Ashley Erazo's Groups Activities

Taxation of Carried Interest

Ashley Erazo — Wed, 12 Apr 2017 16:44:18 GMT

The tax treatment of carried interest has for many years been a high-profile target for potential reform. “Carried interest” refers to the share of profits or gains from investment received by a manager of a private equity fund, hedge fund, or similar investment vehicle, which is typically unrelated to any capital investment by the manager.

UNDER EXISTING LAW APPLICABLE TO ENTITIES TREATED as partnerships for U.S. income tax purposes, carried interest is generally taxed at favorable long-term capital gain rates. Many lawmakers view this treatment as inequitable, under the premise that long-term capital gains should apply to returns from the investment of capital, rather than receipts for the provision of services. In the private equity world, proposed legislation to close the carried interest “loophole” could have a profound impact on the economics and structure of investment funds and their portfolio companies. This article addresses the U.S. federal income tax treatment of carried interest paid to private equity fund managers, as well as potential changes in the law that could impact this treatment.

Economics of Carried Interest

Carried interest is designed to reward fund managers for identifying and managing investments. While fund managers receive a fixed management fee, the bulk of their profits is typically derived from carried interest that is contingent on the success of the underlying investments. Private equity funds are generally structured as limited partnerships, with the capital investors holding limited partner interests and the manager setting up a special purpose vehicle as the general partner. Because of the beneficial tax treatment described in more detail below, fund managers’ “carry” is structured as a special class of equity in the underlying investment partnership rather than a contingent success-based fee.

There are two primary methodologies for calculating carried interest: net profits and gross profits. Under the more common net profits methodology, carried interest is calculated as a percentage (usually 20%) of the profits generated from the fund’s investments less expenses, which typically include management fees and other overhead expenses that are not capitalized into the costs of investments.

To read the full practice note in Lexis Practice Advisor, follow this link.

Robert D. Starin is a partner at K&L Gates LLP. Mr. Starin’s practice emphasizes federal, state, and international tax issues and general corporate issues for both foreign and domestic clients. He has worked on numerous transactions involving mergers and acquisitions (U.S. domestic and cross-border), divestitures, complex joint ventures, and inbound and outbound investments. He advises public and private corporations, limited liability companies and partnerships on various tax matters, including choice of entity, structuring of international operations, and executive compensation issues.

Examining Harassment Claims

Ashley Erazo — Wed, 12 Apr 2017 16:45:19 GMT

By: Richard D. Glovsky, Locke Lord LLP.

THIS ARTICLE ADDRESSES PROTECTED STATUS HARASSMENT issues, a subset of discrimination claims that arise where an employee alleges that he or she was subjected to unwelcome conduct in the workplace due to the employee’s protected status (race, sex/gender, age, disability, national origin, etc.). It focuses on the elements of these claims and defenses to them. It also provides practical tips that employers can follow to address, defend, and avoid harassment claims.

Most harassment allegations assert that the employer created a hostile work environment that negatively impacted the terms and conditions of an employee’s employment. But it is important for employers to remember that not all harassment is illegal. Most federal and state laws only prohibit harassment that is “severe or pervasive.” One, or even a few, questionable incidents do not usually amount to unlawful harassment.

Not All Harassment Is Illegal

Many employees do not understand that not all harassment is illegal; it must be premised upon a particular protected category. Federal law, for example, prohibits harassment based on the following grounds:

Race
Color
Religion
Gender/sex
Age
Disability
National origin
Ethnicity
Citizenship status
Genetic information
Military status
Qualified medical leave
Reporting discrimination

Many state jurisdictions have their own equal employment opportunity (EEO) laws that protect employees who fall into additional protected categories. For example, many states and the District of Columbia have enacted laws prohibiting discrimination on the basis of sexual orientation. To cite another example, Michigan bans discrimination on the basis of height and weight.

Localities have also adopted categorical protections. For instance, New York City protects the unemployed from discrimination, while Broward County in Florida prohibits discrimination on the basis of political affiliation.

