made accommodations for three categories of employees: those injured on the job, those who had lost their Department of Transportation Certification and those with an ADA covered disability. Pregnancy-related conditions did not (at the time) fall into any of the three categories. Because she did not fit into one of UPS’s categories, Young was forced to stop working to comply with her doctor’s restrictions and lost her employee medical coverage. Accordingly, Young brought a disparate-treatment claim under Title VII for pregnancy discrimination for refusing to accommodate her pregnancy-related restriction.

    The parties’ arguments centered on the meaning of the second clause of the PDA. Young argued that the PDA “requires an employer to provide the same accommodations to workplace disabilities caused by pregnancy that it provides to workplace disabilities that have other causes but have a similar effect on the ability to work.” UPS, on the other hand, argued the provision did little more than further define and clarify that sex discrimination includes pregnancy discrimination.

    The Court was not satisfied with either definition. As to Young’s reading, the Court found that it required too broad a reading of the provision. The Court reasoned that this interpretation would grant pregnant workers a “most-favored-nation” status, meaning that if a company provided accommodations to a few workers, for example those in particularly hazardous jobs, the company would then be required to provide similar accommodations to pregnant workers with comparable physical limitations. The Court concluded that this could not have been Congress’s intent when it passed the PDA. The Court also rejected UPS’s reading of the provision (with which the dissent agreed). The Court recognized that Congress, in passing the PDA, intended to overturn the Court’s holding in General Electric Co. v. Gilbert. And UPS’s narrow reading of the PDA would not accomplish Congress’s objective.

    The Court instead held that a plaintiff alleging disparate treatment under the PDA may use the traditional McDonnell Douglas test as indirect proof of discriminatory intent, except with a twist. To make out a prima facie case under McDonnell Douglas, a plaintiff must show “that she belongs to the protected class, that she sought accommodation, that the employer did not accommodate her, and that the employer did accommodate others ‘similar in their ability or in ability to work.’” The employer may then present a legitimate, nondiscriminatory reason for denying her the accommodation. The employee then may show that the proffered reason is merely pretextual.

    The twist added by Young v. UPS, is that the employee may show that her employer’s reason (usually an accommodation policy) significantly burdens the pregnant employee. The employee can create a genuine issue of material fact here “by providing evidence that the employer accommodates a large percentage of nonpregnant workers while failing to accommodate a large percentage of pregnant workers.”

    Notably, the Court refused to defer to the July 2014 EEOC guidelines on the issue, which stated “an employer may not deny light duty to a pregnant employee based on a policy that limits light duty to employees with on-the-job injuries.” However, while not a complete victory for plaintiffs, the Court’s ruling in Young v. UPS does give the Pregnancy Discrimination Act more bite than before.

    Aleem A. Dhalla, Summer Associate, Snell & Wilmer, Las Vegas, NV


    June 17, 2015

    Yahoo Faces Nationwide Class Action for Email Mining

    The U.S. District Court for the Northern District of California granted certification to a nationwide class of individuals who do not use Yahoo Mail, but who have sent or received emails from Yahoo users since October 2011. These plaintiffs filed suit against Yahoo for allegedly accessing the content of their non-Yahoo Mail emails. The plaintiffs contend that Yahoo illegally copies, scans, and analyzes the content of emails, including keywords and attachments, and shares the content with third parties to create targeted advertising. The plaintiffs assert that they never gave consent for Yahoo to scan their messages; unlike Yahoo Mail users, who agree to this practice when they obtain an account. The plaintiffs also complain that there is no mechanism for non-Yahoo users to opt out of the practice. The plaintiffs assert that these practices allow Yahoo to create more targeted advertising and thus boost advertising, which in 2013 accounted for about 75 percent of its total revenue. The plaintiffs claim that these practices violate privacy provisions of the federal Stored Communications Act.

    The plaintiffs seek injunctive relief requiring Yahoo to cease scanning non-Yahoo Mail users’ emails without consent and to identify everyone with whom Yahoo has shared or sold information collected from non-subscribers’ emails. The plaintiffs anticipate about one million class members in the nationwide privacy lawsuit.

    The court also certified a sub-group of California residents who have non-Yahoo Mail accounts allowing suit under the California Invasion of Privacy Act, a wiretapping statute. This class will also be made up of non-Yahoo users who have sent or received emails from Yahoo users since October 2011, and alleges the same conduct.

    In making its decision, the court considered that, in the “Mail FAQ” section of its website, Yahoo states that its message-analysis system is the same system that scans messages for spam, viruses, malware, and phishing scams. Yahoo acknowledges that the message analysis may help target ads to users, as the system will “result in both product enhancements as well as more relevant advertising in addition to a safer, less cluttered Mail experience.”

    Yet, Yahoo challenged certification, arguing that the plaintiffs who have continued to send emails to Yahoo users after learning of the scanning practice have effectively given their consent to the practice. Yahoo contends that knowledge of the practice prohibits the plaintiffs from establishing damages. Yahoo relies upon In Re Google Inc. Gmail Litigation, and argues that it will be too difficult to figure out consent to the degree the lawsuit demands. It also described the requested injunctive relief as “setting back email services for decades.”

    Entities with practices similar to those at issue here should be aware of the potential litigation and be prepared to defend similar practices.  

    Alexi Layton, Summer Associate, Snell & Wilmer, Las Vegas, NV


    May 27, 2015

    Data Security Act Would Create National Standard

    Reps. Randy Neugebauer (R-Texas) and John Carney (D-Del.) recently introduced H.R. 2205, the Data Security Act of 2015, which would create a national data breach and security standard applicable to all industries handling sensitive personal and financial information, including financial institutions, verified retailers, and data brokers. H.R. 2205 mirrors companion Senate Bill S. 961 introduced under the same name by Sens. Tom Carper (D-Del.) and Roy Blunt (R-Mo.) earlier this year.

    Both bills would require data breaches to be reported “without unreasonable delay” and also harmonize the jumble of data security laws enacted in 47 states, the District of Columbia, and three U.S. territories. Currently, the inconsistent and conflicting standards pose difficulties to companies operating in multiple states. This lack of uniformity in data-security and breach notification-standards prompted lawmakers to draft this legislation creating a comprehensive data-security program applicable to all actors within the chain of commerce.

    Both bills represent a bipartisan effort to strengthen consumer-privacy protections in response to an increasing number of data breaches. More than 100 million records were reported to have been compromised between January and May 2015. The healthcare industry accounts for nearly 98 percent of records compromised this year, while retail vendors account for the majority of total breaches, at nearly 40 percent.

    Financial institutions have voiced support for both bills. On May 14, 2015, the American Bar Association, in conjunction with several other trade groups, submitted a statement for the record to the House Financial Service Committee hearing on data security that expressed support for H.R. 2205. Under the Gramm-Leach-Bliley Act, every bank and credit union is required to have information-security programs to protect consumer account information. Retail merchants and healthcare organizations are not similarly regulated by such stringent federal requirements. In 2013, 61 percent of fraud losses were borne by issuers, but only 36 percent were borne by merchants. Financial institutions anticipate that the legislation would create an equal burden to protect sensitive consumer information across all industries.  

    Sherry Ly, Snell & Wilmer L.L.P., Las Vegas, NV


    May 27, 2015

    Congress Sharpens Federal False Claims Act's Teeth

    Congress has strengthened the Federal False Claims Act (31 U.S.C. §§ 3729–33) (FCA) over the last six years to crack down on fraud by government contractors and subcontractors as well as those who might conspire with them. Not only does the FCA impose liability for making or causing to be made false claims, but it also imposes liability for (a) conspiracy, even if a person never obtained federal funds through the fraud, (b) failure to report overpayments, and (c) failure to report fraud by others. While many cases brought under the FCA involve Medicare or Medicaid fraud, the law applies to any type of false or fraudulent claim submitted to the government for payment or approval.

    The FCA provides that any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval or a false record or statement material to a false or fraudulent claim, is liable to the U.S. Government for a civil penalty of not less than $5,500 and not more than $11,000, plus three times the amount of damages that the government sustained because of the act of that person. 31 U.S.C. § 3729(a)(1). The FCA’s knowledge requirement could be shown by having actual knowledge, acting “in deliberate ignorance of whether the information is true or false” or acting “in reckless disregard of the truth or falsity of the information.” A third party or qui tam whistleblower may bring suit on the government’s behalf and obtain a portion of the damages award. 31 U.S.C. § 3730.

    FCA liability applies to contractors, subcontractors, and even co-conspirators who may not even receive federal funds.  See United States ex rel. Folliard v. CDW Tech. Servs., Inc., 722 F.Supp.2d 20, 34–35 (D.D.C. 2010) (explaining that Congress intended section 3729(a) to attach “‘without regard to whether the wrongdoer deals directly with the Federal Government; with an agent acting on the Government’s behalf; or with a third party contractor, grantee, or other recipient of such money or property’”) (quoting S. Rep. 110-10 at 11); 31 U.S.C. § 3729(a)(1)(A) and (B). The conspiracy provision of the FCA provides liability for conspiring to commit any of the acts set forth in 31 U.S.C. § 3729(a)(1) (A), (B), (D), (E), (F), or (G). The Fraud Enforcement and Recovery Act, Pub. Law 111-21, 123 Stat. 1617 (2009) (FERA) amended the conspiracy provision in 2009 so that it does not require the person to have personally received any payment based on a false claim. Thus, a consultant who conspired with a contractor to defraud the government and personally did not receive any funds traceable to the government, could nonetheless be liable under the FCA.

    FERA also added language for reverse claims. A reverse false claim is when a person “[k]nowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the State or a political subdivision.” 31 U.S.C. § 3729(a)(1)(G).  An example would be discovering that a billing error had been made resulting in an overpayment from the government and failing to report it and repay it.

    Federal regulation requires

    [t]imely disclosure, in writing, to the agency [Office of Inspector General], with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of any Government contract performed by the Contractor or a subcontractor thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 U.S.C. or a violation of the civil False Claims Act.

    48 C.F.R. §52.203-13(b)(2)(ii)(F). Additionally, if an overpayment is in relation to the Affordable Care Act, i.e., a Medicare claim, it must be reported and returned within 60 days after the date on which the overpayment was identified. 42 U.S.C. §1320a-7k(d); accord 42 U.S.C. § 1320a-7a (Civil Monetary Penalties Act).

    Heavy civil fines per claim and treble damages could be incurred, not only against those who perpetrate the fraud and receive the federal funds through fraud, but also against subcontractors or co-conspirators who might not have directly received any federal funds. Additionally, the FCA imposes liability for failure to follow reporting requirements.

    In conclusion, the FCA comes with very sharp teeth, and it is advisable to (1) become familiar with the laws of the FCA, (2) know your duty to report, and, most of all, (3) know the companies with whom you are doing business, so that their wrongdoing does not become your legal liability.

    Carrie Parker, Snell & Wilmer L.L.P., Reno, NV


    May 15, 2015

    SCOTUS Lets Stand Decision in Favor of CA Truck Drivers

    On May 4, 2015, the U.S. Supreme Court declined to review a Ninth Circuit decision that California’s state law prescribing meal and rest breaks for truckers is not “related to” transportation prices, routes, or services, and thus is not preempted by the Federal Aviation Administration Authorization Act (FAAA).

    This action originated as a class-action lawsuit filed by truck drivers for Penske Logistics, LLC (Penske), who alleged that Penske underpaid for required meal and rest breaks, failed to ensure that the breaks were actually taken, and created an environment that discouraged drivers from taking the mandatory breaks.

    The lower court ruled that the FAAA preempted California’s state law governing meal and rest breaks, because the state law imposed rigid timing requirements for when and how long breaks must be taken. Accordingly, the lower court held that the state law impermissibly restricted the routes Penske could select, which was within the purview of the FAAA because it related to transportation prices, routes, or services.

    In July 2014, the Ninth Circuit reversed the lower court’s ruling and held that the FAAA did not preempt state law, and recently on May 4, 2015, the Supreme Court declined to review Penske’s writ of certiorari.

    According to the Penske drivers, the Supreme Court’s refusal to review the Ninth Circuit decision protects and affirms worker-protection laws in place for over a century in California. Penske, however, argues that the Ninth Circuit’s decision is an outlier, out of sync with other federal circuits. Penske contends that the Supreme Court’s denial of federal preemption here will have substantive ramifications and subjects transportation carriers to risk and exposure in their California operations. Specifically, Penske stated that the decision “effectively insulates laws of general applicability from the preemptive reach of the [FAAA Act], directly contrary to Congress’s intent and [the Supreme Court’s] precedent.”

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    May 11, 2015

    Are You a Good Supervisor? Tips to Improve Your Supervising Skills

    The ABA’s Career Center and Center for Professional Development recently moderated a discussion of supervisor skills and practice tips. Below is a summary of the discussion points and advice.

    1. Motivation Is Key


    • Influence, encourage, and motivate junior associates to produce their optimal work product.
    • Figure out the unique characteristics of individuals. How do they approach a project? What are their unique skills, knowledge, experiences? What interests them? What fears or concerns do they have?
    • Nature of the work. What type of project is this? Do the project type, requirements, and goals compliment the associate’s unique characteristics?
    • Environment. What is the physical and emotional nature of your workplace? Senior attorneys have the most control over the environment and creating a workplace that yields optimal work.
    • Typical motivators include money, success, interesting work, avoidance of failure, praise/acceptance, and what type of work experience is desired or valued.
    • A supervisor must communicate with the junior associate to determine what motivates that individual, while also recognizing that motivators are fluid.
    • Observe the associate and determine what type of project and supervisory style brings out the best in that individual.
    • Ask questions such as, “How can I help you do your best work on this project?”, and “What is your approach to this type of assignment?”
    • Sit down and talk to the junior associate about what environment inspires their optimal performance, your own supervisory style, and the best ways to work together. Communication is a key factor in reaching a shared vision and goal for the project.

    2. Project-Management Tips for Supervising Junior Associates

    • Create a project-management plan that identifies clear objectives, scope, timing, costs, priorities, and resources required.
    • In assigning tasks, assess capabilities, motivators, and work load to select junior associates best suited to the particular project.
    • Communicate and be clear about goals and results.
    • Clarify junior associate’s role and discreet project within the larger team and big picture for the overall project.
    • Maintain regular communications and updates with junior associates.
    • Genuinely promote an attitude of success and positivity.

    3. Tips for Delegating

    • Determine work that can be done at the lowest possible billing rate, at a mid-level rate, that you do not enjoy or are not good at, and what work is necessary that you personally perform. Then, delegate that work accordingly.
    • Create a clear, tangible picture of the end result and share that with the junior associate.
    • Training is key, and you must be willing to spend time training your junior associates.
    • Create a feedback loop to keep the lines of communication open throughout the project. Consistent reporting is necessary.
    • Be patient. Be receptive to questions and mistakes.

    Kathy Morris is the moderator of the ABA’s monthly Career Advice Series and moderated this discussion. Faculty included Sue Manch, who has more than 30 years of experience consulting and coaching law firms. Manch is currently a partner at SJL Shannon and will be taking on a new role in June as the chief of people and development at Norton Rose Fulbright. Mike Ross is a former corporate partner at Latham & Watkins, and previously the senior advisor and VP, executive officer, and general counsel for Safeway, Inc. Ross has taught various ethics and business-law courses at law schools around the world.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    March 31, 2015

    If Receiver's Sales Aren't Foreclosures, Then What Are They?

    When no statute specifically authorizes a court-appointed receiver to sell real property, then what type of sale is it? The Supreme Court of Nevada recently addressed this question, holding that “a receiver sale of real property that secures a loan is a form of judicial foreclosure.” U.S. Bank v. Palmilla Dev. Co., 131 Nev. Adv. Op. 9 (2015).

    In U.S. Bank v. Palmilla, U.S. Bank made a $20.15 million loan to Palmilla Development Co. secured by a development of townhomes. Palmilla defaulted, and U.S. Bank applied for, and obtained, the appointment of a receiver over its real-property collateral.

    The receiver listed the property for sale, and eventually filed a motion to sell the property to a third-party purchaser for $9.5 million. The court granted that motion on March 26, 2010, and the sale closed on June 7, 2010. Five and a half months after the closing, U.S. Bank filed an amended complaint seeking a deficiency judgment against Palmilla, as the proceeds from the sale did not satisfy the loan.

    Palmilla objected, arguing that the lender could not recover a deficiency judgment, because (i) no statute authorized a deficiency after a receiver’s sale; and (ii) even if Nevada’s deficiency statute applied, the deficiency action was untimely. Nevada law requires a deficiency action to be initiated within six months of a foreclosure sale. See N.R.S. § 40.455(1). Because the court approved the sale in March but U.S. Bank did not file the deficiency action until November, Palmilla argued that the action was time-barred. The trial court held that the statute applied, but dismissed U.S. Bank’s action as untimely. U.S. Bank appealed.

    Legal Issues
    On appeal, the Nevada Supreme Court had to determine whether in the absence of any statute specifically authorizing a receiver sale, Nevada’s deficiency statute nevertheless applies.

    The deficiency statute at issue, N.R.S. § 40.455(1), provides that a judgment creditor may obtain a deficiency judgment if the action is brought “within 6 months after the date of the foreclosure sale or the trustee’s sale held pursuant to N.R.S. § 107.080”. Ostensibly, a receiver’s sale is neither a “foreclosure sale” nor “trustee’s sale authorized by N.R.S. § 107.080.” Thus, Palmilla argued that no deficiency was allowed under this statute.

    Both the trial court and Supreme Court, however, disagreed. The Supreme Court held that a foreclosure sale is defined as “‘[t]he sale of mortgaged property, authorized by a court decree or a power-of-sale clause, to satisfy the debt.’” U.S. Bank, 131 Nev. Adv. Op. 9 (quoting Black’s Law Dictionary 1455 (9th ed. 2009)). This broad definition clearly included a receiver’s sale of mortgaged property approved by the court. Thus, a receiver’s sale is, for all intents and purposes, a “foreclosure sale” for the purposes of N.R.S. § 40.455(1).

    As for the timeliness argument, the Nevada Supreme Court concluded that notwithstanding the date the court approved the sale, the sale did not occur until the transaction actually closed. Therefore, because the sale closed in June, the deficiency action was timely filed in November.

    U.S. Bank might be considered a win for commercial mortgage lenders. Nevada does not have a specific statute authorizing receiver’s sales, but the decision makes it clear that courts nevertheless may authorize a receiver sale as “a form of judicial foreclosure” and allow lenders to obtain a deficiency judgment. This holding is consistent with general receivership law on receiver sales, see 16 Fletcher Cyc. Corp. § 7876 (“In the absence of a specific statute governing sales by receivers, such sales are governed by statutes or court rules regulating court ordered sales”), and recognizes the practicality of receivers sales as an effective tool in the commercial lender’s arsenal.

    It is worth noting that U.S. Bank filed an amended complaint seeking a deficiency judgment and not an independent deficiency action. Lenders in similar situations may consider following U.S. Bank’s example and file an amended complaint in the receivership action rather than commencing a new action for a deficiency.

    Ben Reeves and Bob Olson, Snell & Wilmer L.L.P.


    March 25, 2015

    Can Hotels Legally Block Wi-Fi Hot Spots?

    On August 25, 2014, the American Hotel & Lodging Association, Marriott International, Inc., and Ryman Hospitality Properties filed a petition before the Federal Communications Commission (FCC) asking it to reinterpret section 333 as permitting the operator of a wi-fi network (such as a hotel or convention center) to manage the use of wi-fi on its premises, even if doing so “may result in ‘interference with or cause interference’ (e.g., block) to a Part 15 device (such as a wi-fi hotspot) being used by a guest on the operator’s property.” In the alternative, the hotel petition urged the commission to commence a rulemaking proceeding to amend Part 15 to specify the interference to Part 15 devices that section 333 prohibits.

    That petition was subject to public comments. The comments reflect a spirited debate on the issue of regulating access to wi-fi bandwidth. Comments filed by other hotel owners were generally supportive of the petition to allow hotels and convention centers to jam wi-fi hot spots as part of “reasonable network management.” Conversely, many technology companies, such as Google and Microsoft, filed comments calling for the petition’s denial for several reasons, including (1) the unlicensed radio spectrum that wi-fi uses should be equally accessible to everyone, including both hotels and consumers; (2) blocking personal devices constitutes jamming, and signal jamming is illegal; and (3) allowing hotels to block wi-fi hotspots is against the public interest. The Cellular Telecommunications and Internet Association also voiced its opposition to the petition.

    Notably, more than one FCC commissioner issued a statement of strong opposition to the hotel industry’s petition, including Commissioner Jessica Rosenworcel and Commission Chairman Tom Wheeler.

    UPDATE: In the face of such widespread opposition, counsel for the American Hotel & Lodging Association, Marriott International, Inc., and Ryman Hospitality Properties notified the FCC by letter on January 30, 2015, that they were withdrawing the petition. While this will presumably bring the petition to an end, the docket has not yet been closed by the FCC. Even before announcing the withdrawal of the petition, Marriott International had issued a public statement on January 14, pledging not to block guests’ wi-fi devices at any of its managed hotels.

    What’s the takeaway? Tension between businesses that offer wi-fi Internet access, for a price, and customers who bring their own, already-paid-for Internet connectivity is nothing new. However, the growing cyber-security risk threatens everyone who is connected to the Internet, and is forcing businesses to find new security solutions that do not involve blocking their guests’ use of their personal wi-fi devices. Once again, finding the “right” balance between security and convenience remains elusive in cyberspace.

    Patrick X. Fowler, Snell & Wilmer L.L.P.


    March 9, 2015

    Ever-Expanding Attacks on Non-Traditional "Employers"

    In the past few years, it has become increasingly common for plaintiffs to attempt to broaden their potential recovery sources by naming multiple defendants in employment actions under a joint-employer theory—often including larger but more attenuated entities. This argument frequently arises in the following situations: (1) parent and subsidiary companies, (2) franchisors and franchisees, (3) staffing companies and their clients, and (4) contractors and sub-contractors. Generally under labor and employment laws, joint employers are found to exist where two separate legal entities share the ability to control or determine essential terms and conditions of employment, including hiring, firing, disciplining, supervising, scheduling, and directing employees. Where a joint-employment relationship is found, both entities must comply with the applicable employment laws and are subject to civil liability and damages whether the claim is brought under labor laws, wage and hour laws, leave laws, discrimination/harassment/retaliation laws or tort liability. Under the joint-employer theory, plaintiffs seek to hold multiple alleged employers jointly and severally liable for employment-law violations arising in the course of their employment.

    Under labor laws, if an entity is found to be an employer and to have committed an unfair labor practice, the company may be liable for back pay, reinstatement or front pay, litigation expenses of both the National Labor Relations Board (NLRB) general counsel and the union, and injunctive relief. Under wage and hour laws, potential claims for which liability may be found include, but are not limited to, minimum wage, overtime, failure to timely pay all wages due, failure to provide meal periods and/or rest breaks, failure to reimburse for expenses, and inadequate wage statements. Recovery on certain wage claims includes recovery of reasonable attorney fees. For violation of an employee’s leave rights, an employee may be entitled to reinstatement, lost wages and benefits, other direct costs, liquidated damages, attorney fees, and costs. Within the discrimination/harassment/retaliation realm, damages include, but are not limited to, back pay, reinstatement or front pay, injunctive relief, compensatory damages for pain and suffering, punitive damages, and reasonable attorney fees and costs. For employment tort claims, employees are generally entitled to recover the amount that will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not— including back pay, front pay, emotional-distress and mental-suffering damages, and other pecuniary damages, as well as punitive damages. What this all means is that there is a lot of money at stake if a court determines that a company is a joint employer.

    What Can a Company Do to Reduce Potential Joint-Employer Risks?

    While the specific test for who constitutes an employer varies depending on the claim alleged, the key is generally the economic reality of the situation and the amount of control exercised over day-to-day operations based on a totality of the circumstances. The key is to limit the appearance that the company has any control over the dealings with the employees. For clarity, the below top five best practices are discussed in terms of primary and secondary, with the primary being the franchisor, parent company, general contractor, or client of staffing company; and the secondary being the franchisee, subsidiary company, subcontractor, or staffing company.

    Employee handbooks/policies/forms. The safest course is for a primary not to provide its secondary with template employee handbooks or policies. However, if the primary does provide employee handbooks to its secondary, the primary must be sure that the handbook and the acknowledgement to the handbook explicitly state that the worker is an employee of the secondary, not the primary, and that the primary does not exercise control over the employee’s performance of duties, scheduling of hours, or other terms or conditions of employment. Also, the primary should avoid providing secondaries with employment applications or other employee forms or templates that they are required to use.

    Essential employment decisions. A primary must avoid intruding on its secondary’s essential employment decisions, including hiring, firing, disciplining, scheduling, setting wages, and establishing working conditions. A primary should not set specific work schedules for the secondary’s workers nor should it set the pay structure for the secondary’s workers.

    Review the relevant agreement with the secondary. Primaries must watch for overly broad statements of the primary’s ability to control day-to-day operations of the secondary. A primary should include affirmative statements clearly setting forth that the primary has no control over employment matters including personnel decisions, the direction of the workforce, or the terms and conditions of employment of the secondary’s employees. The primary should also consider including an indemnity provision in the agreement with the secondary to explicitly set forth that the secondary assumes all responsibility with respect to employment liabilities.

    Keep a distance from secondary’s workers. A primary should give directions to the secondary’s owner, not the employees themselves. A primary does not want to create any appearance that it has any control over the day-to-day operations of the secondary.

    Training. A primary should make the secondary solely responsible for training its own work force whether based on the secondary’s own standards or the primary’s standards. A primary should let potential breach of the agreement with the secondary motivate the secondary to hire qualified people and appropriately train them.

    Companies should get ahead of the game in warding off joint-employer arguments by reviewing their current agreements, policies, and practices.

    Erin Leach, Snell & Wilmer L.L.P., Orange County, CA


    March 9, 2015

    SCOTUS Gives District Courts More Power in Patent-Claim Construction

    On January 20, 2015, in Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc., the U.S. Supreme Court reallocated power between federal district courts and the Federal Circuit in the patent-claim-construction process. For many years, the Federal Circuit has reviewed all district-court claim constructions de novo, without deference to the district court. Today, the Court held that the Federal Circuit must find clear error before overturning a district court’s resolution of an underlying factual dispute during claim construction.

    After the Court’s decision in Markman v. Westview Instruments (1996), the Federal Circuit’s Cybor Corp. v. FAS Technologies, Inc. (1998) decision announced the de novostandard of review. Under this standard, the Federal Circuit has often reversed district-court claim-construction orders.

    Dissolving this longstanding precedent, the Court held that Rule 52(a)(6), Federal Rules of Civil Procedure, requires that claim-construction decisions involving “evidentiary underpinnings,” “subsidiary factual findings,” or “underlying factual disputes,” not be set aside unless clearly erroneous. The Federal Circuit still reviews “the ultimate construction of the claim de novo.” And claim constructions that only analyze the intrinsic evidence—the patent, its specification, and the prosecution history—still will be reviewed de novo. “But, to overturn the judge’s resolution of an underlying factual dispute, the [Federal Circuit] must find that the judge, in respect to those factual findings, has made a clear error.”

    Recognizing the “need for uniformity in claim construction,” and recalling that Markman aimed to alleviate “damaging . . . unpredictability” in claim construction, by making it an issue for the court, Justice Thomas’s dissent raises the concern that Teva will “inject uncertainty into the world of invention and innovation.” “At best,” Justice Thomas wrote, Teva will increase “collateral litigation over the line between law and fact.” The majority, in contrast, viewed “subsidiary factfinding [as] unlikely to loom large in the universe of litigated claim construction.” With such a significant change in claim construction, it’s at least certain that it will take some time to see who is right.

    David G. Barker and Nicholas M. Kunz, Snell & Wilmer L.L.P., Phoenix, AZ


    February 27, 2015

    Department of Labor Expands FMLA Coverage for Same-Sex Spouses

    Same-sex spousal rights, particularly in the area of employment law, are in a state of flux. This conundrum will hopefully be resolved later this year when the U.S. Supreme Court issues a ruling on a collection of four cases concerning the power of the states to ban same-sex marriages and to refuse to recognize such marriages performed in another state.

    In the meantime, the U.S. Department of Labor (DOL) took action of its own this week, announcing a final rule to revise the definition of "spouse" under the federal Family and Medical Leave Act (FMLA) in light of the Supreme Court’s decision in United States v. Windsor, which found section 3 of the Defense of Marriage Act (DOMA) unconstitutional. The final rule amends the definition of “spouse” under the FMLA so that eligible employees in legal same-sex marriages will be able to take FMLA leave to care for their spouse or family member, regardless of where they currently live or work.

    As proposed under the final rule, the meaning of “spouse” under the FMLA would depend on the law of state in which the marriage was celebrated, not the law of the state where the employee lives or works. For example, if a business is located in Ohio and the business’s employee lives and works in Ohio (which does not currently permit same-sex marriages), but travels to New York for a lawful and valid same-sex wedding ceremony, the Ohio business would be required to grant the employee in the same-sex marriage the same FMLA benefits as it would to any other “spouse.”

    The DOL’s final rule takes effect March 27, 2015, which means that covered employers have only 30 days to update their FMLA policies and practices for this important change by, for example:

    • training human-resources personnel and supervisors on the new FMLA definition of “spouse”
    • reviewing and amending the company’s written FMLA policy and procedures, as well as all FMLA-related forms and notices, to the extent that they specifically define the term “spouse” in a way that does not account for the new final rule.
    • remembering that the FMLA does not protect civil unions or domestic partnerships, so employers are advised to determine whether the FMLA applies in any particular situation. That said, employers are free to provide greater rights than those required under the FMLA.

    If the Supreme Court rules later this year that all states must recognize valid same-sex marriages entered into in other states, then the necessity of this DOL regulatory change is short-lived. Nevertheless, until then, employees are cautioned to remember that the new meaning of “spouse” under the FMLA depends on the law of state in which the employee’s marriage was celebrated, not the law of the state where the employee lives or works.

    Each case is different, and companies should never assume that all such situations require identical responses.

    Jennifer R. Phillips, Snell & Wilmer L.L.P., Phoenix, AZ


    February 23, 2015

    How Do You Prove Juror Misconduct after a Trial?

    Every trial attorney’s worst fear is a saboteur juror, lying in wait to poison the jury’s assumed impartiality. Think John Cusack’s character in The Runaway Jury. Voir dire is supposed to allow a trial attorney to ferret out any bias that may linger in the hearts and minds of potential jurors. What can an attorney do when jurors misrepresent themselves during voir dire? After the verdict is read, and judgment entered, how does a trial attorney prove that a juror lied in voir dire, and poisoned the deliberation of the verdict?

    The U.S. Supreme Court recently provided an example of how not to prove voir dire misconduct in a post-trial motion, in Warger v. Shauers. Gregory Warger was injured when his motorcycle collided with Randy Shauers’ truck. Warger sued Shauers for negligence in the U.S. District Court for the District of South Dakota, the case went to trial, and Warger lost.

    After the verdict, one of the jurors disclosed to Warger’s counsel that another juror had spoken during deliberations about “a motor vehicle collision in which her daughter was at fault for the collision and a man died,” and had “related that if her daughter has been sued, it would have ruined her life.” This “saboteur juror” had said in voir dire that she could be a fair and impartial juror, but that clearly was not the case, based on her own close personal history. The “tattletale juror” signed an affidavit explaining the “saboteur juror’s” statements during deliberations, and Warger’s counsel brought a post-trial motion for a new trial, relying on the affidavit. The district court ruled that the affidavit was barred from introduction into evidence by Federal Rule of Evidence 606(b), which states:

    During an inquiry into the validity of a verdict or indictment, a juror may not testify about any statement made or incident that occurred during the jury’s deliberations; the effect of anything on that juror’s or another juror’s vote; or any juror’s mental processes concerning the verdict or indictment. The court may not receive a juror’s affidavit or evidence of a juror’s statement on these matters.

    At the Supreme Court, Warger argued that the “extraneous information” exception applied to the “tattletale juror’s” affidavit. Because the “saboteur juror” should not have been on the jury in the first place, everything she said during deliberations was arguably “extraneous.” The Supreme Court agreed that the affidavit should not have been received or considered. The Court reasoned that a strict interpretation of the rule discourages jury tampering and promotes the finality of verdicts, as Congress intended. It clarified that “extraneous information” is information that is “external” to the jury. “External” information includes publicity and information regarding the case, whereas “internal” information includes the general body of experiences that jurors bring with them to deliberations.

    How can juror misconduct during voir dire or during deliberations be proved when it’s discovered after trial? The Supreme Court offered some guidance, instructing that juror impartiality is sufficiently protected by: (a) the ability to raise the issue before the verdict is read; and (b) through the introduction of “non-juror” evidence. The Court didn’t elaborate on how “non-juror” evidence could be used to demonstrate misconduct during cloistered jury deliberations, but F.R.E. 606(b) does not prohibit the testimony of bailiffs, or other members of the court staff or judge, who may have information about misconduct. FRE 606(b) also does not prohibit the testimony of outside people who are contacted by jurors, though this may also present hearsay problems.

    It may also be possible to work around the edges of the rule to get in juror testimony regarding misconduct. Most courts will instruct the jury not to discuss the case with their fellow jurors until evidence and arguments are complete, and “deliberations” begin formally. So, if the juror discloses bias, or voir dire misconduct, at some point before deliberations have officially commenced, juror testimony on that subject may not be precluded.

    External influences on the jury fit within the well-established “extraneous information” exception to FRE 606(b). Careful thought should be given to the form of the evidence that is presented in post-trial motion. For instance, had Warger’s counsel obtained an affidavit from the “saboteur juror’s” daughter explaining that her life would have been ruined if she were sued as a result of the car incident, the district court may have been able to consider that evidence. At the least, it likely would not have been barred by FRE 606(b), though it might bring up other evidentiary issues. Careful consideration may make it possible to work around FRE 606(b).

    Jonathan Murphy, Snell & Wilmer L.L.P., Orange County, CA


    February 23, 2015

    Feds Release Proposed Regulations for Unmanned Aircraft Systems

    On February 15, 2015, the federal government unveiled two key documents concerning the future of unmanned aircraft systems (UAS)—sometimes referred to as “drones”—in the United States. The Federal Aviation Administration (FAA) released a highly anticipated notice of proposed rulemaking regarding commercial UAS operations, while the White House issued a memorandum outlining privacy protections for government UAS use in the National Airspace System (NAS). The proposed rules and memorandum underscore the growing importance of rapidly evolving UAS technology and applications, as well as the federal government’s efforts to craft flexible regulations that will foster safe use, protect privacy, and allow further innovation.

    The FAA’s Notice of Proposed Rulemaking
    The proposed FAA regulations allow for expanded but limited commercial use of UAS in the NAS. Subject to what will likely be a very spirited 60-day public-comment period after the proposed rules are officially published in the Federal Register, and prior to finalization, the proposed rules for commercial UAS operations contain the following key points:

    • Individual unmanned aircraft must weigh less than 55 lbs.
    • Among other things, UAS pilots must be at least 17 years old, pass a knowledge test to obtain an unmanned aircraft “operator” rating certificate, followed by a recurrent test and recertification every 24 months. The operator would also be vetted by the Transportation Security Administration.
    • Max airspeed is 100 mph.
    • Max altitude is 500 feet above ground level (AGL).
    • Operators or visual observers must have visual line of sight with the UAS unaided by any device other than corrective lenses.
    • Prohibition on careless or reckless operations. Operations in certain airspace classes require air traffic control permission, and operators would have to observe various FAA airspace restrictions.
    • No operations at night or in poor weather.
    • No operations over bystanders who are not directly involved in the flight, and cannot drop items.

    Businesses that hope to use UAS for delivery services (e.g., fast food, items purchased online) are expected to contest certain proposed regulations which seem to foreclose using UAS for that purpose.

    On the other hand, some stakeholders are pleased that the FAA apparently will not require commercial UAS to meet the same (and very costly) airworthiness standards nor have the UAS certified by the FAA as manned aircraft are, although preflight safety checks are required.

    The FAA also noted that it is seeking feedback on a proposed framework for so-called microdrones—unmanned aerial vehicles weighing in at 4.4 lbs. or less.

    Whatever form the proposed FAA rules ultimately take, they will be the foundation for a regulatory scheme that will need to be sufficiently flexible to adapt to the ever-changing social, legal, commercial, and technological environment within which UAS will operate.

    The Presidential Memorandum: Promoting Economic Competitiveness While Safeguarding Privacy, Civil Rights, and Civil Liberties in Domestic Use of Unmanned Aircraft Systems
    While the proposed FAA rules focus on safety concerns, President Obama’s memorandum directs federal agencies using UAS to adhere to privacy and civil-rights protections (including the Privacy Act of 1974), during the gathering, storage and use of personally identifiable information (PII) collected by government UAS. Among other things, it contains the following directives:

    • UAS must only collect information relevant to an authorized purpose.
    • Unless necessary to an agency’s mission, UAS-collected PII must not be kept for more than 180 days.
    • Except as required by law, the information collected by UAS cannot be shared outside of the agency that gathered it.
    • To improve transparency, agencies using UAS should notify the public about where the UAS are operated.

    To implement these safeguards, the Memorandum calls for the Department of Commerce, through the National Telecommunications and Information Administration, to engage in a “multi-stakeholder engagement process to develop a framework regarding privacy, accountability, and transparency for commercial and private UAS use.” In other words, UAS privacy regulations are coming and commercial and private stakeholders, as well as federal agencies, should be prepared to engage in the discussion.

    Both the proposed FAA rules and memorandum seem to reflect the federal government’s incremental and adaptive approach to incorporating evolving UAS technology in the National Airspace System (NAS). New safety and privacy considerations will bring new regulations, necessitating stakeholders’ constant awareness, education, and involvement in the process.

    Troy D. Roberts and Patrick X. Fowler, Snell & Wilmer L.L.P., Phoenix, AZ


    February 23, 2015

    What Is the "Internet of Things" and What Are Its Legal Challenges?

    The “Internet of Things” is the universe of smart devices that talk to the Internet or to one another. The devices have unique identifiers and the ability to automatically transfer data over a network on their own, without human interaction.

    Some examples in the home include wifi-connected home-security systems, thermostats, cameras, refrigerators, and wearable technology. Some industrial examples include smart grid utilities, patient monitoring, connected commercial vehicles, and smart buildings and factories. Cisco estimates that there are about 200 connectable things per person in the world today. By 2020, it’s estimated that 50 billion things will be connected to the Internet.

    Here are some interesting legal issues and challenges posed by the Internet of Things.

    Device malfunctions. Product-liability law would apply when something goes wrong with a device that causes injury or damage. You can imagine scenarios where, for example, a remotely operated device might malfunction and cause water or fire damage. Or a home-security device that malfunctions and leaves doors or window open, allowing intrusions or burglaries. In this kind of instance, likely any company in the product chain (manufacturer, seller, app developer, installer, monitor) could potentially have some share of liability. User error could also play a role in incidents or malfunctions.

    Data protection.Businesses and industries using data collected by the Internet of Things devices will need to manage and safeguard that data. They will need to have robust systems to protect against data breaches or misuse of data. They will need to ensure that data is only used for the original purpose consent to by the data subject (here, the end user). It may be especially challenging for companies to address consent by end users when they are using a product without a screen, for example. With applications running autonomously, end users may not even be aware of data processing that is happening.

    Evolving regulations.Governments and regulators are paying attention to the Internet of Things. The U.S. Federal Trade Commission (FTC) is taking a serious look at what kind of regulations are needed for personal and home devices that collect and transmit user data. In 2013, the FTC took well-publicized action against a company whose web cameras were routinely hacked due to faulty software. The European Union published a report in 2013 on the results of its public consultation on the topic. It’s likely that there will end up being different regulations in different countries over the Internet of Things.

    Kelly Wilkins, Snell & Wilmer L.L.P., Phoenix, AZ


    January 28, 2015

    NLRB: Employees May Use Employer Email for Nonwork Purposes

    Reversing well-established precedent, on December 11, 2014, the National Labor Relations Board (NLRB) held that employees that have been given access to their employers’ email systems, must be permitted to use those systems for “protected communications” that is, communications that are related to union and other concerted activities, during nonworking time. Purple Commc’ns, Inc. 361 NLRB No. 126 (Dec. 11, 2014). This decision is a radical departure from the existing law that had recognized and protected employers’ property rights.

    In its decision, the NLRB distinguishes email systems from other employer communication systems, such as bulletin boards, copy machines, public-address systems, and telephone systems on the basis that email systems function “as an ongoing and interactive means of employee communication in a way that other older types of equipment clearly cannot.”

    The board notes that its decision is limited in the following ways:

    1. It is limited to email systems and does not apply to other electronic communication systems.

    2. It applies only to employees who have been given access to the employers’ email systems and does not require the employer to give such access to other employees.

    3. It does not apply to nonemployees.

    4. The employees’ right to use the email systems for non-work related purposes is limited to nonworking time.

    5. Employers are free to establish uniform and consistently enforced restrictions, such as prohibiting large attachments or audio/video segments, “if the employer can demonstrate that such [attachments or segments] would interfere with the email system’s efficient functioning.”

    6. Employers may continue to monitor their email systems for legitimate reasons, such as ensuring productivity and preventing use for harassment or other activities that could render the employer liable.

    7. Employers may ban all non-work use of email—including protected communications during nonworking time—by demonstrating special circumstances that make the ban necessary to maintain production or discipline.

    In another case, also dealing with employees’ communications rights in the work place, on December 9, 2014, an NLRB administrative-law judge (ALJ) held that an employer policy that imposed certain restrictions on its employees’ display of logos or other insignia on their clothing was unlawful, even though the policy permitted wearing logos and insignia “allowed under federal of state law.” Wal-Mart Stores, Inc. JD-69-14 (Dec. 9, 2014). The ALJ based the decision on the precedent that “an employer may not validate an overbroad work rule by placing the burden on employees to determine their legal rights.” Trailmobile 221 NLRB 1088 (1975).

    The above cases will likely be appealed. Some believe that federal courts of appeal will reverse the board decision requiring employers to permit employees’ use of its email systems for non-work purposes.

    However, employers may wish to be aware that, unless reversed, the decision is current NLRB law, meaning noncompliance may involve substantial risks and protracted litigation.

    Gerard Morales, Snell & Wilmer L.L.P, Phoenix, AZ


    January 23, 2015

    Florida Appellate Court: No Right to Social Media Privacy

    On January 7, 2015, in Nucci v. Target Corp, et al., the District Court of Appeal of the State of Florida, Fourth District, upheld a lower court’s order compelling plaintiff Maria Nucci to produce photographs originally posted to her Facebook page. No. 4D14-138, 2015 WL 71726, -- So. 3d -- (Fla. Dist. Ct. App. Jan. 7, 2015). The court held there is little, if any, right to privacy in photos posted on Facebook or other similar social-networking sites. In this case, the plaintiff asserted personal injuries resulting when she slipped and fell on a foreign substance in a Target store. Specifically at issue on appeal were more than 30 photos the plaintiff posted on Facebook and then removed shortly after the photographs were discussed during her deposition.

    The plaintiff objected to Target’s written request to produce the photos, asserting that her use of Facebook privacy settings created a right to privacy, and further that the Federal Stored Communications Act (FCSA) prohibited disclosure of her Facebook photos. The court balanced the plaintiff’s purported right to privacy against the relevance of the photos to her damages claim. While the court recognized that Florida’s constitution provides a broader right to privacy than the U.S. Constitution, it nonetheless held that photos posted on social-networking sites are neither privileged nor protected by any privacy rights, despite the use of privacy settings.

    This ruling echoes similar recent decisions across the country. In Tompkins v. Detroit Metro. Airport, the U.S. District Court for the Eastern District of Michigan held that “material posted on a ‘private’ Facebook page, which is accessible to a selected group of recipients but not available for viewing by the general public, is generally not privileged, nor is it protected by common law or civil law notions of privacy.” 278 F.R.D. 387, 388 (E.D. Mich. 2012). The New York Court of Appeals reached a similar result holding that “postings on plaintiff’s online Facebook account, if relevant, are not shielded from discovery merely because plaintiff used the service’s privacy settings to restrict access.” Patterson v. Turner Constr. Co., 931 N.Y.S. 2d 311, 312 (N.Y. App. 2011). Likewise, the U.S. District Court for the Central District of California noted that content posted to social networking sites is not privileged or protected, and requests for such information therefore need only be reasonably calculated to lead to admissible evidence. Mailhoit v. Home Depot U.S.A., Inc., 285 F.R.D. 566, 570 (C.D. Cal. 2012). Indeed, in Nucci, the Florida Appellate Court recognized that discovery requests should be reasonably tailored to lead to discovery of admissible evidence, and acknowledged that Target’s requests met that standard.

    The court gave short shrift to the plaintiff’s privacy claim pursuant to the Federal Stored Communications Act. It held that while the FSCA prohibits providers of communication services from divulging users; private communications, it does not apply to the individual users themselves. The court also rejected the plaintiff’s relevance objections, holding that when personal injuries and quality of life are at issue, photos posted on social-media websites “are the equivalent of a ‘day in the life’ slide show produced by the plaintiff before the existence of any motive to manipulate reality” and are therefore “powerfully relevant to the damage issue.”

    For defendants, this opinion provides another valuable tool in responding to personal-injury claims by ensuring access to relevant information regarding a plaintiff’s physical injuries and quality of life. For the plaintiffs’ bar, this opinion serves as yet another cautionary reminder of the relevance and potentially damaging impact of a client’s social-smedia postings.

    Robin E. Perkins and Casey G. Perkins, Snell & Wilmer L.L.P., Las Vegas, NV


    January 16, 2015

    SCOTUS Resolves Truth in Lending Act Circuit Split

    In Jesinoski v. Countrywide Home Loans, Inc., decided January 13, 2015, the U.S. Supreme Court resolved a circuit split and clarified that borrowers need not file a complaint to invoke their right to rescind within the three-year window of the Truth in Lending Act (TILA). In a short opinion by Justice Scalia, the Supreme Court unanimously reversed the Eighth Circuit Court of Appeals and held that borrowers exercising the right to rescind under TILA need only provide written notice to the lender within the three-year period. The decision resolves what had been a split between the circuits: The Third, Fourth, and Eleventh Circuits had held that written notice is itself sufficient; meanwhile, the First, Sixth, Eighth, Ninth, and Tenth Circuits had held that TILA required a borrower to file suit, not just provide notice.

    On February 23, 2007, the Jesinoskis borrowed $611,000.00 from Countrywide Home Loans to refinance the mortgage on their home. Exactly three years after borrowing the money, the Jesinoskis mailed Countrywide a letter notifying respondents Countrywide and Bank of America that they intended to rescind the loan. Bank of America responded with its refusal to acknowledge the validity of the rescission. One year and a day later (four years and one day after the refinancing) the Jesinoskis filed a complaint in the District Court for the District of Minnesota, seeking a declaration of rescission and damages. The district court entered judgment on the pleadings in favor of the defendants, on the grounds that the rescission right required the Jesinoskis to file a lawsuit within three years of the loan’s consummation. The Eighth Circuit affirmed.

    The TILA provision at issue grants borrowers an unconditional right to rescind for three days, after which they may rescind up to three years after the transaction in the event the lender does not comply with TILA disclosure requirements. 15 U.S.C. § 1635(a). In the opinion, Justice Scalia relied upon the plain language section 1635(a), stating that a borrower may rescind “by notifying the creditor, in accordance with regulations of the Board, of his intention to do so.” Scalia explained that this language “leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind. It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely.”

    The Court rejected the respondents’ attempts to rely upon the Court’s prior holding in Beach v. Ocwen Fed. Bank, 523 U. S. 410, 417 (1998). Justice Scalia explained that while Beach settled the issue of when the right to rescind must be exercised, it said nothing about how it is exercised. The Court further rejected the respondents’ attempt to make a distinction between disputed and undisputed rescissions, finding no support in TILA’s plain language for any distinction.

    Finally, the Court rejected the respondents’ claims that common law implicitly suggested the requirement to file a complaint. Specifically, the respondents argued there were two methods of rescission at common law—(1) that the rescinding party first tender what it had received (rescission at law), and (2) that a court affirmatively decree rescission (rescission in equity). The respondents further argued that because TILA disclaimed the rescission-at-law requirement of tendering proceeds, it inherently recognized rescission in equity. Justice Scalia reasoned that the negation of one did not imply the other and stated that “[t]o the extent [TILA] alters the traditional process for unwinding such a unilaterally rescinded transaction, this is simply a case in which statutory law modifies common-law practice.”

    For lenders, this decision only further reinforces the importance of providing proper TILA disclosures. In addition, lenders and servicers who receive written notices of rescission should not wait until a lawsuit is filed before addressing them.

    M. Lane Molen, Snell & Wilmer L.L.P., Salt Lake City, UT


    January 14, 2015

    Disputes over Interstate Compacts Increase

    On December 29, 2014, a special master recommended that the U.S. Supreme Court find that Wyoming failed to make deliveries of Tongue River water to Montana in accordance with the Yellowstone River Compact. However, the special master’s finding is limited to violations in just two years, 2004 and 2006, and for relatively small amounts of water—1,300 acre-feet and 56 acre-feet, respectively.  

    Despite the small amount of water involved, the special master’s finding highlights a growing trend in interstate water compact disputes. Interstate compacts are contracts between two or more states setting the terms for sharing interstate streams. There are more than two dozen interstate compacts governing water allocations in the United States with Colorado a party to nine of them.

    The increasing demands on water supplies from growing populations and industries, coupled with drought and over-allocated water supplies, have made interpreting, complying with, and enforcing interstate water compacts challenging for many state water managers. Interstate compacts recently challenged include the Red River Compact, the Republican River Compact, and the Rio Grande Compact.  

    Interstate disputes may involve both groundwater and surface water. For example, in Wyoming v. Montana, the parties disagreed on whether the compact applies to groundwater pumping. The pending disputes also seek a variety of remedies, including equitable apportionment, monetary damages, and other contract remedies.

    Interstate water disputes are not limited to states that have entered into compacts. Interstate water disputes between Mississippi and Tennessee regarding one river basin, and between Florida and Georgia regarding another river basin are currently before the U.S. Supreme Court. In these cases, there are no compacts involved.

    Interstate water disputes involve multiple interested parties and take years to resolve. In the Wyoming v. Montana dispute, Montana filed its complaint in 2007 and it is still not resolved. As the special master has now issued his recommendation in this case, the Supreme Court will most likely ask the parties to file their exceptions and then may hear oral argument on these exceptions. Then, the Supreme Court may adopt, in whole or in part, the special master’s recommendations.

    As populations continue to grow and more states struggle to adapt to drought conditions, it is likely that the current interstate disputes are harbingers of future compact challenges. However, states may also want to heed this forewarning and revisit the terms of their existing interstate compacts, or enter into new compacts, before they find themselves in a lengthy court battle.

    Cynthia M. Chandley, L. William Staudenmaier, Karlene E. Martorana, and Christopher W. Payne, Snell & Wilmer L.L.P., Phoenix, AZ


    December 19, 2014

    Is Your Miniature Horse Needed Because of a Disability?

    It’s the busy shopping season, and a customer, who does not seem to have any disabilities, comes in with a miniature horse on a leash. What do you do? Well, there are only two questions you can legally ask this person in this situation. The first is above in the title. The other is “What work or task has your miniature horse been trained to perform?” That’s it. Not “What disability is your miniature horse trained to assist?” Not “Can we see some medical documentation for your disability and need to have a service animal?” Not “Can we see certification that your miniature horse is actually a service animal?” And yes, if you were wondering, a miniature horse can be a service animal.

    Under Title III of the Americans with Disabilities Act (ADA), private businesses that are publicly accessible must permit the use of a service animal by an individual with a disability. The Department of Justice (DOJ) defines a service animal as a dog that is individually trained to work or perform tasks for an individual with a disability including a physical, sensory, psychiatric, intellectual, or other mental disability. The DOJ later revised this definition to include miniature horses. Any other species of animal, wild or domestic, trained or untrained, is not considered a service animal. The work that a service animal completes must be directly related to the person’s disability. This includes pulling a wheelchair, guiding the blind, alerting people who are deaf, alerting or protecting a person having a seizure, and performing other tasks.

    There are several traps and pitfalls for the unknowing employer or business.

    Service animals are allowed to go everywhere the public is allowed. Under the ADA, service animals are working animals—not pets—so they must be allowed everywhere the public is allowed. Even if your business has a “no-pets” policy, a service animal is still allowed on premises. A service animal, however, may be prohibited from certain areas if its presence interferes with a legitimate safety requirement of the facility (i.e. surgery room or burn unit in a hospital). Businesses that sell food still must allow service animals in the public areas even if state or local health codes prohibit animals on site.

    Service animals may be removed from the premises if not under control. A service animal may be removed if: (1) it is not housebroken or (2) it is out of control and the owner is not able to control it. An owner shall have the service animal on a harness, leash, or other tether unless the owner cannot use these due to a disability or the restraint would interfere with the service animal’s performance of task. If no harness is used, the animal must be under the owner’s control via voice command, signals or other method.

    If a service animal is removed, continue to allow access to owner. A business should continue to allow the owner to obtain goods, services, and accommodations without having the animal on the premises after removal of the service animal.

    You cannot isolate people with service animals. People who use service animals cannot be treated less favorably than other patrons or charged additional fees not charged to other patrons without animals. If an establishment normally charges a deposit or fee for individuals with pets, it must waive this fee for service animals. However, if an establishment normally charges a fee for the damage an individual causes, it may also charge the owner for any damage caused by the service animal. Further, fear or allergies are insufficient reasons to preclude access a service animal. An accommodation should be made to place the person with allergies and the service animal in different places in the room or in different rooms, if possible.

    Staff are not required to provide for the care or supervision of a service animal.

    An emotional support animal is not a service animal. While emotional support animals or comfort animals are often used as therapy animals, they are not considered service animals under the ADA; however, other laws may require an accommodation for emotional support animals. If an animal is merely to provide emotional support and has not been trained to provide a task directly related to a disability, you do not need to make an accommodation under the ADA.

    Other state and federal laws may define service animals more broadly than the ADA. For example, the definition of service animal is broader under the Fair Housing Act and Air Carrier Access Act, and these acts, including others, may mandate accommodations for emotional-assistance animals. There are also state regulations that may require you to allow your employees with medical conditions and disabilities to bring in their service animal and/or emotional support pets.

    If your business is open to the public, it is likely that you must comply with one or more of the laws requiring access by service animals. Figuring out how to accommodate service animals can be difficult, but whatever you do, be sure to keep some hay handy.

    Karl O. Riley, Snell & Wilmer L.L.P., Las Vegas, NV


    December 19, 2014

    Broadened Interpretation of "Direct Physical Loss" May Expand Scope of Insurers' Liability

    On November 27, 2014, the U.S. District Court for the District of New Jersey, applying New Jersey law, issued a decision broadly interpreting the term “direct physical loss or damage” to an insured’s covered property to include temporary loss of use of the insured’s facility due to a gas leak. This is an affirmation of the New Jersey appellate court and Third Circuit’s rulings, which both found that property can sustain physical loss without structural alteration.

    In Gregory Packaging Inc. v. Travelers Property Casualty Co. of America, Gregory Packaging sought coverage for an ammonia gas leak that required a temporary shutdown and remediation of its facility, and injured a contract worker. Gregory Packaging claimed that the damage was covered by its policy with Travelers, which stated that Travelers would “pay for direct physical loss of or damage to covered property caused by or resulting from a covered cause of loss.” Similar provisions are included in a wide variety of general commercial liability policies.

    Travelers asserted that finding “physical loss or damage” requires a “physical change or alteration to insured property requiring its repair or replacement.”

    The court rejected Travelers’ definition and held that Gregory Packaging sustained physical damage or loss as a result of the ammonia leak, temporary shutdown, and remediation. The court noted that the leak created an actual change in the facility’s air content, thereby finding that the facility was “physically unfit for normal human occupancy and continued use until the ammonia was sufficiently dissipated.” Ultimately, the court determined that temporary loss of the ability to use the facility constituted “direct physical loss.”

    This decision embarks on a slippery slope away from a bright-line definition of direct physical loss. For policy holders, it provides additional potential grounds to claim coverage for property damage. However, for insurers, it represents an expansive reading of this common contract term, and in turn has the potential to expand the scope of insurers’ liability.

    Lindsay Chapman, Cooley LLP, San Diego, CA


    December 17, 2014

    Top Ten Tips of Right-Sizing E-Discovery

    Diane Rupprecht, staff counsel at the Sunrock Group, and Lenor Marquis Segal, at Ellis & Winters, LLP in Raleigh, North Carolina, recorded a Sound Advice podcast for the Section of Litigation, providing these 10 helpful tips for navigating e-discovery.

      1. Don’t assume you review electronically stored information (ESI) like paper.

    • ESI takes on many forms, and is fragile but pervasive.
    • It is created and maintained in complex systems.
    • The metadata is non-apparent information.
    • It is impossible to anticipate all potential issues.
    • Remember that the discovery rules apply equally to ESI and paper.

      2. Know and understand your client.

    • Educate yourself about your client, its systems, and the volume of information. This will help you advise about collection.
    • Assert yourself into tricky situations.
    • Transparency and communication with your client are key.

      3. Manage client expectations.

    • Assess your client’s tolerance for e-discovery. This will allow you and your client to be better prepared for e-discovery and issues that may arise.
    • Continue to educate your client throughout the process.
    • Advise and remind your client that this is still just discovery and they still have to follow the rules.

      4. Minimize business disruption.

    • Work with in-house counsel early to identify the set of key custodians and data sources.
    • Prioritize e-custodians and data.
    • Utilize technology that allows you to gather information without tying up the custodian’s computer or time.

      5. Proportionality Doctrine, FRCP 26(b)(2)(c)

    • Allows you to utilize cost savings and effectiveness.
    • If you are advocating for computer-assisted review or predictive coding, you need to propose a transparent process for the court to consider.
    • There are benefits to collaborating with the other side because when parties identify and discuss issues early, this increases the potential to reduce costs and burdens associated with e-discovery.
    • Look to FRCP 26(b) and 34 for specific protections against burdensome or unnecessary discovery, and reasonableness requirements.

      6. Make best friends with your client’s IT department.

    • If there is a gap between the legal and IT department, you can be the liaison to bridge that gap.
    • You need to have a good relationship with the people who know where the data lives and how it functions in real life.

      7. Stay flexible with your opposition.

    • Agreements should be made early on. Set parameters for dates, subject matter, and custodians.
    • But, be flexible when those original parameters need to be changed.
    • Compromise to save all parties money as the case evolves.
    • Keep open minds and closed wallets.

    • 8. Never stop reevaluating everything.

    • Even a solid, conservative preservation plan at the outset may prove to be overkill and need to be reevaluated later.
    • Proportionality is not static.
    • Practicality is permissible.
    • Communicate with your client about what archiving burdens their business can carry and for how long.
    • E-discovery does not have to mean being crippled by hoarding.

      9. Document every decision.

    • Every decision about preservation, collection, review, and production should get a memo to the file, even if it is just one line. This should be in addition to data tracking logs and chain-of-custody documents that are standard and required.
    • Document what you did, what your options were or were not, and what was done.
    • The key is defensibility.

      10. No buyer’s remorse and question bills.

    • Insinuate yourself between your vendor and your client, and be the gatekeeper to the vendor being paid.
    • Don’t buy services just because they are the newest and prettiest thing. Don’t let your client pay for anything you don’t understand.
    • Demand detailed billing.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    December 11, 2014

    Joint Employers in the Building and Construction Industry

    On October 21, 2014, National Labor Relations Board (NLRB) associate general counsel, Barry J. Kearny, discussed the litigation, currently before the board, on the joint employer issue. Kearny predicted that the board will issue its decision very soon.

    In the case before the board, Browning-Ferris Industries of California Inc., the NLRB general counsel, Richard F. Griffin, asks the board to abandon the 30-year-old standard for determining whether multiple organizations should be treated as joint employers and therefore jointly liable for the unfair labor practices and union obligations of each other.

    Under the existing standard, to find a joint employer relationship, it must be demonstrated that organizations have “direct and immediate control over employment matters.”

    The general counsel urges the board to adopt a new standard and construe employer status under labor law “broadly in light of economic realities.” Under this new standard, any entity that “wields sufficient influence over the working conditions” of the employees would be an employer of said employees, even if it does not have direct and immediate control over employment matters. Under the new standard, the board would look at whether the following factors are present with respect to the various putative employers: (a) track data on labor costs; (b) calculate labor needs; (c) set policy on work schedule; (d) track wage reviews; (e) track time needed for employees to accomplish given tasks; (f) handle employment applications through their own system; (g) impose safety rules; and (h) impose hygiene/appearance (uniform, etc.) rules.

    To say the least, this change, if adopted by the board, would significantly expand the entities that would be liable for unfair labor practices and that would have obligations for union recognition and under union agreements. The remedial reach of the NLRB would grow exponentially. The general/subcontractor relationship in the construction industry would be significantly impacted.

    Although Kearny would not predict whether the board would adopt the test urged by the general counsel in Browning-Ferris, he said that a majority of the current board members have stated that they do not think very highly of the current joint employer standard.

    Gerard Morales, Snell & Wilmer L.L.P, Phoenix, AZ


    November 26, 2014

    SCOTUS Will Not Consider a Ruling that Companies are Imputed with Racial Identity and Can Assert a Racial Discrimination Claim

    On October 14, 2014, the United States Supreme Court let stand the Fourth Circuit’s ruling that a minority-owned construction company had an “imputed racial identity” and could thus sue for racial discrimination.

    In Carnell Construction Corp. v. Danville Redevelopment & Housing Authority, Carnell filed claims for race discrimination and breach of contract, asserting it was singled out as a minority contractor. While the lower court’s jury disagreed, the Fourth Circuit found that Carnell did have a racial identity that could ground a claim for race discrimination. The Fourth Circuit ruling was consistent with the Second Circuit, which had previously held it was “hard to believe” corporations could not have standing to sue for discrimination.

    The Housing Authority petitioned the Supreme Court to clarify whether companies have a racial identity and can sue for race discrimination. It asserted that a company cannot have a race, color, or national origin under Title VI and further contended that the Supreme Court’s case law did not provide a definitive ruling, leading to a circuit split. 

    In denying the Housing Authority’s petition, the Supreme Court let stand the Fourth Circuit’s holding that a corporation is imputed with racial identity and can assert a claim for racial discrimination. 

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    November 25, 2014

    Impact of New Immigration Initiatives

    On November 20, 2014, President Barack Obama announced a series of executive immigration initiatives that will impact millions of individuals already in the United States and their current or future employers. Although the specific details of how each initiative will be implemented have not yet been announced, employers should expect to receive questions from their employees about these new initiatives and how they will impact their immigration and employment status.

    The new initiatives include the following:

    • Expanded eligibility for Deferred Action for Childhood Arrivals (DACA) to include people who arrived in the United States before turning 16 and have been present since January 1, 2010. It would also extend DACA work authorization from two to three years.

    • Creation of a new program for parents of U.S. citizens and lawful permanent residents who have been in the United States since January 1, 2010, if they pass required background checks. These individuals could request deferred action and obtain employment authorization for three years.

    • Improving and clarifying immigrant and non-immigrant programs, including the following proposed changes:

      • Expanding and extending the use of Optional Practical Training (OPT) for foreign students

      • Providing work authorization to the spouses of certain H-1B visa holders

      • Clarifying the meaning of “specialized knowledge” under the L-1B program

      • Authorizing parole to eligible inventors, researchers and founders of start-up enterprises

      • Clarifying the standard of the “national interest” waiver availability to select foreign nationals

      • Expanding use of provisional waivers of unlawful presence to include sons and daughters of lawful permanent residents and U.S. citizens

      • Providing citizenship education and public awareness for lawful permanent residents

    The economic, legal, and social impact of these initiatives will be a hotly debated topic as federal agencies take steps to implement the President Obama’s goals. Although the executive actions do not contain employer sanctions provisions, employers may wish to remain mindful that they complicate compliance with federal (and in some cases state) employment verification requirements, as well as the antidiscrimination provisions in the Immigration and Nationality Act and Title VII.

    Employers may wish to therefore prepare themselves to address a host of potential issues, including

    • properly addressing situations where employees who announce they have been using a false identity are now inquiring about, or claiming eligibility for, the Deferred Action for Parental Accountability program;

    • addressing situations where employees are attempting to regularize their personnel files after receiving Deferred Action;

    • addressing tax withholding and employee benefit issues;

    • working with contractors and/or subcontractors to ensure procedures to comply with employment eligibility verification requirements are still being met, particularly for government contractors;

    • updating policies, practices and procedures to ensure authorized workers are not treated differently with respect to any terms and conditions of employment; and

    • dealing with other pragmatic consequences associated with the president’s executive actions, including the processing of employer-sponsored visas.

    We expect that over the next weeks and months additional information about these new initiatives will be released.

    Rebecca A. Winterscheidt and Manuel H. Cairo, Snell & Wilmer L.L.P, Phoenix, AZ



    November 24, 2014

    First Circuit Clarifies and Expands Grounds for Removal Based on “Other Papers”

    Meeting the 30-day deadline for removal of a complaint is not always possible when the allegations alone provide insufficient grounds. In such cases, “a notice of removal may be filed within thirty days after receipt by the defendant, through service or otherwise, of a copy of an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable.” 28 U.S.C. § 1446(b)(3).

    The United States Court of Appeals for the First Circuit recently issued an opinion which clarified and expanded the basis for removal relying on “other paper”, adding to similar opinions from other circuit courts. Romulus v. CVS Pharmacy Inc.

    Romulus is a wage-and-hour putative class action dispute, seeking unpaid wages for rest or meal breaks where employees were allegedly required to stay on premise when no mangers were on duty, or when only one other employee was on duty. The defendant’s first effort to remove was remanded because the amount in controversy element of removal was not evidenced in allegations set forth in the complaint.

    While in state court, the parties conducted discovery, and during that time, plaintiffs provided an email to defendant, identifying the total alleged number of unpaid breaks. With this email, defendant was able to reasonably calculate the damages. Accordingly, defendant sought removal within thirty days of receipt of the email, relying upon the email as “other paper” to establish the amount in controversy. 

    The lower court again remanded, holding that even if the email was “other paper,” it provided no “new information” that could not have been determined by the amended complaint or through defendant’s own knowledge. Further, the email was based on data that defendant had from the outset, and which defendant provided in discovery.  

    The First Circuit overturned, stating the lower court imposed “too great a duty of inquiry on the defendant.”  The First Circuit held that the email from plaintiffs, which included information provided by the defendant, qualified as “other paper.” The fact that the information in the email was originally provided by the defendant was immaterial. Additionally, the First Circuit held that “other paper” removals are applicable to Class Action Fairness Act cases.

    For litigators faced with removal challenges, this opinion can provide additional guidance and support for removal efforts.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    November 24, 2014

    Business Development and Rainmaking Tips from the Pros

    On November 5–7 in Chicago, the Section of Litigation’s Woman Advocate Committee, Women in Insurance Network, and Women in Products Liability subcommittees co-hosted the Women of the Section of Litigation: Leading, Litigating, and Connecting. This was an excellent CLE and networking event, and many of the participants attended a panel discussion on business development and rainmaking, titled “Just Ask (For Business)!” 

    This panel included top rainmakers: Jaimmé A. Collins, partner, Adams and Reese LLP, New Orleans, LA; Lucia Coyoca, partner, Mitchell, Silberberg & Knupp, Los Angeles, CA; Vicki Donati, general counsel and corporate secretary, Crate & Barrel Holdings, Inc.; and Patricia Gillette, partner, Orrick, Herrington & Sutcliffe LLP, San Francisco, CA. The panel was moderated by Kristie M. Wetterer Stites & Harbison, PLLC, Louisville, KY. 

    These rainmakers shared invaluable tips and advice on developing business and building genuine relationships. This summary of their advice is beneficial to young and seasoned attorneys alike, and the complete course materials are available on the Woman Advocate Committee’s webpage.   

    First, the panel discussed “The Rainmaking Study – How Lawyers’ Personality Traits and Behaviors Drive Successful Client Development.” This two-year research study focused on identifying the characteristics that make rainmakers successful, which one may naturally possess or can learn over time:

    1. Engagement:

    • Actively listening, and genuinely participate in conversation. Absorb and process information, and provide a valuable and authentic response. Be engaged.

    • The goal is to identify potential problems or issues and provide possible solutions. Be the “go to” person. Be and educator who explains why what you are propose is the best resolution.

    • Be high energy and proactive, take matters into your own hands.

    • The Rainmaking Study found that it is not making money that drives rainmakers, but the desire to win, be appreciated and valued by others.

    2. Dominance:

    • A rainmaker is influential and exercises power over others.  Market yourself and convince your potential client that hiring you is the best choice.

    • Approach issues and conversations from a problem-solving, business focused, orientation.

    3. Motivate Others:

    • A rainmaker succeeds by managing and delegating responsibility, training his/her team, and empowering that team to be as confident and successful as he/she is. A rainmaker needs a strong and supportive team.

    • Give your team increased responsibility, listen to their views, and encourage their independence.

    4. Risk Taker:

    • A rainmaker takes risks and bends the rules. A rainmaker is not afraid of hearing “no.”  In fact, they don’t hear “no”—just “not right now”!

    • Find comfort in risk. Try something different or unusual every day.  Force yourself out of your comfort zone.

    • Be different and stand out.  Consider creative or unusual alternatives and solutions. Think outside the box.

    Additionally, the panelists shared the following information and advice:

    • Rainmaker characteristics are not inherent, they can be learned.

    • It is less relevant where you went to school, or whether you were on law review.  Rainmakers tend to have experienced challenges and struggles which forced them to work hard, and succeed through adversity, teaching them the importance of motivation and grit.    

    • Recognize the difference between your business development goals and work goals.  Set aside time for business development. Calendar time each week to strategize your business development.

    • Develop and constantly adapt your business plan. What is your end game? What is your plan for the next one year, five years, and ten years?

    • Be strategic about your business plan and career goals. What do you want, and how can you achieve it?  

    • A niche practice helps you create an area of expertise, making it easier to market yourself.  

    • Understand your client or potential client’s business. This is essential.

    • Provide information and answers to your client in a format that is easy for not only the in-house counsel to understand and digest, but also for their business counterparts.

    • Consider how you can help your in-house counsel on both a professional and personal level—what can you do to make their jobs easier?

    • If you don’t win a pitch, call and ask why.  It demonstrates that you really wanted the business, you have strong character, and provides an opportunity for improvement.

    • Interestingly, most rainmakers have stay-at-home spouses.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV



    October 30, 2014

    WDLa Substantially Reduces $9 Billion Award Against Takeda

    In April 2014, a jury in the U.S. District Court for the Western District of Louisiana entered a $9 billion verdict in favor of the plaintiffs and against Takeda Pharmaceutical Co., Ltd. and Eli Lilly & Co. Case No. 6:12-cv-00064-RFD-PJH. This award was reported as the seventh-largest punitive damage award in U.S. history. The plaintiffs claimed that Takeda and Eli Lilly concealed the risks of bladder cancer associated with the diabetes drug Actos.

    However, on October 27, 2014, the court substantially cut the $9 billion punitive damages award to $36.8 million. (Memorandum Ruling: Defendants’ Rule 59 Motion for New Trial; Amended Judgment.) The court held that while the jury’s verdict was not unreasonable, the total punitive-damages award should not exceed approximately 25 times the amount of the compensatory-damages award, which was about $1.5 million. The court found the award unconstitutional, but expressly noted that it did not believe that the jury was motivated by “passion or prejudice.” Instead the court believed that the jury acted in accordance with their instructions and entered an award that a jury of laypeople believed would have the appropriate deterrent effect upon Takeda and Eli Lilly, as multibillion-dollar corporations.

    In its ruling, the Court encouraged the U.S. Supreme Court to reconsider punitive-damage-award caps for reprehensible corporate behavior, and suggested that both federal appellate courts and the U.S. Supreme Court should provide more detail and guidance as to punitive-damage awards and ceilings, especially where the alleged conduct is seriously reprehensible.

    As part of this 99 percent reduction in punitive-damages award, the court also denied Takeda and Eli Lilly’s request for a new trial. The defendants have announced their intent to appeal.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    October 29, 2014

    Nevada Special Master: Failure to Preserve ESI, Litigation Holds

    A recent special master’s report issued in the U.S. District Court, Nevada, highlights the level of scrutiny being given to the preservation and collection of electronically stored information (ESI) by litigants nationwide and the standards expected of them.

    Small v. University Medical Center of Southern Nevada arises out of an employment-law dispute. No. 2:13-cv-00298-APG-PAL, 2014 U.S. Dist. LEXIS 114406 (D. Nev. Aug. 18, 2014). The court appointed a special master, who found that the defendant medical center failed to preserve a considerable body of evidence due to its failure to properly issue and maintain a litigation hold.

    The defendant had two policies for mobile devices: a “company-issued, personally enabled” device policy and a “bring your own device” (BYOD) policy where employees used personal smart phones. The devices under the company-issued, personally enabled device policy were not addressed by a litigation hold until after a number of the devices had been wiped clean, resulting in the loss of over 26,000 messages.

    The failure to preserve information under the BYOD policy was even greater. The defendant failed to issue any litigation hold addressing the devices. Several key employees also confirmed that they used their personal mobile devices rather than work-issued devices for work-related purposes. The defendant’s failure to issue a litigation hold resulted in the loss of over two years of messages and other ESI that was potentially relevant to the litigation. The special master declared the defendant’s conduct a “mockery of the orderly administration of justice,” and recommended that the court enter an order of default judgment, along with further sanctions in favor of the plaintiffs. Briefing continues on the special master’s report and recommendations as of this date.

    Although not yet accepted by the court and reduced to an order, the comprehensive and well-drafted special master’s report and recommendations highlight the importance of first, knowing where and how ESI is maintained within an organization; and second, implementing a thoughtful litigation-hold process, executing on it and monitoring it carefully.

    John S. Delikanakis, Snell & Wilmer L.L.P, Las Vegas, NV


    October 15, 2014

    HIPAA Requires Many Health Plans to Obtain HPID by November 5

    On September 5, 2012, the Department of Health and Human Services (HHS) issued final regulations adopting a standard for a national unique “health plan identifier” (HPID) and providing rules for implementing the HPID. Health plans are currently identified by several different number sets, depending on the source. For example, health plans may be identified by an IRS tax-identification number, an employer identification number, the National Association of Insurance Commissioner code, the various identifiers for Forms 5500, or the proprietary descriptors used by clearinghouses.

    These regulations aim to provide consistency and uniformity when identifying health plans in standard electronic transactions to improve efficiency. As discussed below, compliance deadlines are approaching.

    What is an HPID?
    Upon application approval, a health plan is assigned a 10-digit number that is unique to that health plan so it can be easily identified by Health Insurance Portability and Accountability Act (HIPAA)-covered entities (e.g., health insurers, clearinghouses, group health plans, and providers electronically transmitting health information) in standard electronic transactions involving the exchange of healthcare data between these entities. Such standard electronic transactions include, for example, healthcare claims, plan eligibility, premium payments, and plan enrollment.

    What Are the Deadlines?
    The deadline for health plans, except “small” plans, is November 5, 2014. The deadline for “small” health plans, defined as plans with $5 million or less in annual receipts, is November 5, 2015.

    Beginning November 7, 2016, all covered entities must use an HPID whenever a covered entity identifies a health plan that has an HPID in a standard electronic transaction. If a covered entity uses a business associate to conduct standard electronic transactions on its behalf, it must require its business associate to use the HPID to identify a health plan that has an HPID during these transactions.

    Who Must Obtain an HPID?
    A “controlling health plan” (CHP) must obtain an HPID. A “subhealth plan” (SHP) may also obtain an HPID but is not required to do so.

    A CHP is a health plan that:

    • controls its own business activities, actions, or policies; or
    • is controlled by an entity that is not a health plan; and
    • if the CHP has SHPs, it exercises sufficient control over the SHPs to direct their business activities, actions, or policies.

    A SHP is a health plan that has its business activities, actions, or policies directed by a CHP.

    A CHP may obtain an HPID for a SHP or may direct its SHP to obtain one. Self-insured group health plans that meet the CHP definition must obtain an HPID, even if the self-insured plan does not conduct or need to be identified in standard electronic transactions. Fully insured plans generally do not need to obtain a separate HPID because the insurer’s CHP HPID can be used.

    Example A: The employer sponsors three self-funded plans (PPO, high deductible, and self-funded dental). The employer must either obtain one HPID for all three plans and designate the other two as SHPs, or obtain separate HPIDs for all three plans.

    Example B: The employer sponsors two fully insured plans and a healthcare flexible-spending account (FSA). The insurers must obtain the HPIDs for the two insured plans and the employer must obtain a separate HPID for the healthcare FSA (because the employer controls that arrangement). If the healthcare FSA paid out less than $5 million in claims, its deadline for obtaining an HPID is November 5, 2015.

    How Does a Plan Obtain an HPID?
    Health plans must first access the Health Insurance Oversight System (HIOS) by going to the Enterprise Portal found on the website for the Centers of Medicare and Medicaid Services (CMS). Once registered in HIOS, a health plan can then access the Health Plan and Other Entity Enumeration System (HPOES) to complete the online HPID application process. An authorizing official then reviews the application and, upon approval, assigns the plan an HPID number. The CMS website provides step-by-step instructions for the application process. There is no charge to obtain an HPID.

    A third-party administrator cannot obtain an HPID on behalf of a health plan. Each health plan can obtain only one HPID for itself.

    Marvin S. (Bucky) Swift Jr. and Nick J. Welle, Snell & Wilmer L.L.P, Phoenix, AZ


    October 15, 2014

    Important Reminder about the Risk of Unexpected FMLA Liability

    The Family and Medical Leave Act (FMLA) provides “eligible employees” who work for “covered employers” with up to 12 (in some cases 26) workweeks of unpaid, job-protected leave per year. A “covered employer” includes a private employer that employs 50 or more employees for at least 20 workweeks in the current or preceding calendar year. An “eligible employee” is a person who (i) has worked for a “covered employer” for at least 12 months and at least 1,250 hours during the 12 months prior to the start of the FMLA leave, and (ii) works at a location where at least 50 employees are employed within a 75-mile radius.

    The FMLA generally requires a “covered employer” to notify an employee of his or her eligibility to take FMLA leave within five business days when (1) the employee requests FMLA leave, or (2) the employer acquires knowledge that an employee’s leave may be for an FMLA-qualifying reason.

    In some instances, an employer who is not a “covered employer” may give an employee assurances that his or her leave is covered under the FMLA. Likewise, a “covered employer” may automatically send out notice-of-eligibility forms to all employees who provide notice of an FMLA-qualifying condition. Before giving any employee notice of eligibility of FMLA leave, however, an employer should always analyze whether that particular employee is an “eligible employee” under the FMLA and whether the employer is a “covered employer” at the time. For example, does the employee work at a remote location where fewer than 50 employees work within a 75-mile radius? Has the employee worked for the employer for fewer than 12 months or fewer than 1,250 hours in the past 12 months?

    Many courts are imposing FMLA liability on employers with respect to employees who are otherwise not eligible for FMLA leave because the employer’s actions have misled the employee into believing that he or she is entitled to FMLA leave benefits. More specifically, courts have held that the FMLA applies—even if the employer is not a “covered employer” or the employee is not an “eligible employee”—based on the equitable-estoppel doctrine. These court decisions provide that equitable estoppel applies if (1) the employer misrepresented the availability of FMLA leave; (2) the employee reasonably relied on the misrepresentation; and (3) the employee suffered a detriment because of reasonable reliance on the misrepresentation.

    While some companies have made the deliberate decision to treat all of their employees equally in offering FMLA leave, even when some of their employees work in remote locations that otherwise would not entitle them to FMLA leave, that decision should be made carefully and only after considering all of the legal consequences and costs to the company.

    Accordingly, it is critical for employers to (1) maintain proper workplace policies regarding whether the employer is a “covered employee” under the FMLA and which employees are eligible for FMLA leave; and (2) undertake a careful analysis before responding to employee-leave requests.

    Jennifer R. Phillips and Kathryn Hackett King, Snell & Wilmer L.L.P, Phoenix, AZ


    September 26, 2014

    A Reminder of the Importance of Internal Controls under SOX

    On July 30, 2014, the Securities and Exchange Commission (SEC) announced charges against the CEO and the former CFO of a computer-equipment company based in Florida for misrepresenting the state of the company’s internal controls over financial reporting and failure to disclose to its auditors deficiencies in its internal controls. The SEC’s action is a strong reminder to public companies of the importance of maintaining adequate internal controls as required by the Sarbanes-Oxley Act of 2002 (SOX).

    Under SOX, a company’s CEO and CFO are required to certify with each periodic report (i.e., Forms 10-Q and 10-K) that they have disclosed to the company’s outside auditors all material deficiencies and material weaknesses in the design or operation of internal control over financial reporting. In the action identified above, the SEC charged the CEO and former CFO with certifying that the CEO participated in management’s assessment of the internal controls when in fact the CEO did not actually participate. Furthermore, the SEC charged that each had certified that they had disclosed all material deficiencies in the company’s internal controls to outside auditors when each had instead misled the auditors about certain internal controls. Specifically, the SEC alleged that each misled the outside auditors by failing to provide information about inadequate inventory controls and improper accounting practices.

    The SEC stated that each had violated the Securities Exchange Act of 1934 law by signing a Form 10-K containing the false management report on internal controls over financial reporting and signing the section 302 certification required by SOX whereby they represented that they had evaluated the annual report and disclosed all significate deficiencies to the outside auditors.

    Ahron D. Cohen and Jeffrey E. Beck, Snell & Wilmer L.L.P, Phoenix, AZ


    September 25, 2014

    When Did You Last Amend Your Section 125 Plan?

    Section 125 Plans, which are commonly referred to as either cafeteria plans or flexible benefit plans, are much loved, and needed, if you want to allow employees to pay health insurance and other premiums on a pre-tax basis. Unfortunately, they are often ignored and not updated as routinely as they should be.

    On September 18, the IRS released IRS Notice 2014-55, which now allows employees to make certain midyear health-coverage changes when they reduce below 30 hours of service or enroll in a qualified health plan through a marketplace. Employers who want to permit either of these two new changes (which are explained in detail in the notice, so I will not repeat them here) must amend their section 125 plans by the end of the plan year in which the changes are allowed. However, a special rule applies to plans that permit changes during the 2014 plan year. Such plans must be amended by the last day of the 2015 plan year (i.e., December 31, 2015, for calendar-year plans).

    As employers consider whether to amend their section 125 plans to allow these two new change events, which are beneficial to employees, they should give thought to other plan amendments that may be needed. Below is a list of some of the more recent section 125 plan amendments that employers may need to make. Many have a December 31, 2014, deadline.

    • Amend health flexible spending accounts to reflect the $2,500 cap on salary-reduction contributions. Health flexible spending accounts (FSAs) had to comply with the $2,500 cap for plan years beginning on or after January 1, 2013, and must adopt an amendment reflecting the cap no later than December 31, 2014.
    • Consider allowing carryover of $500 for health FSAs. Employers that want to permit carryovers must notify employees and amend their health FSA to reflect the carryover. Carryover amendments must usually be adopted on or before the last day of the plan year from which amounts are carried over. However, a special rule applies to plans that permitted carryovers from 2013 to 2014. Such plans must be amended to reflect the carryover by the last day of the 2014 plan year (i.e., December 31, 2014, for calendar year plans).
    • Amend section 125 plans to reflect the federal recognition of same-sex marriages. Employers must now allow same-sex spouses to pay health insurance and other premiums on a pre-tax basis. Same-sex spouses may also be covered under a health FSA and must be treated as spouses under dependent-care accounts. Plans should be amended by December 31, 2014, to treat same-sex spouses the same as opposite-sex spouses.
    • Amend section 125 plans to prohibit providing qualified health plans offered through a marketplace. Plans had to comply with this requirement as of the first day of the plan year beginning in 2014 and should be amended to reflect this rule.
    • Amend non-calendar-year cafeteria plans to allow mid-year election changes. In 2014, employees were first able to purchase coverage through marketplaces and the individual mandate took effect. To accommodate employees participating in non-calendar-year cafeteria plans (who would otherwise have been locked into their elections as of January 1, 2014), the IRS provided transition relief (1) allowing employees to prospectively revoke or change their salary-reduction elections for accident and health-plan-coverage election once during the plan year, without regard to whether there was a change in status event, and (2) allowing employees who failed to make salary-reduction elections for accident and health-plan coverage prior to the normal IRS deadline for the 2013 plan year to make prospective salary reduction elections for such coverage during the plan year, without regard to whether there had been a change in status event. Employers who permitted either midyear election change during the 2013 plan year must amend their plans by December 31, 2014, to reflect the transition rules.
    • Amend health FSAs to require participants to have a prescription for over-the-counter medications to be eligible for reimbursement under a health FSA. This is a fairly old change. It took effect January 1, 2011, but I thought it worth noting.

    Nancy K. Campbell, Snell & Wilmer L.L.P, Phoenix, AZ


    September 15, 2014

    Energizing Transmission Construction in the Electric Industry

    With so many personal gadgets needing daily recharging, desktop hard drives running 24 hours a day, and DVRs recording movies that run while we’re asleep, do you wonder where all that electricity is coming from? The next big construction boom may be in electric-transmission infrastructure. In 2012, electric utilities invested $90.5 billion in generation, transmission, and distribution facilities. Conservatively, some analysts estimate that between now and 2030, up to $320 billion will be needed just to ensure electric-transmission infrastructure keeps pace with projected generation and load. If Southern California Edison’s Devers-Colorado River (DCR) project is any indication, however, these projected costs are likely to increase. The Edison Electric Institute reports that the DCR project was initially projected to cost $545.3 million. Since that time, costs increased by 29 percent to an estimated $701.3 million (in real 2005 dollars).

    To some extent, the expected upsurge in transmission infrastructure investment is driven by federal emissions regulations proposed by the Environmental Protection Agency (EPA) and aggressive renewable-portfolio standards implemented by the states. Anticipating or facing increasing costs associated with fossil-fuel generation, electric utilities are including solar and wind generation in their portfolio mix.

    Adding renewable generation, however, is not simply a matter of building more wind and solar farms. The biggest challenge facing the renewable industry is transmission. In most cases, the economies of scale for solar and wind generation require project siting based on existing transmission capacity. Although there are a number of sites with significant solar and wind potential, generation development will require a huge capital investment in transmission infrastructure. Given the variability of wind and solar generation, transmission lines dedicated to these projects have historically been uneconomical.

    Recently, however, the D.C. Circuit Court of Appeals upheld Federal Energy Regulatory Commission (FERC) Order No. 1000. Under FERC Order No. 1000, regional transmission planning is mandatory for cost recovery under FERC transmission tariffs. Moreover, transmission projects must consider regional “public policy.” Many in the industry have construed this mandate as FERC’s attempt to shoehorn renewable development priorities in a determination traditionally driven exclusively by cost and risk. Most importantly, however, FERC Order No. 1000 eliminates federal rights of first refusal in FERC tariffs. Incumbent utilities currently maintain a right of first refusal to construct all proposed transmission infrastructure in their territory. Presumably, by eliminating this right, merchant transmission owners and operators will be able to participate in transmission development, rendering the process more competitive and more efficient. Some contend that the cumulative effect of FERC Order No. 1000 will be to loosen states’ grip on transmission siting, thereby forcing the industry to take a more regional approach to transmission construction.

    FERC undoubtedly hopes that the mandates imposed under Order No. 1000 will spark more transmission construction, including lines, substations, switchyards, and interconnections to support variable generation.

    Renewables are, however, only part of the story. To a large extent, the electric industry is playing “catch up.” Throughout the 1980s and 1990s, investment in transmission infrastructure steadily declined. Many utilities opted to delay construction or upgrade existing transmission facilities. Consequently, transmission capacity on many paths has reached or exceeded its limit. Moreover, existing infrastructure is out-of-date. Unmanned and unmonitored facilities pose operational and security risks to electric-industry operations.

    Whether renewable generation takes off, transmission-infrastructure development is crucial. To capitalize on existing resources, existing transmission infrastructure must be upgraded. Digital protection and control systems providing real-time data sharing and telemetry are necessary to implement smart-grid technology and load following. Additional capacity must be constructed to alleviate transmission constraints emerging in California and the northwest. All of this portends well for companies in the business of acquiring rights of way and building transmission facilities.

    Elizabeth M. Brereton, Snell & Wilmer L.L.P, Salt Lake City, UT


    September 10, 2014

    HIPAA Business Associate Agreements—Reminder of September 22 Deadline

    On January 17, 2013, the U.S. Department of Health and Human Services (HHS) issued a final rule under HIPAA making substantial changes to the rules for vendors that provide services to HIPAA-covered plans, such as third-party administrators, pharmacy-benefit managers, and certain brokers—known in the HIPAA world as “business associates.” Under this final rule, business associates are required, for the first time, to comply with the HIPAA Security Rule and many provisions of the HIPAA Privacy Rule, and are subject to direct enforcement by HHS. As a brief reminder, existing agreements with business associates must be amended to comply with the requirements of this final rule on or before September 22, 2014.

    Marvin S. (Bucky) Swift Jr., Snell & Wilmer L.L.P, Phoenix, AZ


    August 29, 2014

    IRS Provides Long-Awaited Instruction and Guidance to Employers

    On August 28, 2014, the IRS released draft forms and guidance for employers, providing instruction on compliance with the employer mandate reporting requirements in the Affordable Care Act (ACA). Employers with 50 or more full-time employees will use these forms to report ACA-required information.

    The IRS released a draft of Form 1094-C, “Transmittal of Employer-Provided Health Insurance Offer and Coverage Information,” which will be used to report summary information on each employer. The IRS also released a draft of Form 1095-C, “Employer-Provided Health Insurance Offer and Coverage,” which will be used to report information about each employee.

    These forms are welcomed by employers who have been waiting for this additional guidance and instruction, as they continue to work on complying with the ACA. Additionally, the IRS has opened a comment period for interested parties.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    August 25, 2014

    Court Rules Companies Have a Duty to Preserve Employee Text Messages

    Text messaging continues to grow as a category of potentially relevant evidence, which must be accounted for and, in most cases, preserved during the e-discovery process. The more that capabilities and usage of cell phones increase, the more likely it is that courts will be willing to allow e-discovery requests for information contained within the device, such as text messages. Courts have held that text messages of company employees are subject to litigation-hold notices, too, just like email, computer files, and hard copies of files.

    In Re Pradaxa (Dabigatran Etexilate) Products Liability Litigation, 2013 WL 6486921 (S.D.Ill.) highlights the current trend of courts finding that companies have an obligation to preserve text messages sent by their employees. Pradaxa involved more than 1,500 claims of damages related to the drug Pradaxa. In this case, the court held the defendant pharmaceutical company had an obligation to preserve the text messages of its sales representatives. In support of this finding, the court noted that despite knowing numerous Pradaxa lawsuits were imminent, the defendant pharmaceutical company did not take proper action to preserve critical files. The court also found that the defendant pharmaceutical company failed to implement an adequate company-wide litigation hold on critical documents, failed to place a hold on employees’ business-related text messages, and lost files on a hard drive used by company employees. Based on these findings, the judge ordered sanctions of almost $1 million against the defendant pharmaceutical company.

    The holding in Pradaxa makes it clear that companies/organizations of all sizes should consider implementing a mobile-device-management policy and incident-response plan well in advance of litigation. Courts have made it clear that electronic communications of all kinds are considered accessible by the courts and privacy related to these communications will be limited. Prior to enacting a mobile-device-management policy, a company/organization should know exactly what devices are being used by its employees to better understand the potential issues unique to each manufacturer or operating system.

    Jeffrey Lilly, Elizabeth Lorell, and Andrew Cary, Gordon & Rees LLP


    August 25, 2014

    New EEOC Guidelines Expand Obligations Toward Pregnant Employees

    In July 2014, the Equal Employment Opportunity Commission (EEOC), on a 3–2 vote, issued new “Enforcement Guidance” on pregnancy-related issues. These new guidelines significantly expand employers’ obligations and expressly require employers to accommodate pregnant employees, including providing light-duty positions, even if such positions are generally reserved only for employees who are disabled due to workplace injuries.

    The Pregnancy Discrimination Act of 1978 (PDA) mandates that “women affected by pregnancy, childbirth, or related medical conditions shall be treated the same for all employment-related purposes” as non-pregnant employees. Courts have grappled with the meaning and application of the PDA, particularly with respect to accommodations and light-duty positions. One salient case, Young v. United Parcel Service Inc., issued by the U.S. Court of Appeals for the Fourth Circuit, is currently pending before the U.S. Supreme Court. A ruling in that case is expected to opine on when an employer is required to provide light-duty positions to pregnant employees. The very recent timing of the EEOC guidance led one of the two EEOC commissioner dissenters to the guidelines to oppose them, stating that the guidance “may well be mooted in the very near future depending on how the Court decides Young.

    The enforcement guidance significantly expands an employer’s obligation to accommodate pregnant employees. The guidance applies the standards of reasonable accommodations under the Americans with Disabilities Act (ADA) to the PDA, and to pregnant employees under both a disparate-treatment and disparate-impact analysis. Accommodations are required for pregnant women, regardless of the severity of their condition or whether it is a typical symptom of pregnancy. The guidance further provides that reasonable accommodations for pregnant employees might include “allowing a pregnant worker to take more frequent breaks, to keep a water bottle at a work station, or to use a stool; altering how job functions are performed; or providing temporary assignment to a light duty position.” The guidance also states that employers may not exclude pregnant workers from access to light-duty positions reserved only for workers injured on the job. This is so even if non-pregnant employees are also denied such positions, if the policy would have a disparate impact on pregnant employees, or if the employer has made exceptions in the past.

    The guidance also clarifies EEOC views on a number of other pregnancy-related issues. For example, it clarifies that discriminating based on past or future pregnancy is a violation of the PDA. Also, if an employer provides non-medical parental leave for mothers (e.g., baby bonding time), it must also provide the same amount of leave for fathers. The guidelines also state that lactation is a pregnancy-related medical condition and that “[a]n employee must have the same freedom to address such lactation-related needs that she and her co-workers would have to address other similarly limiting medical conditions.”

    Although enforcement guidance from the EEOC is not binding on the courts, many courts find the EEOC guidance persuasive in cases. Moreover, EEOC enforcement guidance implicitly influences how the EEOC evaluates charges against employers and investigates claims of PDA violations. Thus, employers should be aware of the EEOC’s expressions of how the PDA will be enforced, and consider whether any policies may need to be modified.

    Employers should take note of the EEOC’s importation of ADA accommodation principles to the PDA, and review their anti-discrimination, benefits, leave of absence, light-duty, and accommodation policies to consider whether they need to be changed to reflect the EEOC’s current position. Employers should also stay tuned for the U.S. Supreme Court’s decision in Young v. United Parcel Service Inc., which is expected later this year.

    Jordan Lee, Snell & Wilmer L.L.P, Salt Lake City, Utah


    August 14, 2014

    NLRB GC Opens Door for Franchisors Liability for Actions of Franchisees

    In a directive that has rocked the franchise world, the National Labor Relations Board (NLRB) Office of the General Counsel determined that McDonald’s USA, LLC, as the franchisor, could potentially be held liable for the actions of its franchisees under the “joint employer” theory. The general counsel’s decision has authorized numerous unfair-labor-practice complaints based on alleged violations of the National Labor Relations Act (NLRA) to potentially proceed against both the franchisor and franchisee entities.
    According to the NLRB’s Office of Public Affairs, 64 cases are currently pending investigation and 43 additional cases have been found to have merit, potentially resulting in McDonald’s—the franchisor—being named in numerous ongoing matters relating to the franchisee entities. In total, McDonald’s has over 3,000 franchisees. With over 35,000 locations worldwide and more than 14,000 of those locations being in the United States, only a small fraction of the McDonald’s restaurants are company-operated.

    This decision is consistent with an earlier amicus brief that was filed about one month ago on behalf of the NLRB general counsel in Browning-Ferris Industries of California, Inc. The amicus brief argued that the board “should abandon its existing joint employer standard” that finds joint employer liability when an employer exercises direct or indirect control over significant terms and conditions of employment of another entity’s employees and, instead, “adopt a new standard that takes account of the totality of the circumstances, including how the putative joint employers structured their commercial dealings with each other.”

    Subjecting a franchisor to liability otherwise reserved for the franchisee-employers could potentially obliterate the heart of the franchise business model and affect businesses throughout the United States. Franchisors simply do not exert the level of control (or in many cases any control) over the franchisees’ employees’ terms and conditions of employment so that the franchisors would be considered “employers.” Until now, franchisors have not been involved in the run-of-the-mill disagreements among employees and the franchisees. If franchisors are suddenly brought into such disputes, as the general counsel of the NLRB has suggested may occur here, it essentially eliminates one of the prime reasons a potential franchisor may choose to enter into the franchise model as opposed to just obtaining investors or lenders. Franchisors may be forced to exercise more control and, as a result, spend more money and provide more oversight of the day-to-day tasks of their franchisees. It chips away at much of the upside of the franchisor/franchisee relationship for the franchisor, and will arguably make it more difficult and costly for small business owners and individuals to become franchisees.

    The directive really becomes a catch-22 for franchisors who, based on the presumption that they may be viewed as a joint employer, must now consider whether they need to exercise more control over the terms and conditions of the franchisees’ employees’ employment. Do they need to weigh in on wages, hiring decisions, terminations, disciplinary issues, and other actions that are typically delegated contractually to the franchisees? And if the franchisors do those things, have the franchisors now perpetuated the argument that they now, in fact, should be treated as joint employers?

    Jeopardizing franchisor/franchisee relationships is only the tip of the iceberg. There are also broader implications with this new guidance that extend far beyond the potential that franchisors may arguably be considered “employers” under the NLRA. It remains to be seen whether the NLRB will begin more actively pursuing “joint employer” cases against parent companies or corporations that would otherwise not have been included in the earlier definition of “employer” under the NLRA. It also begs the question as to whether other agencies, such as the Equal Employment Opportunity Commission or Department of Labor, will follow the NLRB general counsel’s lead. Accordingly, the issue of joint employer liability is important for any company to understand that utilizes temporary agencies, subcontractors, independent contractors, leased employees or operates any business model in which services or work is performed by entities or employees other than its own. It is essential because companies may be individually and jointly responsible for those entities’ compliance with the laws.

    The investigation of the charges against McDonald’s franchisees is still ongoing. McDonald’s has issued a statement that it “will contest this allegation in the appropriate forum,” and reiterated that it does “not direct or co-determine the hiring, termination, wages, hours, or any other essential terms and conditions of employment of [its] franchisees’ employees.” This is definitely one super-sized issue that will be making the headlines for a while.

    Ashley T. Kasarjian, Michael J. Coccaro, and Gerard Morales, Snell & Wilmer L.L.P, Phoenix, AZ


    August 14, 2014

    Servicemembers Civil Relief Act: Critical Takeaways

    After many years of U.S. military mobilizations and overseas deployments since 2001, businesses have learned some valuable lessons about consumer rights and privileges triggered by military service. Here are some of the critical takeaways stemming from military consumer rights under the Servicemembers Civil Relief Act (SCRA):

    • The best data retention-policy assures accurate documentation of the military member’s banking and loan accounts; tracks critical notifications that start and stop the clock for reduced interest rates; and manages written and verbal correspondence concerning matters affecting military-member rights under the SCRA.
    • Military members are more familiar with their right to cap mortgage and non-mortgage interest at 6 percent during periods of active duty service. Financial institutions should adopt and enforce policies designed to monitor military accounts and confirm the applicable interest rate. The military member will typically receive the benefit of the doubt when enforcing the 6 percent cap, so documentation of notice and the status of military service (active duty, activated reserve, inactive) are the keys to complying with the SCRA.
    • Military members are equally knowledgeable of their rights against foreclosure. This is another area requiring comprehensive policies designed to avoid undue foreclosure or default against a protected military member. Financial institutions should be especially familiar with the resources and information provided here, which allows the creditor to double-check the propriety of foreclosure or default based on the military member’s active duty or reserve status.
    • Good consumer relations with military members includes familiarization with the programs made available for their benefit or to avoid financial hardships that may interfere with the military member’s ability to perform critical military duties. For example, the Home Affordable Modification Program (HAMP) may be available to military members displaced from their existing home due to orders for a permanent change of duty station. HAMP and other programs affecting military members are explained and available for military consumers to review here. Financial institutions should also become familiar with this site and similar references and resources.
    • For the most part, military members will live up to their financial obligations because they are duty-bound to do so. Financial institutions should, therefore, implement lease termination policies that favor military members and fairly consider adverse deployment circumstances. This will assure that lease termination and corresponding debt collection occur without scrutiny. Fair policies on lease termination also carry over to implementing fair lending practices and marketing and selling financial products that match military pay grades and economic wherewithal of the service member.

    Richard G. Erickson, Snell & Wilmer L.L.P, Phoenix, AZ


    July 24, 2014

    Rethinking COBRA after Health-Care Reform

    The Health Care Reform Act makes many changes to health plans, but one thing it did not do was expressly eliminate or change the rules for the Consolidated Omnibus Budget Reconciliation Act (COBRA).Although health-care reform does not expressly change COBRA, it does, in many ways, impact COBRA, making it important to rethink various aspects of COBRA. Here are some of the COBRA issues that plan administrators may need to reconsider.

    • Interplay of COBRA coverage and health-exchange coverage. Each state’s health exchange must permit special enrollment (outside the exchange’s annual open-enrollment period) when specified triggering events happen, such as an employee losing employer coverage due to a termination of employment. When a qualified beneficiary (QB) loses employer coverage and does not elect COBRA coverage, the QB may take advantage of the health exchange’s 60-day special-enrollment opportunity. If a QB elects COBRA, the QB is also entitled to special enrollment, but not until he or she exhausts COBRA coverage. Accordingly, a QB who elects COBRA coverage may only be able to enroll in the health exchange during the health exchange’s annual open-enrollment period or upon the expiration of the COBRA maximum coverage period. For many employees, coverage through a health exchange may be less expensive than COBRA coverage, but electing COBRA coverage may render an employee ineligible for health-exchange coverage for some period of time.
    • New model COBRA notices. In May 2014 the Department of Labor (DOL) issued new model general and election notices. The general notice now includes basic information about the health exchanges. The model election notice has been substantially revised to include detailed information about health exchanges, enrollment opportunities and restrictions, financial assistance, and factors to consider in deciding whether to elect COBRA, health-exchange coverage, Medicaid, or other coverage. There is no specific date the two new model notices take effect, however, employers may wish to consider updating their COBRA notices sooner rather than later, so individuals understand these new, rather complicated, rules. Providing this information may also encourage QBs to elect health-exchange coverage rather than COBRA coverage. When updating COBRA notices, we caution employers to use the new model notices as a starting point. For example, the new model-election notice omits details about extending COBRA coverage due to disability or a second qualifying event. Many employers will want to retain such information in their election notices.
    • Severance agreements. Many employers, under their severance agreements, offer to subsidize COBRA premiums if the individual elects COBRA coverage. Given the interplay between COBRA coverage and health-exchange coverage (as explained in the first bullet above and in the new COBRA election notice), this approach may no longer be a best practice. If an employer offers to temporarily subsidize COBRA coverage, forcing the employee to elect COBRA coverage to obtain the subsidy, the employee may not be able to elect health-exchange coverage in lieu of COBRA coverage when the employer subsidy ends. It is interesting to note that the new COBRA election notice even directs employees who have been offered a severance package, including employer-subsidized COBRA coverage, to contact the DOL to discuss their options. Due to these recent developments, employers might instead provide an equivalent taxable cash payment to the employee, allowing the employee to choose COBRA coverage, health-exchange coverage, other coverage, or no coverage. Providing taxable cash compensation also avoids potential nondiscrimination issues under Code Section 105(h) if the employee is highly compensated.
    • Large employers using the look-back measurement method to determine full-time employee status. For purposes of the large employer-shared responsibility penalties, which take effect January 1, 2015, if the employer decides to use the look-back measurement method to determine full-time employee status, it will affect COBRA administration. The affected employees will be those who experience a reduction in hours of service during a stability period, because the reduction of hours will occur mid-year, but the loss of coverage will not occur until sometime later, for example, at the end of the plan year. A reduction in hours that causes a loss of coverage is a COBRA qualifying event. Employers using the look-back measurement method will need to determine when the qualifying event occurs and when the COBRA maximum coverage period begins. Plan amendments could be required.

    Nancy K. Campbell, Snell & Wilmer L.L.P, Phoenix, AZ


    July 18, 2014

    Special Fraud Alert Issued about Lab Payments to Referring Physicians

    On June 25, 2014, the Office of Inspector General (OIG) issued a special fraud alert addressing compensation paid by laboratories to referring physicians. The alert sets out two specific problematic scenarios: “Specimen Processing Arrangements” and “Registry Arrangements.”

    The first of two problematic arrangements that the OIG discussed was the collection, processing, and packaging arrangements for blood specimens (specimen processing arrangements), involving payments from laboratories to physicians for certain duties, including collecting the blood specimens, centrifuging the specimens, and more.

    Characteristics of a specimen processing arrangement that may be evidence of unlawful purpose include:

    • Payment exceeds fair market value for services actually rendered by the party receiving the payment.
    • Payment is for services for which payment is also made by a third party, such as Medicare.
    • Payment is made directly to the ordering physician rather than to the ordering physician’s group practice, which may bear the cost of collecting and processing the specimen.
    • Payment is made on a per-specimen basis for more than one specimen collected during a single-patient encounter or on a per-test, per-patient, or other basis that takes into account the volume or value of referrals.
    • Payment is offered on the condition that the physician order either a specified volume or type of tests or test panel, especially if the panel includes duplicative tests (e.g., two or more tests performed using different methodologies that are intended to provide the same clinical information), or tests that otherwise are not reasonable and necessary or reimbursable.
    • Payment is made to the physician or the physician’s group practice, despite the fact that the specimen processing is actually being performed by a phlebotomist placed in the physician’s office by the laboratory or a third party.

    The OIG stated that its concerns regarding these arrangements are not abated when they apply only to specimens collected from non-federal health-care program patients. “Carve outs” for federal health-care program beneficiaries or business from otherwise questionable arrangements implicate the anti-kickback statute and may violate it by disguising remuneration for federal health-care program business through the payment of amounts purportedly related to non-federal health-care program business. The OIG was careful to highlight that both the lab and physician entering the arrangement may be at risk for criminal liability under the statute.

    The second major area addressed in the alert is the existence of registry arrangements, whereby clinical laboratories are establishing databases (often through an agent) purportedly to collect data on the attributes of patients who have undergone certain tests performed by the offering laboratories. The arrangements typically involve payments from laboratories to physicians for certain specified duties. The OIG’s principal concern is that the payments may induce physicians to order medically unnecessary or duplicative tests.

    Some characteristics of registry arrangements that could be evidence of an unlawful purpose include:

    • The laboratory requires, encourages or recommends that physicians who enter into registry arrangements perform the tests with a stated frequency to be eligible to receive, or to not receive a reduction in compensation.
    • The laboratory collects comparative data for the registry from, and bills for, multiple tests that may be duplicative or that otherwise are not reasonable and necessary.
    • Compensation paid to physicians pursuant to registry arrangements is on a per-patient or other basis that takes into account the value or volume of referrals.
    • Compensation paid to physicians pursuant to registry arrangements is not fair market value for the physicians’ efforts in collecting and reporting patient data.
    • Compensation paid to physicians pursuant to registry arrangements is not supported by documentation, submitted by the physicians in a timely manner, memorializing the physicians’ efforts.
    • The laboratory offers registry arrangements only for tests (or disease states associated with tests) for which it has obtained patents or that it exclusively performs.
    • When a test is performed by multiple laboratories, the laboratory collects data only from the tests it performs.
    • The tests associated with the registry arrangement are presented on the offering laboratory’s requisition in a manner that makes it more difficult for the ordering physician to make an independent medical-necessity decision with regard to each test for which the laboratory will bill (e.g., disease-related panels).

    The OIG's alert should serve as a guide, albeit not a comprehensive one, for both laboratory companies and physicians as they establish the contractual terms that cover both specimen-collection payments and payments under registry arrangements.

    Justin A. Shiroff, Snell & Wilmer L.L.P, Las Vegas, Nevada


    July 18, 2014

    Unanimous Supreme Court Issues ERISA Fiduciary Duty Opinion

    On June 25, the Supreme Court issued a unanimous decision in Fifth Third Bancorp v. Dudenhoeffer which is likely to change the future of Employee Retirement Income Security Act (ERISA) stock-drop litigation.

    Factual Background
    The plaintiffs in the case were participants in Fifth Third Bancorp’s defined contribution plan. The plan had a number of different investment options, including an employer stock fund that was designated as an employee stock ownership plan (ESOP). The ESOP portion of the Plan was required to be invested primarily in Fifth Third common stock.

    The plaintiffs alleged that the plan fiduciaries breached their fiduciary duties and should have known, on the basis of both publicly available information and inside information, that the Fifth Third stock was overpriced and excessively risky.

    The plaintiffs alleged that the plan fiduciaries should have (1) sold the ESOP’s holdings of Fifth Third stock before its value declined, (2) refrained from purchasing any more Fifth Third stock, (3) cancelled the ESOP option in the plan, and (4) disclosed the inside information so that the market would adjust its valuation of Fifth Third’s stock downward and the ESOP would no longer be overpaying for the stock.

    The plan fiduciaries, however, continued to hold and purchase Fifth Third stock and the price of Fifth Third’s stock declined by 74 percent between July 2007 and September 2009.

    Procedural History
    The district court dismissed the case and held that “the plan fiduciaries start with a presumption that their ‘decision to remain invested in employer securities was reasonable’” and that this presumption applied at the pleading stage. The Sixth Circuit reversed and determined that the presumption only applied at the evidentiary stage.

    Supreme Court Decision
    Fifth Third appealed the Sixth Circuit’s decision. The Supreme Court held that ESOP fiduciaries are not entitled to a presumption of prudence. Rather, ESOP fiduciaries are subject to the same standard of prudence that applies to all ERISA fiduciaries, except that an ESOP fiduciary is under no duty to diversify the ESOP’s investments.

    The Supreme Court remanded the case to the Sixth Circuit with guidance on how to apply the pleading standard. In its decision, the Court instructed that when a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the stock was overvalued or undervalued are generally implausible, absent special circumstances.

    The Supreme Court also found that to state a claim for breach of fiduciary duty on the basis of insider information, a plaintiff must allege an alternative action that the defendant could have taken that would be consistent with the securities laws and that a prudent fiduciary would not have viewed as more likely to harm the stock fund than help it. According to the Court, three points should be considered in this analysis:

    • ERISA does not require a fiduciary to break the law (e.g., federal securities laws).
    • Courts should consider whether the decision to purchase stock or failing to disclose information to the public could conflict with the insider-trading laws and corporate disclosure requirements and the objectives of those laws.
    • Courts should consider whether a prudent fiduciary could have concluded that stopping purchases or publicly disclosing negative information would do more harm than good to the stock.

    Future Stock Drop Litigation
    After this case, plan fiduciaries no longer may rely on or benefit from a presumption of prudence with respect to investments in employer stock. Plan fiduciaries also may find that plan language authorizing continued investment in employer stock in the absence of certain dire circumstances will be of little value. At the same time, in the case of a publicly traded employer/plan sponsor and in the absence of non-public information, it appears that a claim for breach of fiduciary duty for purchasing employer stock or failing to divest employer stock will remain limited. Absent special circumstances, plan fiduciaries may continue to assume that the market value of publicly traded employer stock is the best barometer of the stock’s value.

    It remains to be seen how courts will apply the standards that the Supreme Court articulated. Nevertheless, plan fiduciaries must actively monitor an employer stock fund in accordance with ERISA’s prudence requirement and the fiduciaries remain personally liable if their failure to do so leads to financial harm to plan participants.

    Anne Meyer and Tom Hoecker, Snell & Wilmer L.L.P, Phoenix, AZ


    July 17, 2014

    Supreme Court Decision Impacts Presidential Appointments

    On June 26, the Supreme Court decided National Labor Relations Board v. Noel Canning, et al. 573 U.S.___ (2014). This decision will have long-term significance on the ability of federal administrative/regulatory agencies (often referred to as the fourth branch of government) constituted by presidential appointees, to carry out their mission.

    From a constitutional perspective, this decision is significant because it limits the president’s power to use recess appointments—a key vehicle for the exercise of executive authority. The Court held that, for purposes of the Recess Appointments Clause, the Senate is in session when it says it is, provided that, under its own rules, it retains the capacity to transact Senate business. In practice, the decision, therefore, precludes the president from appointing individuals of his choice, who are not likely to survive the Senate’s confirmation process, to key government positions, except during periods when the Senate agrees that it is not in session. This limitation on presidential power is a huge victory for the Senate as it significantly enhances its power to deny consent to presidential appointments.

    From the labor-law perspective, Noel Canning will require the National Labor Relations Board (NLRB) to re-decide as many as a few hundred cases that had been decided by recess appointees—that is, individuals who acted as NLRB members without Senate confirmation.

    Some of the significant issues that the NLRB will have to re-decide include: the protection that should be given to social-media communications among off-duty employees regarding work performance and working conditions; an employer's duty to continue union dues check-off after the union contract expires; the degree of confidentiality that may be imposed on employees regarding ongoing disciplinary investigations; and whether unions are entitled to witness statements regarding disciplinary investigations.

    Gerard Morales and Kathryn Hackett King, Snell & Wilmer L.L.P, Phoenix, AZ


    June 26, 2014

    SCOTUS Rules That Inherited IRAs are Available to Pay Creditors

    On June 12, 2014, the U.S. Supreme Court issued its opinion in Clark v. Rameker , opening up another source of recovery for creditors and Chapter 7 trustees in bankruptcy proceedings. In Clark, a Chapter 7 debtor inherited an individual retirement account (IRA) from her mother nearly 10 years before filing bankruptcy with her husband. Upon filing the bankruptcy petition, she claimed the inherited IRA as exempt under 11 U.S.C. § 522(b)(3)(C). The Court notes that the exemption in section 522(b)(3)(C), for debtors who proceed under their state-law exemptions, uses the exact same language as the exemption in section 522(d)(12), for debtors who proceed under the federal exemptions. It should be assumed that the opinion in Clark will apply to debtors proceeding under the federal exemptions. The bankruptcy court disallowed the exemption on the grounds that an inherited IRA, unlike a debtor’s own IRA, was not meant to provide for the retirement of the debtor. The district court reversed, finding that the exemption was meant to protect funds that were originally meant for retirement, irrespective of the person for whom the funds were originally intended. In re Clark, 466 B.R. 135 (W.D. Wis. 2012). The Seventh Circuit Court of Appeals reversed the district court on the grounds that inherited funds could be spent immediately and did not need to fund retirement expenses. In re Clark, 714 F.3d 559 (7th Cir. 2013).

    Relying on the text and the purpose behind the retirement-fund exemption, the U.S. Supreme Court held that inherited IRAs are not “retirement funds” within the meaning of the exemption statute. In so holding, the Court defined “retirement funds” as “sums of money set aside for the day an individual stops working.” The Court then applied an “objective” test to determine whether the legal characteristics of an inherited IRA account indicate that the account is one “set aside for the day an individual stops working.” Three characteristics of inherited IRAs prevented them, in the Court’s view, from qualifying for the exemption: (1) A holder of an inherited IRA cannot deposit additional funds; (2) withdrawal, either in whole or in minimal annual installments, is required from an inherited IRA no matter how close the holder is to retirement; and (3) the whole balance of an inherited IRA can be withdrawn at any time and for any purpose without penalty.

    The Court also reasoned that allowing the holder of an inherited IRA to exempt it from its creditors would not serve the purpose of the Bankruptcy Code, which is to provide the greatest recovery for creditors without leaving the debtor destitute. Exempting an inherited IRA would not guarantee the provision for the debtor’s basic needs in retirement, but would rather amount to a cash windfall for the debtor at the expense of creditors.

    One interesting area left open by the Court’s opinion involves IRAs that have been inherited by a spouse. The Court notes early in the opinion that a spouse may roll over an inherited IRA into his or her own IRA account or keep it as an inherited IRA. Would a rolled-over inherited IRA be considered exempt retirement funds? Would it matter if the surviving spouse in bankruptcy was over 59-and-a-half and could remove the funds without penalty?  These are questions that will have to wait for the next case.

    Bob L. Olson and Nathan G. Kanute, Snell & Wilmer L.L.P, Las Vegas and Reno, NV


    June 26, 2014

    NLRB's GC Urges Board to Overturn Pro-Business Precedent

    “Employees have no statutory right to use the Employer’s e-mail system for Section 7 purposes.” At least that is what the Bush-era National Labor Relations Board (NLRB) proclaimed in Guard Publishing Co. d/b/a Register Guard. (Case No.351 NLRB 1110 (2007)). But, at the urging of numerous amici briefs, the oft-criticized Register Guard decision may soon be overruled.

    In late 2013, an administrative-law judge (ALJ) heard Purple Communications Inc. and Communications Workers of America, AFL-CIO, disputes arising over a company’s right to maintain rules prohibiting the use of work email systems and other electronics for any purpose other than business. (Case nos. 21-CA-095151, 21-RC-091531, 21-RC-091584). Following the precedent set by Register Guard, the ALJ found that Purple Communications’ rules did not violate federal law, as employees do not have a statutory right to use work email for section 7 purposes.

    Recently, the NLRB encouraged third parties to submit briefs on behalf of either party before making a decision. Proponents of Purple Communications made relatively consistent arguments—an employer has a property interest in the email system it develops for business purposes; and the potential shortcomings of overruling Register Guard. Namely, if employees are free to use business email for concerted activity, a section 7 protected action, then the business will have virtually no oversight to ensure that the employees are working productively and not abusing privileges.

    But perhaps the most telling brief was submitted on June 16, 2014, by Richard F. Griffin, general counsel to the NLRB. Griffin argued that employee emails sent over the business’s system should be protected as concerted activity, regardless of whether they are sent during work or non-work hours. Griffin argued that “[t]he board should hold that employees who use their employer’s electronic communications systems to perform their work have a statutory right to use those systems for Section 7 purposes during non-work time, absent a showing of special circumstances relating to the employer’s need to maintain production and discipline.” Thus, Griffin urged the board to overrule the Register Guard decision because it does not comport with rapid advancements in technology.

    Although the board has not yet decided Purple Communications, it is likely to reform or even abolish the Register Guard standard, taking away at least some of the authority employers have over their ability to control employees’ use of their systems.

    Robin E. Perkins and Michael Paretti (summer associate), Snell & Wilmer, LLP, Las Vegas, NV


    June 11, 2014

    SCOTUS Steps Back from Formalism, Takes Practical Bankruptcy Approach

    Bankruptcy courts, created under Article I of the U.S. Constitution, decidedly lack Article III power. In an effort to resolve this deficiency, Congress statutorily developed a scheme to divide bankruptcy cases into “core” and “non-core” claims. For core claims, Congress authorized bankruptcy courts to issue decisions; for non-core claims, bankruptcy courts could issue findings of fact and law to later be reviewed by the district court.

    In the formalistic decision of Stern v. Marshall, 131 S. Ct. 2594 (2011), the U.S. Supreme Court overturned Congress’s core/non-core structure and held that despite Congress permitting bankruptcy courts to enter final judgment on core claims, bankruptcy courts do not have the Article III authority to do so. The Supreme Court did not, however, delineate how bankruptcy courts should handle these claims.

    On June 9, 2014, the Court confronted the bankruptcy courts’ confusion in Executive Benefits Insurance Agency v. Arkison, Case No. 12-1200. Regressing from its decision in Stern, the Court took a practical approach: handle core claims in the same way Congress authorized the bankruptcy courts to handle non-core claims, by issuing findings of fact and law for the district court to later review and adjudicate.

    The unanimous decision did leave unresolved the issue of whether parties have the option to consent to a binding judgment by the bankruptcy court—an issue the petition addressed. Even still, the Court’s decision should help reduce the increased litigation costs and delays caused by the Stern decision.

    Robin E. Perkins and Michael Paretti (summer associate), Snell & Wilmer, LLP, Las Vegas, NV


    June 10, 2014

    SCOTUS Relaxes the Indefinite-Standard Test for Patents

    On June 2, 2014, the U.S. Supreme Court in Nautilus Inc. v. Biosig Instruments, Inc., Case No. 13-369, substantially revised and relaxed the long-standing test that a patent can only be found indefinite where it is “insolubly ambiguous.” In rejecting this test, the Supreme Court ruled that an accused patent infringer can establish that a patent is indefinite if the patent fails to inform a person skilled in the art about the scope of the invention “with reasonable certainty.”

    The previous test upheld a very stringent standard because it meant that only a patent that no person could possibly understand would be held as indefinite, and therefore invalid. Thus was created what was generally considered tantamount to a bar on invalidating patents as indefinite. The Supreme Court’s new standard is expected to increase the number of accused patent infringers who will make indefiniteness claims, and file summary judgment motions on the issue. However,  practitioners do not expect this relaxed standard to create major changes. This new standard is certainly not a bright-line test, and will require continued fact-specific determination on a case-by-case basis.

    Additionally, this standard may impact the U.S. Patent and Trademark Office, potentially encouraging the Patent Office to require better clarity in patent claims during the examination phase. Indeed, the public has encouraged the Patent Office to issue more precise patents. And this new standard may be an impetus for that change within the Patent Office.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    May 30, 2014

    Courts Nationwide Finding Lack of Standing in Data-Breach Cases

    Invasion-of-privacy class action lawsuits related to data breaches and cyber-attacks continue to be filed by plaintiffs asserting injuries sustained as a result of the alleged data theft. However, courts around the country continue dismissing actions when plaintiffs cannot allege actual injury, and thus lack standing.

    For example, in Vides et al v. Advocate Health and Hospitals Group, an Illinois state court, on May 27, 2014, dismissed a class-action suit claiming invasion of privacy related to a data breach. The Advocate Health and Hospital Group is yet another defendant successfully dismissing these claims, on the basis that the class-action plaintiffs lacked standing. In this case,four laptop computers containing patient information were stolen. The court found that the plaintiffs could not show that they suffered any actual harm or that data was stolen or used for unauthorized purposes. The court held that because the plaintiffs could not connect the information on the laptops to any misuse of that data, they lacked standing. The court noted that the complaint failed to allege that any misuse had occurred or was imminent.

    Additionally, on May 9, 2014, a U.S. District Court for the District of Washington D.C. dismissed almost all class-action plaintiffs, holding that they failed to allege any cognizable injury resulting from a theft of computer tapes containing confidential patient information. In re: Science Applications Int'l Corp. (SAIC) Backup Tape Data Theft Litig. The court ruled that because there was no indication that the stolen data was ever viewed or misused, the alleged injury was too speculative.

    And on February 10, 2014, the U.S. District Court for the Southern District of Ohio Eastern Division also dismissed two separate class-action suits related to similar cyber-attacks, where personal customer information was allegedly stolen from Nationwide Mutual Insurance Co. Mohammed Galaria v. Nationwide Mutual Ins. Co., case number 2:13-cv-00118; and Anthony Hancox v. Nationwide Mutual Ins. Co., case number 2:13-cv-00257. In these cases, while the plaintiffs alleged increased risk of harm, loss of privacy, and deprivation of the value of their personal information, they failed to allege that the cyber-attack resulted in any identify theft or other fraud, necessitating dismissal.

    However, the U.S. District Court for the Northern District of California in April 2014 has allowed a class action to proceed related to LinkedIn Corp.’s privacy policy and alleged security misrepresentations in the posted privacy policy—indeed a different fact pattern. In re: LinkedIn User Privacy Litig., case number 5:12-cv-03088. In this case, the lead plaintiff, in her third attempted complaint, asserted claims under California’s unfair-competition laws, alleging that her decision to purchase a premium account with LinkedIn was based on the misleading privacy-policy representations. The court elected to treat misleading privacy-policy representations the same as misleading labeling. Accordingly, the court found sufficient pleading of injury, and denied the motion to dismiss.

    These cases, among others, demonstrate the prevailing tide, in conformity with the U.S. Supreme Court’s February 2013 decision in Clapper v. Amnesty International, upholding a heightened standard for plaintiffs attempting to assert actual injury in these data-breach invasion-of-privacy cases.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    May 22, 2014

    Mass. Court Holds Attorney Fees May Include In-House Work

    Holland v. Jachmann
    85 Mass. App. Ct. 292, ___ N.E.3d ___, 2014 WL 1887534 (Mass. App. Ct. May 14, 2014)

    In a case of first impression, the Massachusetts Appeals Court has held that an award of attorney fees under M.G.L. c. 93A (the Massachusetts Consumer Protection Act) may include compensation for the legal work performed by in-house counsel.

    The genesis of the case involved a typically convoluted business transaction whereby the Omniglow Corp., a manufacturer of luminescent products, was effectively split into two companies that then maintained active business dealings with one another. While a company now known as Cyalume Technologies purchased the profitable segments of Omniglow, the remaining segments continued to operate under the Omniglow name. The two entities entered into a series of contracts, but the relationship quickly deteriorated. Omniglow then sued Cyalume and prevailed at trial on claims for breaches of contract, conversion, and violations of Chapter 93A. Pursuant to Chapter 93A, the trial judge awarded attorney fees to Omniglow for the legal work performed not only by its outside counsel but also by its in-house counsel. Cyalume appealed, arguing that no legal fees were “incurred” on account of the work of the in-house counsel, a salaried employee, because he did not bill Omniglow for his services.

    A three-judge panel of the Massachusetts Appeals Court affirmed. The court first held that the trial judge’s finding of a Chapter 93A violation was appropriate based on Cyalume’s egregious pattern of conduct in disregarding Omniglow’s contractual rights and undermining its business interests. The court then affirmed the award of attorney fees primarily on the grounds of fairness and public policy. From a practical perspective, the court noted that Omniglow “incurred” costs because the time Omniglow’s in-house counsel spent on the Cyalume litigation directly impeded him from spending time on other legal matters facing Omniglow. The court also reasoned that denying attorney fees because Omniglow chose to use its own in-house counsel in a lead role instead of additional outside counsel resources would undercut the deterrent purposes of Chapter 93A, and that permitting recovery of attorney fees for work of in-house counsel furthered the broad remedial purpose of Chapter 93A. The court further found no abuse of discretion in the amount of the award, despite reservations with the documentation provided in support of the fee request. In-house counsel had provided a post-trial re-creation of the time spent on the case by month with a brief description of services provided. The court noted that better practice would have been to keep contemporaneous time records, but the failure to provide them was not an insurmountable impediment to the award, particularly given the trial judge’s first-hand knowledge of the case. Thus, the court affirmed the judgment.

    This decision is welcome news for businesses that rely on in-house counsel during litigation, because whether the prevailing party in a Chapter 93A case can recover attorney fees for time and effort of in-house counsel has long been in doubt. The appeals court’s opinion suggests that businesses that prevail in Chapter 93 lawsuits should always request attorney fees for in-house counsel and take steps to maximize potential recovery. This includes having a system in place whereby in-house counsel keeps contemporaneous time records at the outset of any matter that may go to trial. While these records likely need not be painstakingly detailed or broken down by the tenth of an hour, some amount of specificity will aid in recovery. The lack of specificity in this case appears to have been overcome in many respects by the “egregious” and “sinister” conduct of the defendant resulting in the findings. Further, what remains to be seen is whether Massachusetts courts will limit this holding to Chapter 93A cases for public-policy reasons, or whether a plaintiff could seek a similar recovery in any action in which the judge awards attorney fees.


    May 22, 2014

    Fee-Shifting Bylaw Facially Valid under Delaware Law

    On May 8, 2014, the Delaware Supreme Court, en banc, answered four questions certified to it by the U.S. District Court for the District of Delaware and upheld the facial validity of a fee-shifting provision in a Delaware corporation’s bylaws adopted for the purposes of deterring litigation. The decision was issued with respect to a non-stock corporation; however, the court’s analysis is applicable to stock corporations as well. The decision should prompt boards of directors of Delaware public and private corporations to consider adopting fee-shifting bylaws. To the extent that the decision does not conflict with the laws of other states, boards of directors in other jurisdictions will likely do the same. The case is ATP Tour, Inc. v. Deutscher Tennis Bund, et al.

    ATP Tour is a Delaware membership corporation that operates a professional men’s tennis tour. Deutscher Tennis Bund (DTB) is a member of the company. In the early 1990s, DTB joined ATP and agreed to be bound by ATP’s bylaws, as amended from time to time. In 2006, ATP’s board amended the bylaws to include Article 23.3(a) a fee-shifting provision applicable to intra-corporate disputes. Article 23.3(a) provides that, where a current or former member brings a claim or counterclaim against the company and “does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League [the Company] . . . for all fees, costs and expenses of every kind . . . in connection with such Claim.”

    In 2007, ATP’s board voted to make changes to the tour, which downgraded the tier of the tournament operated by DTP. ATP’s board also changed the scheduling of several tournaments in the tour. Unhappy with the board’s decisions, DTB and another member of the company filed suit in the U.S. District Court, Delaware, alleging federal antitrust claims and Delaware breach-of-fiduciary-duty claims. After a 10-day trial, ATP won on all claims brought against it. ATP then moved pursuant to Federal Rule of Civil Procedure 54 to recover its attorney fees and costs pursuant to Article 23.3(a) of its bylaws.

    The district court denied ATP’s motion and found Article 23.3(a) to be contrary to the public policy underlying federal antitrust laws. ATP appealed to the Third Circuit, which vacated the district court’s order and found that the district court should have first decided whether Article 23.3(a) was enforceable under Delaware law before deciding the federal-preemption question.

    On remand, the district court found that whether Article 23.3(a) was enforceable was a novel question under Delaware law and certified four questions to the Delaware Supreme Court. The Delaware Supreme Court responded as follows:

    1. Fee shifting bylaws are facially valid under Delaware law. Corporate bylaws are “contracts among a corporation’s shareholders” and contracting parties may agree to modify the American Rule, under which parties to litigation each generally pay their own fees and costs. Whether Article 23.3(a) is enforceable, however, “depends on the manner in which it was adopted and the circumstances under which it was invoked.” The Court quoted from one of its earlier decisions that “inequitable action does not become permissible simply because it is legally possible.” Nonetheless, the Court stated that it has upheld similarly restrictive bylaws enacted for proper purposes, such as amended bylaws that increase board quorum requirements and mandate unanimous board actions for anti-takeover purposes.

    2. A fee shifting bylaw, if valid and enforceable under the circumstances in the underlying case, is facially valid under Delaware law whether a claimant fails to “substantially achieve” [the language contained in Article 23.3(a)] the full remedy sought or completely fails to achieve any relief against the company.

    3. “Legally permissible bylaws adopted for an improper purpose are unenforceable in equity. The intent to deter litigation, however, is not invariably, an improper purpose.”

    4. Fee shifting bylaws are enforceable against members who agree to be bound by rules adopted by the company’s board, even where the bylaw was enacted after a member joined the company.

    The decision will be welcome news to the boards of Delaware companies, and where not in conflict with other states’ laws, companies incorporated outside Delaware. Nonetheless, as with any other restrictive corporate bylaw, the circumstances surrounding its enactment and invocation will be closely scrutinized by courts to insure that it was not enacted or invoked for an improper or inequitable purpose.

    John Delikanakis, Snell & Wilmer L.L.P, Las Vegas, NV


    May 13, 2014

    Potential Conflicts of Interest for Class-Action Counsel

    A recent decision by the Florida Supreme Court reminds class-action counsel to be cognizant of potential conflicts of interest that may arise upon proposal of a class-action settlement where objections to the settlement are lodged, or when members’ interests and positions change.

    At issue in Young v. Achenbauch, No. SC12-988, 2014 (Fla. Mar. 27, 2014), was a class-action lawsuit by flight attendants against various tobacco companies, asserting injuries related to second-hand-smoke exposure. The parties’ settlement agreement awarded $300 million to be used for scientific research on early detection and cure of diseases related to cigarette smoking. The agreement also provided for the creation of the Flight Attendant Medical Research Institute (FAMRI) to oversee the research, which board membership was made up of several class members. Finally, the agreement allowed the plaintiffs to pursue individual claims for compensatory damages.

    As part of the individual suits, some plaintiffs were dissatisfied with FAMRI’s activities, and therefore filed complaints directly against FAMRI for an accounting of funds, injunctive relief prohibiting further activity, and modification of the original settlement agreement. The FAMRI and two of its board members moved to disqualify the attorneys filing suit against FAMRI, asserting a conflict of interest. The trial court determined that disqualification was required, as counsel had violated Florida’s Rules of Professional Conduct governing conflicts with current clients and conflicts with former clients.

    On appeal, the Florida appellate court did not apply Florida’s Rules of Professional Conduct, but instead looked to federal courts’ balancing tests used in class-action proceedings. The balancing test considers a party’s right to select counsel versus a client’s right to undivided loyalty of his or her counsel. The appellate court relied on the Third Circuit’s holding that even if some class representatives object to a proposed settlement, class counsel may continue to represent the remaining class representatives and the class, as long as the best interests of the class are maintained by continued representation of that counsel, and are not outweighed by actual prejudice to the objecting members who will now be opposite to their former counsel.

    The appellate court also looked to the Second Circuit, which has stated that conflicts between multiple clients in a federal class action need not require counsel’s withdrawal, because class counsel is typically allowed to challenge contentions of class members who have opposed a proposed settlement agreement of the class action. Finally, the appellate court noted that class counsel’s responsibility is to ensure the best interest of the class, as a whole, not any individual client. Accordingly, the appellate court reversed the trial court’s disqualification order.

    The Florida Supreme Court ultimately affirmed the trial court’s disqualification of counsel and criticized the appellate court for applying federal law instead of the Florida Rules of Professional Conduct. The supreme court agreed that the rules were violated because the action against FAMRI was directly adverse to interests of the board members, thus creating conflicts of interest with current clients. And conflicts of interest related to former clients also existed because the complaint against FAMRI, the individual suits, and the original class action were all substantially related. Importantly, the Florida Supreme Court’s opinion did not address whether a more standard objection to a class-action settlement from some members would automatically create a conflict requiring withdrawal of counsel.

    In navigating potential conflicts of interest, class-action counsel should be aware of potential issues and evolving interests that may arise after a settlement agreement is reached; and additionally understand how each state applies its rules of professional conduct and related federal laws to conflicts of interest considerations for class-action counsel.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    May 9, 2014

    SCOTUS Relaxes Attorney Fee Standard in Patent Infringement Cases

    The U.S. Supreme Court, in two unanimous decisions issued on April 29, 2014, held that the Federal Circuit’s test for awarding attorney fees in patent-infringement cases was too rigid, making it unnecessarily difficult for courts to award fees to the prevailing party.

    The Patent Act allows courts to award attorney fees to a prevailing party in “exceptional cases.” The Federal Circuit has defined “exceptional” as “objectively baseless” and “brought in subjective bad faith.” However, in Octane Fitness LLC v. Icon Health & Fitness Inc., the Supreme Court disagreed with this definition, and found that “exceptional” only means “uncommon” or “not ordinary.” The Court found that the Federal Circuit’s requirement was too inflexible and encumbers a court’s statutorily granted discretion. The Court held instead that fees can be awarded if the losing party’s case “stands out from others” or is litigated in an “unreasonable manner.” The Court noted that a judge should be able to independently determine whether a case is indeed “exceptional.” Additionally, the Court held that a party seeking fees need not prove their case by clear and convincing evidence, because the governing statute does not impose any specific evidentiary burden.

    In the second opinion, Highmark Inc. v. Allcare Health Management System Inc., the Court focused on the standard for review of an attorney-fee award. Here, the Court rejected the Federal Circuit’s de novo review standard, and held that these awards should be reviewed for abuse of discretion.

    For litigants, the impact of these opinions is significant. First, with the risk of a substantial attorney-fee award, sanction motions will likely become more common in an effort to dismiss baseless litigation early on. This is important as, prior to these decisions, there was little disincentive to file unsubstantiated patent claims. Second, the prevailing party now has a higher chance of success on its attorney-fees motion, which is always positive, and also an important factor in litigation strategy.

    While commentary on these opinions has been primarily focused on the deterrent effect for patent trolls, the rulings are no less important to patent owners and accused infringers. The risk and benefits associated with potential sanction motions and attorney-fees awards apply equally to both plaintiffs and defendants in patent cases, and will likely change the landscape of this litigation.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    April 30, 2014

    Telephone Consumer Protection Act—Legal Pitfalls and Defenses

    The Telephone Consumer Protection Act (TCPA), codified as 47 U.S.C. § 227, was enacted in 1991 to reduce and control aggressive telemarketing techniques. Today, the TCPA prohibits a broad range of advertising activities, including the use of automatic telephone-dialing systems and artificial or prerecorded voice-delivery systems, via telephones, fax machines, and text messages.

    For each and every separate TCPA violation, damages of $500, and up to $1,500 for willful violations, will be awarded. Importantly, there is no cap on the total damage amount that may be assessed. Accordingly, depending on the amount of individual communications and the number of consumers contacted, the risk of liability and potential exposure is substantial.

    Typically, TCPA violations involve unauthorized calls from an automatic telephone dialing system (ATDS). A company may be liable under the TCPA even if its ATDS does not actually call a single consumer. The Ninth Circuit in Satterfield v. Simon & Schuster, Inc. held that “a system need not actually store, produce, or call randomly or sequentially generated telephone numbers, it need only have the capacity to do it.” 569 F.3d 946, 951 (9th Cir. 2009). Therefore, companies must be aware that simply having the capacity to use ATDS is potentially sufficient to invoke liability.

    An important defense to TCPA claims is “prior express consent.” Before October 21, 2013, a company was deemed to have the requisite prior express consent if a consumer provided his or her telephone number to the company, or through other implied conduct. Now, however, as a result of the Federal Communication Commission’s (FCC) new interpretation of prior express consent, a company must obtain express written consent to deliver prerecorded messages and autodialed calls or text messages for advertising purposes. Rules and Regulations Implementing the Telephone Consumer Protection Act of 1991, CG Docket No. 02-278, Report and Order, 27 FCC Rcd. 1830, 1838–40 ¶ 32 (2012). The FCC requires a consumer receive “clear and conspicuous disclosure” that he or she will receive telemarketing calls or messages. As long as valid prior express consent is obtained, companies will be protected.

    Because of the profit potential with the extremely high damage awards, TCPA class-action suits are on the rise. Indeed, some of these suits have garnered settlement awards in the tens of millions of dollars. Therefore, the potential for class-action litigation is a legitimate concern. However, the FCC’s updated interpretation of prior express consent is actually being successfully used by companies to defeat class-action certification. Courts have held that the factual issues regarding consent likely differs for each potential class member, therefore the “typicality” and “commonality” requirements for class-action certification cannot be met.

    One important distinction to note is that while prior express consent is required for communications made for “telemarketing purposes,” a company need not obtain express written consent for communications that are considered as for “informational purposes” only. And finally, companies must also be aware that consumers can withdraw their prior consent at any time.

    Companies must fully understand the TCPA, and ensure that all telemarketing efforts comply with the ever-evolving regulations and interpretations of the TCPA. Failure to do so exposes companies to significant risk for liability and substantial damage awards.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    April 28, 2014

    What Every Company Must Know When Conducting Background Checks

    On March 10, 2014, the Equal Employment Opportunity Commission (EEOC) and the Federal Trade Commission (FTC) co-issued two articles: “Background Checks: What Employers Need to Know” and “Background Checks: What Job Applicants and Employees Need to Know,” that synthesize employer guidelines and applicant privileges for background checks. The two agencies raised nine key concepts related to preventing unlawful discrimination and enforcing the Fair Credit Reporting Act (FCRA). As such, employers and employees should be aware of restrictions on employer efforts to obtain and use individual background information and of the concepts addressed by the EEOC and FTC in the articles.

    First, background checks are lawful, and employers generally have wide discretion in obtaining individual information from applicants and employees. Second, the employer must comply with federal laws protecting individuals from discrimination, the FTC’s rules governing enforcement of the FCRA, and all other applicable state or local laws.

    Third, the FCRA places guidelines on employers. For example, employers must provide applicants with written notice that background information could be used in the employment decision-making process. This notice should be in a stand-alone format that is not part of the employment application. Additionally, if the employer requests an “investigative report” (based on personal interviews regarding character, general reputation, personal character, or lifestyle), then it must inform applicants of their entitlement to a description of the nature and scope of the investigation. An employer must also obtain written permission from the employee or applicant to conduct the background check, and if it wishes to conduct ongoing checks throughout the employment period, then it must notify the employee “clearly and conspicuously.” Finally, the employer must certify to the background-check company that it: 1) notified the applicant and obtained permission to proceed with the background report; 2) complied with FCRA requirements; and 3) will not misuse any information obtained in violation of federal or state law or for discriminatory purposes.

    Fourth, an employer using background information to take adverse action against an employee or applicant must provide the party with the following information: 1) a notice that includes a copy of the consumer report relied upon to take the adverse action; 2) a copy of the “summary of your rights under the Fair Credit Reporting Act” document; and 3) an advance notice that the party may review and explain any negative information contained in the report. Fifth, after an employer takes an adverse action against a party, it must in writing, electronically, or orally, provide the following information to the party subject to the action: 1) The party was rejected based on information in the report; 2) the name, address, and phone number of the company that sold the report; 3) the company selling the information cannot make employment decisions and is unable to provide specific reasons for it; and 4) the party may dispute or obtain an additional free report within 60 days.

    Sixth, there are also limitations as to the types of inquires used to obtain information. For instance, employers cannot request medical information prior to making the job offer. Additionally, in rare instances where genetic information is being requested, the employer cannot lawfully use this information in the hiring process. Seventh, all of the usual nondiscrimination laws apply, thus an employer cannot use information obtained to discriminate based on sex, race, national origin, color, religion, disability, or any other protected status.

    Eighth, employers must be cognizant of these limitations because improperly obtaining or using a background check can constitute unlawful discrimination either as “disparate treatment” or “disparate impact.” Unlawful disparate treatment occurs where an employer rejects a job applicant of a protected class with a criminal history, but not other applicants with the same criminal history that do not belong to that same protected class. Disparate-impact discrimination occurs where a policy or practice excludes certain applicants to the disadvantage of a protected class, and the policy is not related to the job and consistent with business necessity.

    Ninth, and finally, while employers should carefully review their background-check policies for lawfulness and avoid any discriminatory pitfalls, applicants should be proactive in ensuring information contained in a report is accurate or otherwise corrected. For example, a party can request a correction from the background company, provide a corrected copy to an employer, and can advise the employer regarding any errors.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    April 28, 2014

    How Companies Can and Must Prepare for the Inevitable Data Breach

    As businesses increasingly collect a customer’s highly sensitive information, data breaches become progressively more prevalent. Because breaches are both intentional and unintentional, it is difficult to predict when a breach will occur, and as a result it is even more difficult to prevent. However, if necessary steps are not taken to prevent breaches, it can have detrimental effects on businesses. Many of these breaches in data security cost substantial amounts of money to identify and rectify. Because the likelihood of data breaches is at an all-time high, businesses must be equipped with the knowledge and capabilities to address the situation immediately if and when a breach occurs. To do so, businesses should retain counsel who possess the requisite expertise to effectively address the inevitable litigation.

    In the meantime, before a breach occurs, businesses can take some preventive measures to reduce the risk of a breach. Businesses can test current data security and address the security’s weaknesses, maintain ongoing risk assessments, and invest in high-tech security software. Additionally, businesses can keep employees and vendors apprised of the proper security procedures and create a team of employees to implement a course of action when a breach occurs. Further, businesses should consider purchasing cyber-insurance to cover data breaches.

    In the event a breach occurs, a business should isolate the situation, secure the system to prevent further loss of data, and start to repair the breach. In addition, a business should contact its counsel to analyze any legal or regulatory ramifications of the breach. Soon after the breach, it will be necessary to contact the customers who are affected by the breach. Moreover, it is essential to prepare for foreseeable litigation either through filing suit against the person or company responsible for the breach or preparing strategies and defenses for suits filed by persons affected by the security breach. And not only must businesses prepare for civil consequences but they also must prepare for regulatory ramifications.

    Currently, there are no uniform federal laws that directly govern data-breach notification. However, some specialized regulations may govern certain industries. For example, the Gramm-Leach-Bliley Act governs financial institutions’ reporting, while Securities and Exchange Commission regulations and the Sarbanes-Oxley Act regulate certain reporting obligations for publicly traded companies. Additionally the FTC Act, the Health Insurance Portability and Accountability Act, and the Children’s Online Privacy Protection Act relate to cybersecurity and may provide some guidelines.

    States, however, have enacted statutes that require some form of notification once a breach has taken place. Typically, businesses or state agencies must notify state residents within a reasonable amount of time after the business or state agency becomes aware of the security breach and subsequent loss of information. The notification statutes vary from state to state and therefore it is important to comply with the specific state’s statute.

    It is clear that the risk of a data breach continues to grow for every business, and it is essential for businesses to have a team of employees, consultants, and attorneys to create and implement a comprehensive set of protections to prevent breaches, and also policies and procedures for reporting and resolving after a breach occurs.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    April 8, 2014

    Privilege Ruling Counteracts Incentives for Internal Investigations

    It has long been assumed that under the U.S. Supreme Court’s decision Upjohn Co. v. United States, reports generated during an internal investigation undertaken at the direction, and under the supervision, of corporate attorneys are protected from discovery by the attorney-client privilege. It came as a significant surprise then that the U.S. District Court for the District of Columbia recently held that the privilege does not apply when an investigation is conducted pursuant to a legal requirement, and not purely for the purpose of obtaining legal advice. Unless reversed, this decision could pose a significant new dilemma for regulated companies, and especially for government contractors, that perform internal investigations to determine whether “credible evidence” of actual wrongdoing exists.

    The decision in United States of America ex rel. Harry Barko v. Halliburton Co., et al. is the latest in a long-running False Claims Act (FCA) suit against Halliburton and its former subsidiary, Kellogg, Brown & Root (KBR). In the course of pretrial discovery, the relator sought the production of reports created by KBR in the course of conducting internal investigations into alleged violations of the company’s code of business conduct (COBC). KBR objected to the production of the COBC reports, contending they were protected from discovery by the attorney-client privilege and work-product doctrine. On the relator’s motion to compel, the court rejected KBR’s argument that Upjohn was dispositive of the issue, and ordered that the reports be produced. The court reasoned that because the KBR investigators who prepared the reports were not lawyers, and because the subject investigations were done pursuant to legal requirements and corporate policy, and not solely for the purpose of obtaining legal advice, the reports were not privileged.

    More specifically, the court explained that the KBR case could be distinguished from Upjohn because while the internal investigation at issue in Upjohn was conducted only after company attorneys conferred with outside counsel, KBR’s COBC investigations were routine compliance investigations required by law and corporate policy. As such, held the court, the COBC investigative reports did not meet Upjohn’s “but for” test because the investigations would have been conducted regardless of whether legal advice was sought, and the COBC investigations “resulted from the Defendants [sic] need to comply with government regulations.”

    U.S. ex rel. Barko is important in that it not only contradicts Upjohn, but is counter to a string of more recent cases in which similarly conducted internal investigations were held to be privileged. By ruling that investigations conducted pursuant to legal requirements are not privileged, even if conducted at the direction of legal counsel, and even if at least in part for the purpose of legal advice, the decision seems to completely abrogate the rule that has guided corporate investigations for more than three decades. If upheld, this decision could deprive most federal government contractors of the benefits of the attorney-client privilege when conducting internal investigations because virtually all contractors are subject to legally or contractually required internal controls and investigations obligations.

    This decision, however, would appear to go beyond the government-contracting context, affecting most publicly traded companies as well by depriving such companies of the benefits of the attorney-client privilege when conducting internal investigations. This is because Sarbanes-Oxley and other laws require publicly traded companies to maintain a system of internal controls and a mechanism for conducting internal investigations. Moreover, the U.S. Sentencing Guidelines provide for an offense-level reduction where a corporate defendant establishes standards and procedures to prevent and detect criminal conduct. Thus, this decision, which seems to penalize companies that actually follow legally imposed investigatory requirements, will undoubtedly have a chilling effect on corporate efforts to detect internal wrongdoing. This cannot be in line with Congress’s intent or the desire of governmental agencies to have companies investigate wrongdoing thoroughly and provide concise voluntary disclosures as appropriate.

    In response to this decision, KBR has petitioned the D.C. Circuit Court of Appeals for a writ of mandamus directing the district court to vacate its order. But, until and unless the district court’s decision is reversed, public companies, and especially government contractors, must choose between ignoring interna-investigation requirements imposed by federal statutes/regulations/contracts, or following these requirements, knowing that the attorney-client privilege may not apply to any internal investigation conducted pursuant thereto. Either choice is fraught with peril. This new reality might be very good for qui tam plaintiffs, but it presents an unenviable dilemma for companies intent on following the law.

    The bottom line, at least for now, is that all government contractors and other companies subject to internal investigation requirements should review and revise existing policies and procedures for handling internal investigations to ensure such investigations fall under Upjohn decision and not the KBR decision.

    Greg Brower and Brett W. Johnson, Snell & Wilmer L.L.P


    March 28, 2014

    The New Cybersecurity Framework—A Roadmap for All Companies

    The recent string of well-publicized data breaches has demonstrated that cyber criminals are targeting companies of all sizes and in all industries. Even companies with the most sophisticated security systems admit that the hackers are usually one step ahead of them. The unsophisticated amateur hackers have now been joined by professional cybercriminals and foreign-government-sponsored mercenaries intent on stealing confidential and other proprietary information. It is understandable that cybersecurity is now a corporate-governance issue that is at the top of the list of concern for most boards of directors, executives, and legal departments. Most companies have had little in the way of government regulations or industry standards to guide them on what they should be doing to protect their own data and the data they handle belonging to customers, vendors, and clients.

    However, on February 12, 2014, the National Institute of Standards and Technology (NIST), an agency within the Department of Commerce, published a 41-page Framework for Improving Critical Infrastructure Cybersecurity in response to President Obama’s 2013 executive order calling for such a framework. Exec. Order 13636, Fed. Reg., Vol.78, No. 33 (Feb.19, 2013). The framework, developed by the NIST and industry stakeholders, was created to identify best practices and assessment tools to help critical-infrastructure companies develop and implement guards against cybersecurity risks. However, it will likely become a de facto “standard of care” that companies will be judged against in defending claims relating to data breaches, including class actions. Companies that suffer data breaches should expect to be questioned by regulatory authorities and plaintiff lawyers about whether they considered and adopted the best practices contained in the framework. It is expected that insurance companies offering cyber-insurance will also look to the framework as a baseline standard of care.

    The framework encourages companies to take a risk-based approach to creating and managing cybersecurity. It also creates a method for companies to determine both where they currently are in terms of managing cybersecurity risks and where they want to be. Companies are encouraged to consider the following five core functions as they work to either create or strengthen their cybersecurity program:

    Identify. Companies should conduct a cyber-readiness assessment based on the type of data the company holds and the level of risk the company is willing to assume if there is a data breach. This will help direct available resources to protecting the company’s most important data.
    Protect. Companies should analyze access control, the use of protective technology, and provide training to all employees with access to data.
    Detect. It is important to review what type of security monitoring or other detection processes are in place to identify areas of potential vulnerability.
    Respond. Implement or update the company’s data-breach response plan, including having key contacts already in place as part of that plan.
    Recover. Inventory, classify, and risk-rank critical systems and assets.

    These five core elements should be part of a life-cycle methodology for continuously improving a company’s cybersecurity. In addition to reviewing these five core elements to determine the company’s current state of cybersecurity, companies should always go back and recheck items 1–4 as business changes or if you suffer a data breach.

    Each of these five core elements has additional corresponding action items including best practices, policies, and processes that should be considered when creating or updating a cybersecurity program. Privacy issues are also important in designing a cybersecurity program, and organizations must understand how to incorporate privacy protections into every aspect of their product or service.

    The NIST recognizes that there is not a one-size fits all approach to managing cybersecurity because companies will have unique risks and different risk tolerances. However, this framework provides a way for companies, regardless of industry, size, sophistication, or available budget, to create a cybersecurity program or improve an existing program. It will also allow top management to understand how well prepared an organization is in the cybersecurity area and where it has room for improvement. In preparing such a self-assessment, consideration should be given to protecting such information from possible future discovery.

    It is up to senior executives to set the tone for both privacy and cybersecurity within an organization. Dealing with cybersecurity issues is no longer simply an IT issue. There are legitimate stakeholders throughout an organization and those stakeholders should work together, using the framework, to create a cybersecurity program that is truly effective.

    Rebecca A. Winterscheidt, Snell & Wilmer L.L.P, Phoenix, Arizona


    March 26, 2014

    SCOTUS Expands Whistleblower Protections for Private Employees

    In an opinion issued on March 4, 2014, the U.S. Supreme Court extended the whistleblower protections of the Sarbanes-Oxley Act to employees of private companies that do business with public companies, such as investment advisors, accountants, and lawyers. By adopting a broad view of whistleblower protections, the Court’s decision in Lawson v. FMR LLC, Case No. 12-3 (U.S. Mar. 4, 2013), expands the group of employees who are eligible for protection under the law as whistleblowers.

    In Lawson, two former employees of private companies that provided investment advice to the Fidelity family of mutual funds claimed that their former employer had fired them in retaliation for raising concerns about Fidelity mutual funds. They each brought claims under section 806 of the Sarbanes-Oxley Act of 2002, which provides that public companies may not retaliate against “any officer, employee, contractor, subcontractor, or agent of such company” because of whistleblowing or other protected activity. 18 U.S.C. § 1514A. Although the district court initially allowed these claims to proceed, the U.S. Court of Appeals for the First Circuit rejected the claims on the ground that the reference to “employee” in section 806 of Sarbanes-Oxley referred to employees of public companies, not employees of private companies that do business with public companies. Because these employees worked for private companies that did business with public companies, not the public companies themselves, their claims could not proceed.

    In its first-ever decision on the whistleblower protections of Sarbanes-Oxley, the U.S. Supreme Court reversed this decision in a 6–3 opinion by Justice Ginsberg. The Court’s decision focused primarily on the text of the statute, and the Court concluded that the reference to “employee” in section 806 referred to employees of contractors and subcontractors who work for public companies, not just employees of public companies. The Court’s opinion also relied on the history of the Sarbanes-Oxley Act, which was enacted in 2002 in the wake of the Enron scandal. The Court viewed Sarbanes-Oxley as an attempt by Congress to “ward off another Enron debacle,” and found that the role of outside professionals such as accountants, law firms, contractors, and other agents is crucial to identifying shareholder fraud. Following this decision, these outside contractors are now entitled to bring whistleblower claims under Sarbanes-Oxley.

    In a strong dissent, Justice Sotomayor predicted that the decision created “a sweeping source of litigation that Congress could not have intended,” and that the decision imposes “costly litigation burdens on any private business that happens to have an ongoing contract with a public company.” The dissent also raised concerns about the limits of the decision and raised the possibility that Sarbanes-Oxley arguably now covers household employees of anyone who works at a public company, including babysitters and landscapers. The majority opinion rejected this scenario, noting that there was “scant evidence that these floodgate-opening concerns are more than hypothetical.”

    The Lawson opinion makes it clear that private companies that do business with public companies must be aware that their employees could proceed with whistleblower claims under Sarbanes-Oxley. More generally, the decision is consistent with the trend among many lower federal courts to expand, rather than restrict, whistleblower protections for employees.

    Joseph G. Adams, Snell & Wilmer L.L.P, Phoenix, Arizona


    March 13, 2014

    Justice Remains Denied for Uncompensated Ecuadorian Tribes

    Indigenous tribes in Ecuador assert that throughout the 1970s and ‘80s, Chevron spilled millions of gallons of toxic wastewater into Ecuadorian Amazon waterways and left unlined waste pits filled with toxic sludge. These tribes allege that this conduct contaminated their lands and destroyed their ability to farm and live on the land. Steven Donziger, a U.S. plaintiffs’ attorney, and his team represented the Indigenous tribes, filing suit against Chevron (originally in 1993), and ultimately obtaining a $9.5 billion judgment against Chevron in 2011 in an Ecuadorian court.

    This verdict was one of the largest environmental-pollution penalties ever imposed. And Chevron has drawn harsh criticism and condemnation from environmental and human-rights groups for failing to pay the judgment or accept responsibility. But Chevron has always defended the allegations, asserting that it remediated any contamination for which it may have been responsible, and that the Ecuadorian national oil company was actually responsible for most of the pollution.

    Furthermore, Chevron asserted that the judgment was obtained by fraud and corruption. And in an unusual turn of events, Chevron countersued Mr. Donziger and his team, individually, in the U.S. District Court for the Southern District of New York for fraud, corruption, racketeering, and related claims. Chevron offered evidence that Mr. Donziger committed bribery and coercion in the Ecuadorian litigation, and specifically ghostwrote favorable opinions for the presiding judge, and agreed to pay that judge a $500,000 kickback in exchange for a favorable verdict.

    On March 4, 2014, the Southern District of New York agreed with Chevron (issuing an almost 500-page opinion), finding the Ecuadorian judgment the product of “egregious fraud” and corruption. Mr. Donziger, supported by prominent environmental activist groups, called the trial a “well-funded corporate retaliation campaign.” Mr. Donziger has announced his plan to appeal, stating that the decision is based upon paid evidence—witness testimony from a former allegedly corrupt Ecuadorian judge. Indeed, Chevron’s primary witness, Alberto Guerra, testified that he accepted substantial amounts of money from Chevron and that Chevron paid for relocation of him and his family to the United States. And, Mr. Guerra was removed from the bench in 2008 after charges of impropriety.

    The court’s ruling now prevents Mr. Donziger and his team from enforcing the Ecuadorian judgment in the United States. However, and in spite of this recent verdict, Mr. Donziger has expressed plans to take the judgment to other countries such as Canada and Brazil in an effort to obtain monies and assets from Chevron’s substantial business activities in those countries. Yet with this recent decision, it is unclear how those foreign courts will respond to enforcement efforts.

    But what about the real victims here? What of the substantial pollution and contamination? There is really no dispute by anyone that the Ecuadorian indigenous tribes have suffered significant damage as a result of substantial pollution, be it at the hand of Chevron, the Ecuadorean national oil company, or others. In fact, the Southern District of New York’s opinion does not dispute that pollution occurred. And unfortunately these real victims have seen no remediation and no compensation for the destruction to their native lands and way of life.

    While extreme, this case forces lawyers to consider at what point our ethical obligation for zealous advocacy goes behind that to conduct that rises to the level of impropriety or even fraud. Further, this case is a stark reminder that two wrongs don’t make a right. And, perhaps most importantly, a sad reminder that while even having good intentions, the legal system does not always render justice due.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    March 12, 2014

    Does California's New Hen-Cage Law Violate the Commerce Clause?

    In 2008, California voters passed Proposition 2, mandating roomier cages for all of California’s (egg) laying hens. Currently, 90 percent of the approximately 280 million total laying hens in the United States spend their lives in battery cages—about the size of a filing-cabinet drawer. California’s Prop. 2, effective January 1, 2015, requires 116 square inches of space per hen, compared to the current industry standard of 67 square inches. As a follow-up to Prop. 2, in 2010, California enacted a law requiring that not only California-produced eggs, but all eggs imported into California, come from hens with at least 116 square inches of living space.

    Citing violation of the U.S. Constitution’s Commerce Clause, Missouri’s attorney general filed suit on February 3, 2014, in the U.S. District Court for the Eastern District of California, alleging that Prop. 2 would require Missouri’s egg producers to spend millions of dollars to comply with the increased space requirements or find themselves shut out of the very large and profitable California market. (California, with the largest population, is likewise the largest consumer of eggs). And on March 5, Iowa, Nebraska, Kentucky, Alabama, and Oklahoma joined Missouri in its action. This lawsuit comes on the heels of the controversial King Amendment, which was the legislative response to Prop. 2, and which would have prohibited states from setting mandatory standards for agricultural products produced in other states but to be sold into the state setting the standard. The King Amendment ultimately died, and was not included as part of the recently passed federal farm bill.

    Missouri’s lawsuit asserts that the livelihood of non-Californian farmers should not be subject to the “whim of California’s voters” (according to Nebraska Attorney General Jon Bruning). But California argues state’s rights and the public mandate demanding more humane living conditions for laying hens. And while the cost of compliance is one of the primary arguments asserted, the Association of California Egg Farmers has predicted that implementing compliant cages will only add about one penny to the cost of each egg produced. This calculation is based, in part upon the Association of California Egg Farmers’ position that with the added space, producers get “slightly more productive” hens and a “somewhat lower mortality.”

    California is not alone in its legislative effort. Similar legislation, mandating state-wide standards for laying hens, has been passed in Michigan, Oregon, and Washington. Additionally, the United Egg Producers sponsored similar federal legislation in April 2013, known as the “Egg Bill”. While well supported, the Egg Bill was ultimately defeated by opposition from the meat industry.

    And the meat industry has weighed in again here on Prop. 2, the Missouri lawsuit, and the potential ramifications on other agriculture sectors. Specifically the Missouri Pork Association expressed concern that California’s legislation will not stop with roomier cages for laying hens, and anticipates similar legislation affecting the pork, beef, dairy, and corn industries.

    Indeed, California has successfully led the way with legislation providing protection for animals’ rights. After California banned the production of foie gras produced by force-feeding birds, the U.S. Court of Appeals for the Ninth Circuit upheld the ban, finding no violation of the Commerce Clause in a lawsuit filed by Canadian foie gras producers.

    This is a hot-button issue, with billions of dollars as stake, and powerful agricultural and animal-welfare groups lobbying hard on both sides of the issue. The ramifications of the decision will not only affect the agriculture industry as a whole, but also consumers’ purchasing options and pocketbooks. And, regardless of the outcome, it is expected that this issue will ultimately make its way to the U.S. Supreme Court.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    February 27, 2014

    EINs: Updating Responsible Party Information

    When filing for an employer identification number (EIN), which is required for purposes of tax administration, the applicant must disclose the name and taxpayer identification number (e.g., Social Security number, individual tax identification number, or EIN) of the principal officer, general partner, grantor, owner, or trustor of the entity. This individual or entity is termed the “responsible party.” If an entity has more than one responsible party, the entity may designate a responsible party from among such persons.

    Beginning January 1, 2014, every entity is required to report any change in the identity of its responsible party on Form 8822-B, Change of Address or Responsible Party—Business, within 60 days of the change. If the change occurred prior to January 1, 2014, however, the entity has until March 1, 2014, to file Form 8822-B.

    Although, as of the date of this alert, there is no penalty for failing to timely file Form 8822-B, if an entity fails to file Form 8822-B and update the IRS with new responsible-party information and, as a consequence, the new responsible party does not receive a notice of deficiency or demand for tax, penalties and interest will accrue notwithstanding that the entity’s new responsible party did not receive these documents.

    Accordingly, all businesses with an EIN should consider reviewing the responsible-party information that was originally submitted on Form SS-4 or previously updated via Form 8822-B, to determine whether any revisions are necessary. Further, businesses should consider reviewing responsible-party information and filing a new Form 8822-B whenever there is a change in ownership, management, or other situations that might result in a new responsible party.

    Information about obtaining an EIN and who to designate as a responsible party can be found on the IRS website.

    Geoffrey L. Gunnerson and Carlene Y. Lowry, Snell & Wilmer L.L.P, Phoenix, Arizona


    February 24, 2014

    Comments Could Result in FDA Troubles

    After appearing on CNBC television show Fast Money, the CEO of Aegerion Pharmaceuticals received a warning letter from the U.S. Food and Drug Administration (FDA) Office of Prescription Drug Promotion. The agency asserted that comments made on the show constituted promotional speech and resulted in Aegerion’s cholesterol-lowering drug, Juxtapid, being misbranded.

    According to the FDA, comments made on Fast Money by Aegerion CEO Marc Beer about Juxtapid “provide evidence that Juxtapid is intended for new uses, for which it lacks approval and for which its labeling does not provide adequate directions for use, which renders Juxtapid misbranded within the meaning of the Federal Food Drug and Cosmetic Act (FD&C Act) . . .” The agency also stated that Beer’s comments created a misleading suggestion that Juxtapid “is safe and effective for use in decreasing the occurrence of cardiovascular events including heart attacks and strokes, and increasing the lifespan of patients with HoFH [homozygous familial hypercholesterolemia].” Finally, it took issue with Beer’s failure to discuss any of the drug’s risks or limitations.

    While the above scenario may be rare, drug manufacturers should take away from this action that statements made by their executives, even if not intended as advertisements or promotional comments, could be considered as such, and ultimately result in the FDA requiring corrective action if such comments are deemed misleading. Here, the agency demanded that Aegerion disseminate “corrective advertising” and send the FDA a “comprehensive plan of action to disseminate truthful, non-misleading and complete corrective messages . . . about the approved use of Juxtapid.”

    This incident is just the latest in the FDA’s recent crackdown on any activity it deems “off-label marketing.” Drug manufacturers should be aware that any statements about a drug’s efficacy or use could be targeted for similar action.

    Amanda Sheridan, Snell & Wilmer L.L.P, Phoenix, Arizona


    February 12, 2014

    No Duty to Buy Out Minority Shareholders in Closely Held Corporations

    The Delaware Supreme Court recently considered whether directors of a closely held corporation had a duty under common-law fiduciary principles to repurchase a minority shareholder’s shares. The court found no such duty, reaffirmed Delaware precedent on the issue, and highlighted the importance of having an agreed-upon exit strategy for minority shareholders or members of closely held entities. Blaustein v. Lord Baltimore Capital Corp., No. 272, 2013 (Del. Jan. 21, 2014.)

    In 1999, Susan Blaustein became a minority shareholder in the Lord Baltimore Capital Corp., a closely held Delaware corporation. Paragraph 7(d) of the Baltimore shareholder’s agreement addressed the repurchase of stock from minority shareholders. It provides in pertinent part:

    . . . the Company may repurchase Shares upon terms and conditions agreeable to the Company and the Shareholder who owns the Shares to be repurchased . . .

    Blaustein claimed that she purchased shares in Baltimore on the understanding that after 10 years, she would have the opportunity to sell the stock back to Baltimore for full value. Blaustein’s understanding was based upon an alleged oral promise made to her by the CEO of Baltimore.

    Ten years later, Blaustein asked Baltimore to buy-out her shares at full value. In response, Baltimore’s board offered to purchase Blaustein’s shares at a 52 percent discount from the net asset value of her shares.

    Blaustein filed suit in the Delaware Court of Chancery, alleging promissory estoppel, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing. All of Bluestein’s claims were dismissed or disposed of by summary judgment.

    On appeal, Blaustein argued that Baltimore’s directors acted out of self-interest when they failed to offer more than a 52 percent discount on a share repurchase. Blaustein claimed that this failure constituted a breach of the board’s fiduciary duties toward a minority shareholder. Blaustein also argued that paragraph 7(d) of the shareholder’s agreement contained an implied contractual right to good-faith negotiation of stockholder-redemption offers.

    In rejecting Blaustein’s arguments, the Delaware Supreme Court affirmed two established legal principals in Delaware. First, the directors of a closely held corporation have no common-law fiduciary duty to repurchase the stock of a minority stockholder. Second, an investor must rely upon contractual protections if liquidity is a matter of concern when investing in closely held entities. The court looked to paragraph 7(d) of the Baltimore shareholder’s agreement, which “gives the stockholder and the company discretion as to whether to engage in a transaction, and as to the price. It does not impose any affirmative duty on either party to consider or negotiate any repurchase proposal.” Similarly, the court noted that the “implied covenant of good faith and fair dealing cannot be employed to impose new contract terms that could have been bargained for but were not. Rather, the implied covenant is used in limited circumstances to include what the parties would have agreed to themselves had they considered the issue in their original bargaining positions at the time of contracting.” In this case, the parties had considered whether, and on what terms, minority shareholders might have their stock repurchased. That consideration was expressed in paragraph 7(d) of the shareholder’s agreement. Finally, the court noted that the complaint’s factual allegations regarding the CEO’s offer to buy back Blaustein’s shares after 10 years “suggest a claim for fraud in the inducement.” However, the court pointed out that Blaustein never pled fraud. Therefore, the court declined to consider whether relief was available to Blaustein under a theory of fraud in the inducement.

    Blaustein is useful to closely held businesses, minority investors, and lawyers. For closely held businesses, Blaustein reaffirms that, under Delaware law, the duties of directors toward minority shareholders or members will be squarely governed by the shareholder or operating agreement. For minority investors, Blaustein illustrates that an exit strategy and formula to value shares or member interest should be created before investing, and memorialized in whatever agreement governing the business relationship. Oral promises outside these agreements are unlikely to be enforced. Finally, for lawyers, Blaustein is a cold reminder of the importance of sometimes pleading all possible causes of action that the facts can support.

    John S. Delikanakis, Partner, Snell & Wilmer L.L.P., Las Vegas, NV


    February 5, 2014

    How Domain-Name Collision Could be Your Biggest Security Threat

    We are barely a month into 2014 and one news story that is likely to be remembered is the Target security breach that resulted in upwards of 70 million customers’ personal information being disclosed. Data and other security breaches are fast becoming a critical issue for any organization that handles third-party data.

    One of the biggest threats to your company’s data and information-technology security is a problem known as “domain name collision” which can result in your internal data being disseminated on a public network. A “domain name collision” occurs when an attempt to locate an internal address used in a private network results in an inadvertent query on the public Internet.

    For example, assume your company’s accounting department has an internal network and it was set up with the extension of “.money” (as opposed to “.com”). Your accounting department has the records for all of your clients stored on this network with each client’s records stored at a separate extension ending with “.money” (i.e., client Smith would have records on your internal network at http://smith.money”). Until now, you never worried that queries for extensions ending in “.money” would end up anywhere but on your internal network as the “.money” extension was never used for any public networks.

    The situation described above is about to change drastically. The Internet Corporation for Assigned Names and Numbers (ICANN) recently unveiled a new program (known as the New gTLD Program) making thousands of new generic top-level domain extensions (gTLDs) available to the public. Now, instead of being limited to the traditional extensions of .com, .edu, .biz, etc., the Internet is about to expand to include thousands of new top-level domain-name extensions thanks to the New gTLD Program. Individuals and organizations are in the midst of an application process at ICANN to operate approximately 1,700 new gTLDs. Thus, the amount of top-level domain extensions is about to grow exponentially.

    What this means is that companies with internal networks that use extensions previously thought to be private could find their sensitive confidential information on a public network because the extension they have been using is now a public gTLD. In the example above, the .money extension used by the accounting department might suddenly query a different server when the .money extension becomes public. This could result in the loss of data on the company’s private network.

    Unfortunately, traditional computers and servers are not the only devices that could be affected by domain-name collisions. Any device (such as a networked television, a dialysis machine, a networked printer, etc.) that queries a network could be affected by this issue.

    ICANN is aware of the problem and recently undertook a study and other proactive action to assess the risk to assist the public in dealing with the domain-name-collision issue. While ICANN was able to take certain actions to help mitigate the risk of domain-name collisions occurring, the possibility of domain-name collisions occurring in the wake of the new gTLD program is still significant, and proactive steps should be taken to mitigate this risk within your organization.

    The good news is that we are several months away from the new gTLDs going live. This should give your organization time to prepare for the myriad of new gTLDs and take action now to avoid a possible data loss. There are numerous steps that can be taken from both a technical and legal standpoint. For instance, on the technical front, you can closely monitor the new gTLDs, their applicants, and amend your internal network’s setup accordingly. From a legal standpoint, revising customer terms of use and other agreements to address the issue of domain-name collision and limiting liability may be prudent. Further, if a plan is not already in place, a comprehensive plan to address a data breach could also significantly reduce your liability in the event of a data breach caused by domain-name collision.

    Damon Ashcraft, Snell & Wilmer, L.L.P, Phoenix, AZ


    February 3, 2014

    No Duty, No Problem? Strict Product Liability Applies Anyway

    A California court of appeal this week considered “the circumstances under which a legal duty of care is owed to a later-conceived child.” The ruling, however, extends beyond that specific circumstance, and is both good news and bad news for defendants in product-liability and toxic-tort actions.

    In Elsheref v. Applied Materials, Inc., the plaintiffs alleged that the child “was born with a number of birth defects allegedly caused by [his father’s workplace] exposure to toxic chemicals at AMI,” a company involved in “semiconductor, flat panel display, and solar photovoltaic products.” The defendant argued it had no duty to the child. The trial court granted summary adjudication on a number of causes of action, and the plaintiffs stipulated to dismissal as to their other claims.

    No duty.The court of appeal in part agreed with the defense. The court “cannot find AMI assumed a duty to safeguard [the child’s] health. To conclude otherwise would mean that every employer that complies with state law requiring the protection of employee health and safety thereby assumes a duty to protect the health and safety of its employees’ family members. . . . [W]e decline to expose employers to such potentially boundless liability.” This holding is not limited to the “after-conceived” plaintiff, and is in line with other recent California decisions, such as Campbell v. Ford Motor Co., 206 Cal. App. 4th 15, 29, (2012) (no “duty to protect family members of workers . . . from secondary exposure to asbestos used during the course of . . . business”). 

    No assumption of duty.Plaintiffs argued that defendant assumed a duty “to protect its employees’ future children” because of practices common to many employers: “by employing industrial hygienists to reduce workplace hazards and nurses to provide unspecified medical services, as well as by sending [the father] for a medical examination where he completed a questionnaire containing questions about his reproductive history,” “such as whether his spouse ever had a miscarriage, a child with a birth defect, or difficulty becoming pregnant.”

    The Elsheref court found this to fall short, and held that to accept the plaintiffs’ argument “would mean that every employer that complies with state law requiring the protection of employee health and safety thereby assumes a duty to protect the health and safety of its employees’ family members. . . . [W]e decline to expose employers to such potentially boundless liability.”

    Still strict products liability. But, said the Elsheref court, a specific duty is not an element of strict products liability. The case was therefore remanded as to that cause of action only. The plaintiffs argued on appeal that the same analysis should apply to their causes of action other than negligence—strict liability/ultrahazardous activity, willful misconduct, misrepresentation, and intentional infliction of emotional distress. The plaintiffs did not, however, advance the “no duty” argument as to those claims at the trial court, so Elsheref ruled that the argument was waived as to those claims. It seems likely that the Elsheref rationale would apply and allow claims on at least some of these theories, such as strict liability/ultrahazardous activity.

    One might question, however, why does strict product liability apply at all? The exposures appear to have been during or as a result of the manufacturing process, not finished products. The duty to provide a safe workplace is different from the duty to market safe products.

    The opinion is not yet final. It may be modified on rehearing or ordered de-published in whole or part. If no rehearing is granted, any petition for California Supreme Court review would be due March 7, 2014.

    Michael J. Pietrykowski and Don Willenburg, Gordon & Rees LLP, San Francisco, CA


    January 29, 2014

    Guilt by Affiliation: Agility Defense v. Department of Defense

    One of the many business strategies to win more government contracts is to “team” with other companies that provide specific specialties or qualify for socio-economic benefits. Sometimes, these partnerships are formal through a “teaming agreement” or “joint venture,” or informal without a written agreement. Under any arrangement, a government contractor is usually concerned about being considered “affiliated” with its partners because of the possible loss of the socio-economic benefits. Now, a recent Eleventh Circuit case, Agility Defense & Government Services v. United States Department of Defense, has taken fear of “affiliation” to a new level. Case No. 13-10757, 2013 WL 6850891 (11th Cir. Dec. 31, 2013).

    A traditional government contractor was concerned about an affiliation determination in regard to socio-economic preferences (such as HUBZone, 8(a), veteran, etc.). Typically, the small business would bid on a set aside project and perform the required scope-of-work portion, while subcontracting the remainder to another company. Prior to bidding, some partners would solidify the arrangement through a teaming agreement or a joint venture. But, any agreement had to be carefully crafted to avoid being considered affiliated by the government, which would result in the small business losing its status for a period of time.

    To determine whether two separate business concerns are effectively affiliated, the government applies a totality-of-the-circumstances test. In a bid protest, the Small Business Administration will evaluate the incorporating documents of both companies and the realistic relations that exist to determine if affiliation exists.

    But as a recent decision from the Eleventh Circuit Court of Appeals shows, government contractors must now be aware of a new pitfall of any affiliation with their partners. In Agility Defense, the Eleventh Circuit held an affiliate can be suspended indefinitelybased solely on its status as an affiliate with a potentially seedy entity. In that case, Agility Defense & Government Services and Agility International, Inc. were suspended by the Defense Logistics Agency (DLA, a combat support agency of the Department of Defense) after its parent company, Public Warehousing Co., K.S.C., was indicted for fraud.

    The Affiliates sued the DLA claiming that an indefinite suspension during legal proceedings was prohibited. Because the DLA had not brought legal proceedings against the affiliates within the timeline required by 48 C.F.R. § 9.407-4, the district court ordered the DLA to terminate their suspensions.

    The Eleventh Circuit reversed after concluding that the term “legal proceedings” means “against the indicted government contractor.” But, more importantly, the appellate court held that to suspend an affiliate, an agency must satisfy only three requirements: (1) It must establish that the affiliate has the power to control the indicted government contractor or be controlled by the indicted government contractor; (2) it must specifically name the affiliate; and (3) it must provide notice of the suspension and notice of an opportunity for the affiliate to respond. Id. (citing 48 C.F.R. §§ 9.403, 9.407-1(c)). Providing the affiliate with notice of and an opportunity to respond to its suspension in writing are “are constitutionally adequate procedures” to negate a due-process violation from the affiliate’s indefinite suspension. “Together,” the court stated, “the suspensions of an indicted government contractor and its affiliate constitute one ‘suspension decision’ because an affiliate is ‘include[d]] in the suspension of the indicted government contractor.” Id. at *4 (citing 48 C.F.R. §9.407-1(c)). What’s more, “no showing of wrongdoing by the affiliate is required for suspension or disbarment.”

    The Eleventh Circuit’s decision carries tremendous implications for affiliates of government contractors. Not only might such an affiliate be indefinitely suspended based on actions of the contractor, but the affiliate might be debarred as a result of a contractor’s conviction. Now, the risk of being debarred should cause all government contractors to review their current partnership arrangement and perform solid due diligence before entering into future “teaming” arrangements.

    Partnering with other companies provides a competitive advantage on government projects. But the decision should be made after careful consideration, so as to avoid the unintended consequence of becoming a debarred government contractor. Consulting with knowledgeable legal counsel who understands the regulatory environment can also help a company get an edge in government contracting—and possibly avoid guilt by affiliation.

    Brett W. Johnson and Matthew Schoonover, Snell & Wilmer, L.L.P, Phoenix, AZ


    January 27, 2014

    TX Supreme Court Defines, Limits Contractual-Liability Exclusion

    The Texas Supreme Court’s much-anticipated decision in Ewing Construction Co. v. Amerisure Insurance Co. is significant to contractors and insurance-liability carriers alike. __ S.W.3d __ (Tex. Jan. 17, 2014), 2014 WL 185035. At issue in Ewing was whether a contractor, who agrees to perform in a “good and workmanlike manner,” assumes liability for damages arising out of defective work, such that the contractual-liability exclusion is triggered.

    The contractual-liability exclusion in Ewing, common in many commercial general liability policies, (and substantively identical to similar provisions) states that:

    This insurance does not apply to:

    . . .

    b. Contractual Liability

    “Bodily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreements. This exclusion does not apply to liability for damages:

    (1) That the insured would have in the absence of the contract or agreement; or

    (2) Assumed in an contract or agreement that is an “insured contract” . . .

    In Ewing, the Texas Supreme Court held that the contractor’s agreement to perform its construction services in a good and workmanlike manner was not an assumption of liability beyond its obligations under general law, and thus did not trigger the contractual-liability exclusion. The court compared the facts of Ewing to the court’s prior decision in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, where the court did find that the contractual-liability exclusion was triggered because the contractor assumed liability outside the obligations of general law by contractually agreeing to repair or pay for damages to third-party property. 327 S.W.3d 118, 127 (Tex. 2010).

    Based upon the court’s decision in Gilbert, contractors and insurance carriers around the country were especially interested in how the court would address the Ewing case. Contractors feared that a broad interpretation of the contractual-liability exclusion would be detrimental. Therefore, contractors were relieved by the Ewing decision, which limited Gilbert and narrowed its application. In fact, the court noted that Gilbert involved “unusual circumstances.”

    The court held that “assumption of liability” requires a finding that the insured assumed a liability for damages that exceeded the liability it would have under general law. In Ewing, the court did not find an assumption of liability because: (1) The insurer’s claim that the contractor failed to perform in a good and workmanlike manner was substantively the same as its claim that the contractor negligently performed; and (2) the contractor already had a common-law duty to perform its obligations with skill and care. As such, the court ruled that a contractor’s obligation to perform in a good and workmanlike manner does not expand its duty to exercise ordinary care, and therefore, the contractor does not assume liability that would trigger the contractual-liability exclusion.

    This ruling is obviously important to contractors who would have been faced with the potential for uninsured liability from their contract work. But also significant is the real potential that the alternative decision would have left consumers without an avenue for recovery from contractor’s negligence and misconduct.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    January 24, 2014

    SCOTUS: No General Jurisdiction Based on Agency Relationships

    The U.S. Supreme Court’s January 14, 2014, decision in Daimler AG v. Barbara Bauman, clarifies and reminds us that the general-jurisdiction standard (originally set forth in the landmark International Shoe Co. v. Washington, 362 U.S. 310 (1945)) requires a showing of connections and affiliations so continuous and substantial, such that the company is “at home,” to warrant suit against the company for conduct arising out of entirely distinct activities. 571 U.S. ___ (2014).

    At issue in this case was whether a group of Argentine plaintiffs could sue DaimlerChrysler in California under general jurisdiction, over Daimler’s Argentine subsidiary’s alleged union-busting activities and human-rights violations occurring in Argentina from 1976 to 1983 (during Argentina’s “Dirty War”).

    The Supreme Court overturned the Ninth Circuit Court of Appeals’ 2011 ruling that Daimler could be sued in California based on general jurisdiction. The Ninth Circuit relied on the agency test, finding that Daimler’s subsidiary, Mercedes-Benz USA LLC, engaged in activities that Daimler would have to undertake if the subsidiary did not exist, and that Daimler had control over the subsidiary’s daily operations. Accordingly, the Ninth Circuit found that general jurisdiction applied.

    The Supreme Court disagreed with using the agency test to determine general jurisdiction. The Court noted that the standard for general jurisdiction is very high, has not been stretched beyond its original limits, and has been found applicable in very few cases. The Court, reiterating prior rulings, held that the all-purpose forums for general jurisdiction are typically limited to a company’s place of incorporation or principal place of business. The Court reminded the parties that general jurisdiction must be limited to circumstances where the company’s contacts and affiliations are continuous and substantial, and only available if the company’s “affiliations with the State are so ‘continuous and systematic’ as to render [it] essentially at home in the forum state.” Daimler AG, 571 U.S. ___ (2014).

    This decision establishes that a company’s substantial contacts in a forum and control over day-to-day operations of a subsidiary in that forum will not be sufficient to create general jurisdiction. The Court cautioned that failure to find that a company really is “at home” in the jurisdiction, relying instead on less stringent tests, such as an agency relationship, exceeds the bounds of general jurisdiction and creates the potential for improper global reach.

    This ruling helps companies better anticipate the forums in which they likely can and cannot expect to be sued. Moreover, companies should continue to observe corporate formalities and corporate independence. Additionally, companies should revisit their written agreements with subsidiaries to ensure the appropriate corporate separation, which will limit the possibility of finding an agency or alter-ego relationship, and minimize any basis for plaintiffs to assert general jurisdiction based on such relationships.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    January 17, 2014

    Maintaining Privilege While Investigating a Sexual-Harassment Claim

    Most companies and their counsel know that an employee’s sexual-harassment allegations must be investigated, and that a reasonable investigation can be a defense for the employer. Importantly, the legal advice related to the investigation is generally protected. However, employers must remember that the attorney-client privilege may be waived if counsel becomes too involved in the investigation.

    Recently, in Koss v. Palmer Water Department, the U.S. District Court for the District of Massachusetts, relying on opinions from other district courts, held that the attorney-client and work-product privileges were waived in an employer’s investigation of sexual-harassment allegations because the employer’s counsel “although not personally conducting interviews, not only directed and collaborated with [the investigator], but exercised significant control and influence over him throughout the investigation.” Koss v. Palmer Water Dep’t,Civ. A. 12-30170-MAP, 2013 WL 5564474, at *2 (D. Mass. Oct. 7, 2013.) The court found that all documents, interviews, notes, and memos prepared as part of the investigation, plus direct communications between counsel and the investigator must be disclosed. The court reasoned that counsel was “part and parcel of the investigation which goes to the heart of Defendants’ affirmative defense.”

    While an important cautionary reminder, this ruling is not without limitation. The court noted an opinion from another district where waiver was not found because counsel communicated only with his client, the employer, and not the investigator; did not conduct interviews; did not make disciplinary decisions; and did not “otherwise participate in the investigation itself.” McKenna v. Nestle Purina PetCare Co., No. 2:05–CV–0976, 2007 WL 433291, at *4 (S. D. Ohio Feb. 5, 2007.) Additionally, the court noted that counsel’s direct communication with the investigator does not constitute an automatic waiver, distinguishing the circumstance where counsel is not injecting himself or herself into the investigation, but merely requesting status updates from the investigator. See Waugh v. Pathmark Stores, Inc., 191 F.R.D. 427 (D.N.J. 2000.)

    While this issue is certainly not clear-cut, and waiver of the attorney-client privilege must continue to be considered on a case-by-case basis, Koss offers important reminders for employers and their counsel, as they conduct sexual-harassment investigations. First, counsel’s direct communication with the investigator should be limited and reflective of the attorney’s role as a legal advisor only. Second, the privilege is likely waived where counsel actually conducts interviews, or exercises significant control and influence over the investigator. Third, counsel should generally distance himself or herself from the investigator and allow the investigator to independently complete the investigation and report the findings. Fourth, if the investigator has any questions or concerns, he or she should be directed to the appropriate employee contact, not employer’s counsel. If necessary, that employee can then take those questions to counsel, ensuring the attorney-client privileged is maintained.

    Robin E. Perkins, Snell & Wilmer, LLP, Las Vegas, NV


    December 10, 2013

    Denial of Health Benefits For Same-Sex Partner Violates Constitution

    In In Re Fonberg, EDR No. 13-002 (9th Cir. Nov. 25, 2013), the Executive Committee of the Ninth Circuit Judicial Council held the denial of health benefits for an employee’s same-sex domestic partner violated the District of Oregon’s Employment Dispute Resolution Plan and was a deprivation of due process and equal protection because the employee and her partner were treated differently from similarly situated couples on the basis of their sex or sexual orientation.

    Margaret Fonberg was a law clerk for the Honorable Thomas M. Coffin, U.S. magistrate judge for the District Court of Oregon. Fonberg and her same-sex partner were registered under the Oregon Family Fairness Act as domestic partners. The act grants domestic partnership rights “on equivalent terms, substantive and procedural,” to marriage. Or. Rev. Stat. § 106.340(1).

    Fonberg requested her partner be enrolled in her employer-offered health plan. However, the U.S. Office of Personnel Management (OPM) denied the request. Fonberg responded to the denial by filing a complaint under the district’s Employment Dispute Resolution (EDR) Plan, which alleged discrimination on the basis of sex.

    Initially, the chief judge of the district issued an order holding the OPM’s denial of health benefits to Fonberg’s partner violated the EDR Plan and ordered the district to reimburse Fonberg for the cost of providing her partner with health-insurance coverage similar to the coverage offered to other judicial employees. However, the chief judge then issued an amended order rescinding the original order on the basis that there currently was no legal method of reimbursement available and the law gave Fonberg no remedy.

    The Executive Committee of the Ninth Circuit Judicial Council overturned the chief judge’s amended order and ordered the chief judge to reinstate the original order granting relief. The committee held that the OPM’s denial of health benefits for Fonberg’s partner violated the district’s EDR Plan and constituted a deprivation of due process and equal protection because Fonberg and her partner were treated differently from similar couples owing to their sex or sexual orientation. The couple was treated differently from opposite-sex couples, who are permitted to marry and gain spousal benefits under federal law. The couple was also treated unequally in comparison with same-sex couples in other states in the Ninth Circuit, who can marry and obtain benefits pursuant to United States v. Windsor, 133 S. Ct. 2675 (2013) (holding unconstitutional the federal Defense of Marriage Act, which defined marriage as being between a man and a woman). Thus, the committee found these forms of sexual discrimination were prohibited under EDR Plan (which forbids discrimination based on sex) and constituted a violation of due process and equal protection under the Constitution.

    Franz Hardy and Seth J. Manfredi, Gordon & Rees LLP


    October 22, 2013

    Is Indefinite Leave a Reasonable Accommodation in New York City?

    There are few certainties in employment law, but there are several concepts on which most employers have been able to rely. Until recently, one of those concepts had been that “indefinite” leave is automatically excluded from the definition of a “reasonable accommodation.” However, the New York State Court of Appeals recently called that premise into question with respect to the New York City Human Rights Law (CHRL).

    In Romanello v. Intesa Sanpaolo, S.P.A., No. 152, the plaintiff was diagnosed with a series of disorders rendering him unable to work. He was out of work for five months, during which time the defendant paid his full salary. His employer sent him a letter asking whether he was planning to return to work or was abandoning his position. In response, the plaintiff sent a letter stating that he has been prevented from returning to work due to his illness and has never indicated any intent to abandon his position. However, he stated he had an “uncertain prognosis and a return to work date that is indeterminate at this time.”

    After he was terminated, the plaintiff brought a lawsuit, including claims for disability discrimination under the New York State Human Rights Law (SHRL) and the CHRL. The lower court dismissed both causes of action, and the appellate court affirmed. The court of appeals, however, reversed the dismissal as to the CHRL claim only.

    The court began its analysis with an examination of the SHRL and followed the expected course of reasoning. It reaffirmed that indefinite leave is not considered a reasonable accommodation under the SHRL and concluded that the plaintiff’s own letter demonstrated that was the exact accommodation he was seeking.

    The court departed from the expected path when turning to the CHRL. It started with the general proposition that the CHRL is broader than its state and federal counterparts and must be construed in favor of discrimination plaintiffs as long as such a construction is reasonably possible. It then looked at the difference in the statutory language between the SHRL and CHRL.

    The SHRL, it explained, contains the requirement of a reasonable accommodation within the definition of the word “disability,” which means that part of a plaintiff’s initial burden of proof is to demonstrate the existence of a reasonable accommodation that enables him or her to perform the job in a reasonable manner. This definition places the initial burden of proof on the employee. The CHRL, on the other hand, does not incorporate the necessity of a reasonable accommodation into that definition; rather, it “defines ‘disability’ solely in terms of impairments.” The concept of a reasonable accommodation only arises when talking about an employer’s obligations. Thus, the court reasoned, it is the employer’s burden to prove that a proposed accommodation is an undue hardship, and the employer has the burden of proof—even at the pleading stage—to show that an employee could not satisfy the essential requirements of the job with reasonable accommodation.

    Applying this construction, the court concluded that the plaintiff met the pleading requirements of demonstrating he had a disability under the CHRL, but the defendant did not meet its obligation to plead and prove that the plaintiff could not perform his essential job functions with an accommodation. The court reversed the dismissal of the CHRL claim and remanded the case to the lower court.

    The CHRL has been a thorn in employers’ sides since its amendment and expansion in 2005, and the Romanello case proves this yet again. Given the reversal of the burden of proof, it has become extremely difficult to obtain an early dismissal of a disability-discrimination claim where the requested accommodation is indefinite leave. It is unlikely a plaintiff will plead facts in a complaint that will enable a company to satisfy its burden of proof at the pleading stage. Thus, companies will likely be forced to wait until summary judgment before seeking dismissal, and will have to endure full-blown, expensive discovery first. 

    Moreover, because this decision turns the issue of indefinite leave on its head, it is unclear at this time what proof courts will expect to see that demonstrates it is an undue hardship for an employer to leave a job open indefinitely. The difficulty of taking such a wait-and-see approach is often less tangible than operational, with the uncertainty factor creating problems within the command structure. However, given the breadth with which the CHRL is interpreted, that may or may not be enough to satisfy the courts as an undue hardship.

    Diane Krebs, Gordon & Rees LLP, New York


    October 22, 2013

    In Antitrust Law, the Devil Is in the Details

    Apple, Inc. is safe from antitrust scrutiny—at least for the time being—as a result of the U.S. Court of Appeals for the Ninth Circuit’s recent ruling in Somers v. Apple, Inc.

    In Somers, the plaintiff sued Apple alleging state and federal antitrust claims. The plaintiff sought to represent a class of indirect purchasers of the iPod device as well as direct purchasers of iTunes music. She alleged that Apple encoded its music and iPod devices with software making its music and devices incompatible with non-Apple products and services. The plaintiff alleged that Apple’s behavior excluded competition within the relevant product and music markets. Specifically, Apple allegedly created and implemented periodic software updates that prevented the use of Apple music and products with non-Apple products and services. The plaintiff alleged that this anticompetitive behavior resulted in Apple obtaining an unlawful monopoly over the portable-digital-media-player and music-download markets.

    The district court denied the certification of class of the indirect purchasers under Federal Rule of Civil Procedure 23(b)(3) based on the fact that the plaintiff abandoned her underlying individual claim. Specifically, she failed to renew her individual claim based on an iPod overcharge theory in her amended complaint but instead asserted a new theory based upon diminution of iPod value. Because the plaintiff abandoned the individual claim for which she sought certification, on Sept. 3 the Ninth Circuit ruled that she waived her right to review the issue of class certification on appeal.

    Moreover, the district court dismissed the plaintiff’s antitrust claims with prejudice under Federal Rule of Civil Procedure 12(b)(6) as unsupportable based upon the pleadings. The Ninth Circuit agreed, finding that the plaintiff failed to allege sufficient facts for an antitrust violation because Apple used its software encoding from the beginning, thus, the software updates only “served to maintain the status quo” rather than alter it. 

    The Ninth Circuit found that the plaintiff’s monopolization claim, based on a theory of diminution in value of the iPod, was barred by the U.S. Supreme Court’s ruling in Illinois Brick Co. v. Illinois, 431 U.S. 720 (U.S. 1977) because the plaintiff was an indirect purchaser of the iPod and lacked standing. The Ninth Circuit found that the plaintiff did not state a claim for monopolization based on overcharging of music because Apple has charged the same price whether or not a competitor is in the market.

    Finally, the Ninth Circuit held that the plaintiff failed to state a claim for injunctive relief barring Apple’s use of encoded software because an “inability to freely play . . . encoded music is not comparable to the loss of free choice between market alternatives.” Apple’s actions did not result in antitrust injury. These details, apparently overlooked by the plaintiff in the pre-filing investigation or during the pleading stage of her case, ultimately doomed her case and spared Apple from antitrust scrutiny.

    Justin Aida, Gordon & Rees LLP, Orange County, CA


    September 30, 2013

    Participation by In-House Counsel Helps Meet Pro Bono Needs

    Many jurisdictions encourage, and some require, attorneys to commit to community service in some capacity. Pro bono representation is an opportune way for attorneys to showcase their trade and connect with their communities. In-house counsel may be an untapped resource to alleviate demand for pro bono representation. Recent developments indicate that in-house counsel are willing and committed to providing legal services to those in need.

    The chief judge of the New York state court system announced a new initiative to involve in-house counsel in providing pro bono legal services. The New York judiciary implemented an Advisory Committee on Pro Bono Service by In-House Counsel to develop structure and incentive for in-house counsel’s participation in helping out vulnerable New Yorkers. Involving in-house counsel in pro bono efforts will require changes to the court’s rules. One of the rules in review requires in-house counsel to be supervised by locally licensed attorneys or by an approved organization. The court’s initiative will determine whether this supervision requirement is unnecessary, as in-house counsel are already required to provide competent representation under New York state rules. The advisory committee includes counsel from various corporate legal departments, including PepsiCo Inc., Xerox, and Pfizer, Inc.

    The U.S. District Court for the District of Colorado has developed a pilot program for a Civil Pro Bono Panel, which matches attorneys with individuals in need of pro bono services. The Colorado chapter of the Association of Corporate Counsel joined the panel and is working with the panel’s standing committee to determine appropriate services. The Colorado chapter of the Association of Corporate Counsel also recently staffed a state-based effort, Project Homeless Connect, which evaluated legal needs of low- and no-income persons and helped them find appropriate legal referrals.

    Nationally, the Association of Corporate Counsel joined with the Pro Bono Institute to form an organization dedicated to corporate pro bono efforts. In 2006, the Corporate Pro Bono group launched the CPBO Challenge, which strives to add corporate legal departments making a voluntary statement of commitment to pro bono service to its growing list of dedicated companies. Each year, the Association of Corporate Counsel recognizes an outstanding corporate legal department or individual counsel with the coveted Corporate Pro Bono Award. Recent recipients include Dell Inc. and Verizon Communications.

    Local chapters of the Association of Corporate Counsel provide information and opportunities for in-house counsel to get involved with their communities’ pro bono initiatives. As stated by the Association of Corporate Counsel, “[t]he strengths and talents of the in-house legal community are in high demand. Pro bono practice opportunities help to enrich communities while providing personal satisfaction to each lawyer who engages, benefiting internal corporate culture and legal department morale.”

    Nicole Salamander, Gordon & Rees, LLP, Denver, CO


    September 26, 2013

    Supreme Court Upholds Contractual Waiver of Class Arbitration

    On June 20, 2013, the U.S. Supreme Court, in a five-to-three decision, held that the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq. does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the cost of individually arbitrating a federal statutory claim exceeds the potential recovery. The Court’s ruling in American Express Co. v. Italian Colors Restaurant, 570 U.S. __ (2013) affirms that contracting parties may bargain away their ability to pursue a class action even if it would be economically infeasible for individuals to pursue arbitration on their own.

    The respondents are a purported class of merchants who entered into agreements with American Express (and its wholly owned subsidiary) to accept American Express cards for payment. The merchants’ agreement with American Express contained a clause that required all disputes between the parties relating to the agreement be resolved by arbitration. The agreement also provides that “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.” In re American Express Merchants’ Litig., 667 F.3d 204, 209 (2d Cir. 2012). Despite the contractual waiver in their agreements, the merchants filed a putative class action in federal court against American Express alleging, among other things, that American Express “used its monopoly power in the market for charge cards to force merchants to accept credit cards at rates approximately 30% higher than the fees for competing credit,” in violation of the Sherman Act. The petitioners moved to compel individual arbitration under the FAA and, in response, the merchants argued that the contractual waiver of class actions was unenforceable because the cost of individually arbitrating the claim exceeded any potential recovery. The district court granted the motion to compel arbitration under the FAA and dismissed the case.

    The Court of Appeals for the Second Circuit reversed, finding the waiver unenforceable because the respondents had established that “they would incur prohibitive costs if compelled to arbitrat[e] under the class action waiver.” In re American Express Merchants’ Litig., 554 F.3d 300, 315–16 (2d Cir. 2009). The Supreme Court granted certiorari and remanded for further consideration in light of its decision in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), which held that a party may not be compelled to submit to class arbitration absent an agreement to do so. See Am. Express Co. v. Italian Colors Rest., 559 U.S. 1103 (2010). On remand, the Second Circuit again found the class action waiver unenforceable. The Second Circuit then sua sponte considered its decision in light of the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 563 U.S. ___ (2011), which held that the FAA preempted a state law barring enforcement of a class-arbitration waiver. The Second Circuit found AT&T inapplicable, and denied a rehearing en banc. The Supreme Court then grantedcertiorari again and reversed.

    In an opinion delivered by Justice Scalia, and joined by Chief Justice Roberts and Justices Alito, Kennedy, and Thomas, the Supreme Court emphasized that arbitration is a “matter of contract” and that courts must “rigorously enforce” an arbitration agreement unless it has been “overridden by a contrary congressional command.” In the instant case, the Court found no contrary congressional command requiring it to reject the waiver of class arbitration and rejected the respondents’ argument that individual arbitration would contravene the policies of the antitrust laws. In so holding, the Court found that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim” and do not “evinc[e] an intention to preclude a waiver of class action procedure.” The Court further found that congressional approval of Rule 23 of the Federal Rules of Civil Procedure, which established class actions, did not establish an entitlement to class proceedings because any such entitlement would be an “abridgment” of a “substantive right” forbidden by those same rules.

    The respondents further argued that enforcing the waiver would bar “effective vindication” of their claims because they had no economic incentive to pursue their claims individually in arbitration. The Court rejected this argument, reasoning that the “effective vindication” exception, which was designed to prevent “prospective waiver of a party’s right to pursue statutory remedies,” was inapplicable because “the fact that it [was] not worth the expense in proving a statutory remedy d[id] not constitute the elimination of the right to pursue that remedy.” In the instant case, the class-action waiver merely limited the arbitration to the two contracting parties and did not, in any way, limit their ability to pursue those claims individually. In sum, the Supreme Court found that the individual suit, which “was considered adequate to assure ‘effective vindication’ of a federal right before adoption of class action procedures,” did not suddenly become “ineffective vindication” merely because the class action procedures were adopted.

    David R. Singh and Luna Ngan, Weil, Gotshal & Manges, New York, New York


    September 16, 2013

    Legal Costs on the Rise at 50 Percent of Large Companies

    A recent survey from AlixPartners sheds interesting light on the legal costs of United States-based companies with revenues above $250 million and the methods being employed by those companies to address current and future legal costs. On the 117 general counsel surveyed, 50 percent reported that their litigation costs had risen in the past year. Of those surveyed, 10 percent reported that their legal department had faced “bet-the-company” litigation in the last year. Respondents also reported a surge in the use of outside counsel with 25 percent noting that their company’s use of non-corporate counsel had increased.

    In an effort to reduce increasing legal costs, the companies surveyed have employed a wide variety of measures. Twenty-three percent of the respondents reported that the size of their legal department had increased in the last year and 52 percent noted that retaining work in-house is important including the production and exchange of documents during the discovery process. The majority of respondents identified alternative dispute resolution and alternative fee arrangements as important cost-control measures. Notably, the vast majority of respondents reported an increase in the use of internal programs and controls designed to prevent litigation. This includes the review of existing compliance programs and retention policies as well as the development of new policies designed to mitigate risk.

    In short, the survey reveals that large companies continue to face increasing litigation costs and rely on outside firms to carry the load associated with active litigation. Nevertheless, many companies are expanding the scope of their legal departments in an effort to reduce costs by developing in-house groups for tasks such as document production. Beyond active litigation, companies are working to actively manage risk through policy review and revision. These changes will continue to transform the relationship between legal departments and their outside counsel.

    Greg Hearing, Gordon & Rees LLP, Denver, CO


    August 30, 2013

    PCAOB May Soon Require Engagement Partners to Be Named in Audit Report

    Among the many changes designed to enhance audit accountability and transparency, the Public Company Accounting Oversight Board (PCAOB) had contemplated requiring an audit engagement partner to sign his or her name to the audit report. However, concerns were raised that a signature requirement would minimize the firm’s accountability and role in conducting the audit. As a result, in 2011, the PCAOB proposed instead that registered accounting firms be required to disclose in the audit report the name of the engagement partner responsible for the most recent period's audit and the names of other accounting firms and other persons not employed by the auditor that took part in the audit (including the internal control audit). The PCAOB is now planning to move forward on the proposal in September, although it is not known whether the PCAOB will issue a final standard or revise its current proposal.

    Investors had originally advocated that engagement partners be required to sign the audit report—similar to the signing of certifications by CEOs and CFOs and common practice in the United Kingdom—to reinforce their “ownership” of audit reports. Given the demise of the signature requirement, investors are now even more vocal in wanting the engagement partner’s name included in the report. They point to the allegations of insider trading by one Big Four engagement partner, as well as a recent study showing that the United Kingdom’s signature requirement led to improvement in key indicators of audit quality.

    Needless to say, most audit firms are opposed to the proposal. Some audit firms are concerned that the engagement partners named might be viewed to have individually prepared or certified part of the registration statement and could be required to separately consent, resulting in potentially increased liability for engagement partners. Others argue that the proposal would be ineffective. One of the Big Four took a different approach, supporting the proposal if the PCAOB could work with the Securities and Exchange Commission to address the liability issue.

    Ryan Blair, Cooley LLP, San Diego, CA


    July 3, 2013

    SEC Announces New Enforcement Initiatives

    On July 2, 2013, the Securities and Exchange Commission (SEC) issued a press release announcing three new initiatives of its Division of Enforcement:

    1. The Financial Reporting and Audit Task Force. This task force will identify securities-law violations relating to the preparation of financial statements, issuer reporting, and disclosure and audit failures. It will focus on identifying and exploring areas susceptible to fraudulent financial reporting, including ongoing review of financial statement restatements and revisions, analysis of performance trends by industry, and use of technology-based tools such as the Accounting Quality Model.
    2. The Microcap Fraud Task Force. This task force will investigate fraud in the issuance, marketing, and trading of microcap securities. It will develop and implement long-term strategies for detecting and combating fraud in the microcap market, “especially by targeting ‘gatekeepers,’ such as attorneys, auditors, broker-dealers, and transfer agents, and other significant participants, such as stock promoters and purveyors of shell companies.”
    3. The Center for Risk and Quantitative Analytics. This “center” will identify risks and threats that could harm investors, and assist staff nationwide in conducting risk-based investigations and developing methods of monitoring for signs of possible wrongdoing.

    According to Andrew J. Ceresney, co-director of the Division of Enforcement,

    [t]hese initiatives build on the Division's unmatched record of achievement and signal our increasingly proactive approach to identifying fraud. By directing resources, skill, and experience to high-impact areas, we will increase the potential for uncovering financial statement and microcap fraud early and bring more cases aimed at deterring these types of unlawful activity.

    Tamara Seelman, Gordon & Rees LLP, Denver, CO


    July 2, 2013

    Oxford Health Plans v. Sutter: Arbitrator Did Not Exceed Powers

    On June 10, 2013, the U.S. Supreme Court, in a unanimous decision, held that an arbitrator did not “exceed his powers” under section 10(a)(4) of the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., when he found that class arbitration was authorized by the parties’ contract based on an arbitration provision, although that provision did not specifically address class actions. The Court’s ruling in Oxford Health Plans LLC v. John Ivan Sutter, 569 U.S. __ (2013) restricts a court’s ability to correct an arbitrator’s erroneous determination that the parties intended to authorize class-wide arbitration under section 10(a)(4) of the FAA as long as the arbitrator was “arguably construing” the contract.

    Respondent John Sutter, a physician, entered into a fee-for-service contract with petitioner Oxford Health Plans LLC, a health-insurance company. Under the contract, Sutter agreed to provide medical care to members of Oxford’s network, and Oxford agreed to pay for those services at specified rates. Several years later, Sutter filed a complaint against Oxford in New Jersey Superior Court on behalf of himself and a proposed class of New Jersey physicians, alleging that Oxford failed to make full and prompt payment to physicians who had agreed to provide medical care to members of Oxford’s network.

    Oxford moved to compel arbitration of Sutter’s claims, relying on the following provision in the contract:

    No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the rules of American Arbitration Association with one arbitrator.

    The New Jersey Superior Court granted Oxford’s motion and the parties agreed to allow the arbitrator to decide whether the contract authorized class arbitration. The arbitrator, interpreting the contract, determined that it did. The arbitrator focused on the text of the arbitration clause quoted above and reasoned that it sent to arbitration “the same universal class of disputes” that it barred the parties from bringing as “civil actions” and that a class action “is plainly one of the possible forms of civil action that could be brought in a court” absent the agreement. Oxford subsequently moved to vacate the arbitrator’s decision on the ground that the arbitrator had “exceeded [his] powers” under section 10(a)(4) of the FAA. The district court denied the motion and the Court of Appeals for the Third Circuit affirmed.

    While the arbitration proceeded, the U.S. Supreme Court held in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010) that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.” Oxford thus promptly asked the arbitrator to reconsider his decision on class arbitration in light of Stolt-Nielsen. The arbitrator issued a new opinion holding that Stolt-Nielsen had no impact on his interpretation because, unlike in Stolt-Nielsen, the parties’ agreement authorized class arbitration.

    Oxford then returned to federal court, filing another motion to vacate the arbitrator’s decision under section 10(a)(4). Once again, the district court denied the motion, and the Third Circuit affirmed, emphasizing the limited scope of judicial review that section 10(a)(4) allows and that, so long as an arbitrator “makes a good faith attempt” to interpret a contract, “even serious errors of law or fact will not subject his award to vacatur.” 675 F.3d 215, 220 (2012). The U.S. Supreme Court granted certiorari, 568 U.S. __ (2012) to address a circuit split on whether section 10(a)(4) allows a court to vacate an arbitral award in similar circumstances.

    The Supreme Court held that section 10(a)(4) does not authorize vacatur of an arbitrator’s decision under these circumstances and affirmed the Third Circuit’s decision. The Supreme Court first noted that, “[b]ecause the parties ‘bargained for the arbitrator’s construction of their agreement,’ an arbitral decision ‘even arguably construing or applying the contract’ must stand, regardless of a court’s view of its (de)merits.” Oxford Health, 569 U.S. at 4 (citing Eastern Associated Coal Corp. v. Mine Workers, 531 U.S. 57, 62 (2000)). The Supreme Court then turned to the facts of the case before it and found that the arbitrator did consider the parties’ contract in deciding whether it reflected an agreement to permit class proceeding and concluded that this alone was sufficient to show that the arbitrator did not “exceed[] [his] powers” under section 10(a)(4) of the FAA.

    In so holding, the Supreme Court rejected Oxford’s reliance on Stolt-Nielsen and distinguished Stolt-Nielsen on the facts. In particular, the Supreme Court emphasized that in Stolt-Nielsen the parties stipulated that they had never reached an agreement on class arbitration but the arbitrators nevertheless ordered class arbitration and that, by contrast, the arbitrator in the instant case “did construe the contract . . . , and did find an agreement to permit class arbitration.” Oxford Health, 569 U.S. at 7. The Supreme Court held that “§10(a)(4) permits courts to vacate an arbitral decision only when the arbitrator strayed from his delegated task of interpreting a contract, not when he performed that task poorly.” The Supreme Court concluded that, because Oxford agreed with Sutter that an arbitrator should determine what their contract meant, and the arbitrator did what the parties requested, the arbitrator did not “exceed his powers” under section 10(a)(4) of the FAA.

    David R. Singh and Luna Ngan, Weil, Gotshal & Manges, New York, NY


    June 28, 2013

    Court of Chancery Holds Forum-Selection Bylaws Facially Valid

    On June 25, 2013, in Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corp., et al., Chancellor Leo E. Strine Jr. of the Delaware Court of Chancery issued an opinion rejecting a facial challenge to board-adopted forum-selection bylaws. The Chevron and FedEx boards had adopted bylaws providing that litigation involving the companies’ internal affairs should be conducted in Delaware, the state of incorporation. The purpose of the forum-selection bylaws was to avoid “multiforum litigation.” The plaintiffs, stockholders of Chevron and FedEx, filed suit arguing that the bylaws were statutorily and contractually invalid. The court disagreed.

    First, the plaintiffs challenged the forum-selection bylaws as statutorily invalid because they exceeded the boards’ authority under Delaware General Corporation Law (DGCL). Under 8 Del. C. § 109(a), a corporation’s certificate of incorporation may confer the power to “adopt, amend or repeal bylaws upon the directors.” Further, 8 Del. C. § 109(b) states that the bylaws of a corporation, “may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its right or powers or the rights or powers of its stockholders, directors, officers or employees.” The court held that forum-selection bylaws covering litigation of the “internal affairs” of a corporation “relates quintessentially to ‘the corporation’s business, the conduct of its affairs, and the rights of its stockholders [qua stockholders].’” Thus, a board-approved forum-selection clause is permitted by 8 Del. C. § 109(b), and thus, is statutorily valid.

    Second, the court upheld the forum-selection bylaws as contractually valid. The plaintiffs argued that because stockholders do not approve the forum-selection clause in advance, it is contractually invalid. However, the court recognized that the bylaws of a Delaware corporation, such as Chevron and FedEx, are part of a broader contract between the corporation and its stockholders that incorporates the DGCL. This contract is flexible and subject to change. “In other words, the Chevron and FedEx stockholders have assented to a contractual framework established by the DGCL and the certificates of incorporation that explicitly recognizes that stockholders will be bound by bylaws adopted unilaterally by their boards.” Moreover, stockholders can protect themselves against unwanted forum-selection clauses by repealing such bylaws and by refusing to elect directors who act against the wishes of the stockholders.

    The court also noted that board-approved forum-selection clauses are still subject to scrutiny under the U.S. Supreme Court case of The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). Under Bremen, forum-selection clauses, such as the ones at issue in this case, are presumptively enforceable, but may be challenged if the clause happens to be unreasonable in a specific real-world situation. Here, the plaintiffs attempted to raise several hypothetical situations in which they claimed the forum-selection clauses were unworkable. The court, however, refused to entertain the plaintiffs’ hypotheticals because “the plaintiffs [may not] seek to undermine Bremen by using a facial challenge as a way to get this court to address conjured-up scenarios. Under our law, our courts do not render advisory opinions about hypothetical situations that may not occur.” Instead, the court suggested that an aggrieved plaintiff may sue in his or her preferred forum and respond to an ensuing motion to dismiss for improper venue by arguing that enforcing the forum-selection clause in that situation would be unreasonable.

    In sum, the court concluded that board-approved forum-selection clauses are not facially invalid, but that if plaintiffs wish to challenge a forum-selection clause or bylaw generally, there are mechanisms to do so.


    June 19, 2013

    SEC to Limit Ability to Settle Without Admission of Wrongdoing

    At a recent Wall Street Journal CFO Network conference [login required], U.S. Securities and Exchange Commission (SEC) Chair Mary Jo White said that, while the ability to settle cases without insisting on an admission of guilt remains an important tool, the SEC plans to “require certain defendants to admit to wrongdoing as a condition of settling securities-fraud charges.” White said that the new policy “would apply to only a select number of cases, and suggested they would have to involve allegations of egregious fraud or significant harm to investors.” The staff will be developing guidance regarding the types of cases that would require admissions of guilt. The SEC has already changed its long-standing practice by precluding defendants from denying guilt when, at the same time, they have admitted to, or have been convicted of, criminal violations in parallel cases brought by the Justice Department.

    The SEC’s former long-standing position that allowed defendants in settlements to neither admit nor deny wrongdoing has come under recent scrutiny. For example, in considering the settlement in the Citigroup case in the S.D.N.Y. a few years back, U.S. District Judge Jed S. Rakoff issued a blistering criticism of the practice. In addition, the House Financial Services Committee had indicated at one time that it was planning to hold hearings to examine the practice. Other federal judges have questioned the practice as “counterintuitive.”

    SEC officials’ rationale for the SEC’s historic position has been that “pursuing litigation solely to obtain an admission of guilt isn't likely to result in greater penalties, noting that the agency's enforcement attorneys only recommend the commission settle a case when they believe they have negotiated for roughly the same amount in penalties that they could reasonably expect to win at trial. Officials also have cited the agency's limited resources.”

    Ryan Blair, Cooley LLP, San Diego, CA


    June 5, 2013

    The Effect of Alternative Work Structures on Diversity and Inclusion

    Yahoo’s chief executive officer made headlines with her termination of the company’s work-from-home policy. Critics and fans alike have commented about this move in Yahoo’s corporate culture. An opinion piece published by CNN online suggests that this decision could have a negative impact on diversity in the workplace. The author opined that Yahoo and other companies’ work-from-home policies actually improve productivity, diversity, and morale: “Yahoo's new policy may drive workers with family responsibilities, disproportionately women, to quit, leaving it more male, young and childless. With less diversity, innovation will suffer.”

    An opinion piece published by Forbes online provides the opposite perspective. This author suggested that exposure and interaction with co-workers in the office can enhance the sharing of information and ultimately, productivity. The author believes that Yahoo’s new policy may create “more connection, commitment and in turn innovation.”

    According to the Minority Corporate Counsel Association (MCCA), innovation is one of the primary reasons to value diversity and inclusion in the workplace. The MCCA encourages corporate law departments to prioritize diversity and inclusion to encourage a more broad corporate environment in which to creatively think and problem-solve. The MCCA ties diversity and inclusion directly to the success of the businesses represented by their members. In A Study of Law Department Best Practices, the MCCA reviewed 25 corporate legal departments’ diversity and inclusion best practices. On the list of best practices is “reducing the attrition rate of minority and women attorneys through focused retention and inclusion efforts.” According to the MCCA, retention and inclusion efforts should include alternative work schedules that allow employees the flexibility to meet family and life commitments. However, the MCCA also notes that interactive mentoring programs are an especially effective method of increasing and improving corporate legal departments’ retention of diverse employees.

    Thus, on one hand, alternative work structures such as working from home can facilitate the retention of talented diverse employees who have family or other obligations. These options enhance diversity and inclusion in the workplace by providing flexibility and support to workers. On the other hand, one of the primary reasons to value diversity and inclusion is the opportunity for a diverse work force to communicate and collaborate with each other. Such communication and collaboration could be improved and enhanced by requiring employees to have a physical presence in the office. Regardless of the policy adopted by any employer, corporate law department, or otherwise, diversity and inclusion are valuable principles to incorporate into hiring, retention, and promotion. The effect of Yahoo’s new policy on diversity and inclusion remains to be seen.

    An expanded version of this article titled “How Limiting Alternative Work Structures May Damper Diversity and Inclusion Efforts,” by Nicole Salamander and Franz Hardy, Gordon & Rees LLP, was published on April 11, 2013 by Law Week Colorado.

    Nicole Salamander, Gordon & Rees LLP, Denver, CO


    May 30, 2013

    EEOC Issues Updated Guidance for Specific Disabilities

    The Equal Employment Opportunity Commission (EEOC) recently updated its guidance for employers concerning employees with cancer, diabetes, epilepsy, and intellectual disabilities. These guides are included in the EEOC’s “Disability Discrimination, The Question and Answer Series,” in furtherance of the agency’s stated strategic plan—to provide timely guidance on antidiscrimination laws. 

    The expanded coverage of the Americans with Disabilities Act Amendments Act (ADAAA) has raised an abundance of questions in the workplace, and these updated documents will hopefully provide employers additional guidance with regard to several conditions that often involve complicated issues. Importantly, each condition-specific document provides insight in several key areas: (1) general information about the medical condition; (2) specific examples of permissible and impermissible inquiries employers may make with respect to the condition, as well as descriptions of circumstances under which employers may make medical inquiries—issues on which supervisors frequently need and should receive guidance; (3) types of reasonable accommodations that employers may and should offer to employees with the condition; (4) confidentiality-related instructions; and (5) analysis of concerns about safety and reminders about harassment and retaliation. 

    While the information is not expansive, it is easily understood and offers enough information to provide helpful guidance to employers. The EEOC provides this information with regard to both applicants and current employees and spells out for the employer appropriate actions under the specific circumstances. 

    Within the general-information section about each of the medical conditions, there is also an analysis of why the condition is likely to be considered a disability. The discussion of intellectual disabilities is particularly helpful because it defines an intellectual disability as being “characterized by significant limitation both in intellectual functioning and in adaptive behavior that may affect many everyday social and practical skills.” (Emphasis added.) This characterization by the EEOC may provide added detail that employers will find helpful. 

    From a practical standpoint, these documents can provide employers and human-resources professionals an excellent resource when issues arise on these specific conditions, each of which has presented significantly more issues since the implementation of the ADAAA.

    Kathy Dudley Helms, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., Columbia, SC


    May 30, 2013

    Shareholder "Proposal-by-Proxy" Rejected by Texas Court

    A Texas federal district courtin Waste Connections, Inc. v. Chevedden et al., S.D. Texas Case No. 13-cv-00176, recently granted summary judgment to Waste Connections on the company’s claim for a declaratory judgment allowing it to exclude a shareholder proposal submitted by John Chevedden on behalf of two of the company’s shareholders. As was the case in Apache Corporation v. Chevedden, U.S. District Court, S.D. Texas Case No. 10-cv-0076, the company notified the Securities and Exchange Commission (SEC) of its court action and intent to exclude the proposal, but did not request a no-action position from the SEC. (It is hard to miss the omnipresence of John Chevedden in these cases. According to the pleadings, he is “the most prolific shareholder activist for U.S. corporations in history.”)

    The Chevedden proposal was to eliminate board classification and instead elect all directors annually. The company argued that the proposal could be excluded on a number of procedural and substantive grounds:

    • that the proposal sought to cut short the terms of directors currently serving on the WCN board, an express ground for exclusion under Rule 14a-8(i)(8)(ii)
    • that Rule 14a-8 did not permit Mr. Chevedden (who owned no WCN shares) to advance a proposal based on a purported “proxy” from other purported shareholders
    • that the proposal was submitted after the deadline specified in WCN’s 2012 proxy statement
    • that the defendants failed to demonstrate the necessary ownership of WCN stock to submit a proposal

    Unfortunately, there was no opinion issued, just a minute entry on the docket, so it’s hard to tell at this point precisely why the court ruled in favor of the company. Interestingly, the company argued, as the second basis for its claim, that Rule 14a-8 does not permit the submission of shareholder proposals by proxy: Because Chevedden was not himself a shareholder, there was no basis in the rule allowing him to act by proxy on behalf of the two shareholders other than “for the limited purpose of presenting the shareholder's proposal at the shareholders' meeting.” The SEC has not looked favorably on the “proposal-by-proxy” argument as a basis for exclusion of shareholder proposals. As such, going to court to seek exclusion (in Texas at least) may turn out to be the wave of the future, at least for those companies aggravated enough to bear the substantial expense involved. That raises the question of whether court action might also have the effect of deterring future proposals.


    May 30, 2013

    What Does It Mean to Put Advice of Counsel at Issue?

    The Court of Chancery of Delaware further clarified and provided insight into its analysis of the at-issue exception to the attorney-client privilege in In re Comverge, Inc. Shareholders Litigation, C.A. No. 7368-VCP (Del. Ch. Apr. 10, 2013). The plaintiffs sought to compel documents containing defendants' counsel's advice regarding the enforceability of a standstill provision in a non-disclosure agreement, which the defendants logged as privileged. In response, the plaintiffs argued that the Comverge defendants waived the attorney-client privilege by relying on the advice of counsel defense at the preliminary-injunction stage of the proceedings. Specifically, the plaintiffs argued that because the defendants had stated that they consulted counsel throughout the underlying transactions, the defendants placed the communications "at issue" in the litigation. Furthermore, the plaintiffs argued that by seeking to rely on the advice of counsel at the preliminary-injunction hearing and in their briefs opposing the plaintiffs' motion for a preliminary judgment, the defendants waived the attorney-client privilege. The defendants argued that the documents remain protected by the attorney-client privilege and the work-product doctrine because they merely relied on the fact that they received legal advice rather than the substance of the privileged communications. The court agreed with the defendants' reasoning and denied the plaintiffs' motion to compel.

    The court reiterated that the at-issue exception "is based on principles of waiver and fairness intended to ensure the party holding the privilege cannot use it both offensively and defensively." The court further noted that the at-issue exception applies in two limited circumstances: (1) when a party injects privileged communications into the litigation; or (2) when a party injects an issue into the litigation, the truthful resolution of which requires analysis of privileged communications.

    With respect to the first prong, the court found that the defendants did not inject or seek to inject any specific attorney-client communications in to the litigation. In so finding, the court noted that it was the plaintiffs that first injected the issue of defendant counsel's legal advice into the litigation. Because the existence of privileged communications was first raised by the plaintiffs, the first prong of the at-issue exemption did not apply.

    With respect to the second prong, the court considered whether examination of privileged communications was necessary for truthful resolution of the litigation. The court concluded that it was not, "because the Comverge Defendants merely seek to rely on the fact that they sought and obtained legal advice rather than that they relied on the substance of privileged communications" to prove a fact at issue. According to the court, these contentions were comparable to what would be disclosed on a privilege log and there was no waiver of the attorney-client privilege through the at-issue exception.

    Patricia Astorga, Law Clerk, Southern District of New York


    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


    March 28, 2013

    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


    March 28, 2013

    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.

    James McMullen and Joseph Sbuttoni, Gordon & Rees LLP, San Diego, CA


    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.

    Andrew D. Castricone and Emma J. Skivington, Gordon & Rees LLP


    January 31, 2013

    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


    January 25, 2013

    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


    January 24, 2013

    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.

    Elizabeth Lorell, Jeffrey Lilly, Andrew Cary, and Jeffrey Frayer, Gordon & Rees LLP


    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:

    1. 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;
    2. 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;
    3. 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”;
    4. Elliot, a minority shareholder with no representative on the board, did not dominate the process;
    5. 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
    6. 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.

    Zachary G. Newman and Yoon-jee Kim, Hahn & Hessen, LLP, New York.


    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.

    Gina Haggerty Lindell and L. Geoffrey Lee, Gordon & Rees LLP


    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


    September 6, 2012

    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.

    Elizabeth F. Lorell, Jeffrey R. Lilly, Andrew W. Cary, Gordon & Rees LLP


    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


    August 16, 2012

    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.

    James McMullen and Nathaniel J. Tarvin, Gordon ∓ Rees LLP, Orange County, California


    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.

    Mercedes Colwin and Bran C. Noonan, Gordon & Rees LLP, New York, NY


    May 1, 2012

    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


    May 1, 2012

    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


    March 29, 2012

    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

    Darren VanPuymbrouck and Deborah Bone, Schiff Hardin LLP, Chicago, IL


    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


    January 6, 2012

    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


    January 6, 2012

    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

    Gina Haggerty Lindell and Nathan J. Marchese, Gordon & Rees LLP, San Diego, CA


    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

    Nic Echevestre and Joe Woodring, Cooley LLP, San Diego, CA


    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.

    Wade Carr and Roger T. Brice, SNR Denton US LLP, Kansas City, MO and Chicago, IL


    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.

    Register for the conference today.

    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).


    Visit Law.com for more on this story.

    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.

    Survey on Federal Circuit Model E-Discovery Order for Patent Cases

    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.

    Kara Baysinger, John F. Finston, Jerome Walker, and Michael E. Zolandz, SNR Denton, San Francisco, CA, New York, NY, and Washington, D.C.


    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 [2011] 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 [2002] 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.

    Mary Thomson and Keith Martin Brandt, Brandt Chan & Partners and SNR Denton

    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

    Top Takeaways from the View from the Bench Program

    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.

    Written Advocacy
    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.

    Jury Selection
    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

    Five Lessons from the Litigation Management Roundtable

    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.

    Alternative Fees

    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.

    Reviewer Consistency Studies
    How Well Do Manual Reviews Compare to Earlier Manual Reviews on Same Records?

    EDI indicates study performed by Electronic Discovery Institute
    TREC refers to studies by the Text Retrieval Conference sponsored by the National Institute of Standards and Technology


    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


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    Like Enron on Steroids

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    Flat Fees That Work and Pay

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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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    An Exclusive Look at the New Westlaw, Lexis, and Bloomberg Legal Research Platforms

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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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