Because protected classifications vary from state to state and even city to city, when advising employers about potential harassment claims, you should be familiar with the laws of each state, county, and municipality where the employer is located.

Types of Harassment Claims

Generally, there are two types of unlawful harassment:

Hostile work environment. A hostile work environment exists when an employee’s workplace is so permeated with discriminatory intimidation, ridicule, abuse, and/or insult that it alters the terms and conditions of the employee’s employment and creates a hostile work environment.
Quid pro quo harassment. Quid pro quo harassment occurs where conditions of employment or job benefits are dependent upon an employee submitting to unwelcome conduct (usually sexual advances) or where an employer retaliates against an employee who rejected such unwelcome conduct.

To read the full practice note in Lexis Practice Advisor, follow this link.

Richard D. Glovsky, a partner in Locke Lord’s Boston office, co-chairs the firm’s robust Labor and Employment Practice Group. He handles employment litigation, including class actions, wage and hour issues, and discrimination and retaliation claims; prosecutes cases for Fortune 500 companies and other businesses to protect their trade secrets and to prevent former employees from violating non-competition and non-solicitation obligations; and is a valued counselor on employment related matters. He is a former Assistant United States Attorney and Chief of the Civil Division of the United States Attorney’s Office for the District of Massachusetts.

The Recharacterization of Loan Agreements under Applicable Bankruptcy and Non-Bankruptcy Law

Ashley Erazo — Wed, 12 Apr 2017 16:46:56 GMT

By: Ira L. Herman, Blank Rome, LLP

The Statutory Predicate for Recharacterization

To increase their share of a finite bankruptcy pie, creditors, debtors and other parties in interest in a case will seek to reduce or eliminate competing claims. This objective may be accomplished using various provisions of the Bankruptcy Code. Section 502(b)(1) is the statutory provision providing for the objection to, and disallowance of, claims based on the applicable laws and rules and by the enforcement of any agreement between or among the relevant parties. Section 510(c) is the statutory provision that governs the equitable subordination of claims where the claim arises from or is tainted by the inequitable conduct of a party as a result of such bad conduct. Subordination does not eliminate claims; rather, it results in the subordinated claim being removed from one class of claims and placed in a class that is afforded a lower priority in the pecking order of the payments to be made in a bankruptcy case. In many instances, a subordinated claim receives no distribution. By virtue of the subordination, the claimants remaining in the class formerly occupied by the subordinated claim may benefit essentially by receiving a proportionate share of a distribution that would otherwise have been paid to the now subordinated claim.

The Bankruptcy Code, however, is silent with regard to the recharacterization of a purported claim¹ as something less (i.e., an equity security interest). Because no section of the Bankruptcy Code expressly provides for recharacterization, it has been left to the courts to determine whether or not they have the authority to recharacterize.

Most courts, when asked to consider recharacterization, have held that the bankruptcy courts have the authority to do so. A majority of the courts authorizing recharacterization, including the Third, Fourth, Sixth, and Tenth Circuits, have found that bankruptcy courts may recharacterize pursuant to the broad equitable powers granted by Section 105(a) of the Bankruptcy Code. In re SubMicron Sys., 432 F.3d 448, 454 (3d Cir. 2006); Dornier Aviation (North America), Inc. v. Official Comm. of Unsecured Creditors (In re Dornier Aviation), 453 F.3d 225, 231 (4th Cir. 2006); Sender v. Bronze Group, Ltd. (In re HedgedInvestments Assocs., Inc.), 380 F.3d 1292, 1297 (10th Cir. 2004); In re AutoStyle Plastics, Inc., 269 F.3d 726, 748, 750 (6th Cir. 2001). The “bankruptcy court’s equitable powers have long included the ability to look beyond form to substance.” In re Dornier Aviation (North America), Inc., 453 F.3d at 233. In fact, the equitable power of the court to recharacterize is viewed as essential to effectuating the Bankruptcy Code’s priority scheme. Id. at 233; In re AutoStyle Plastics, Inc., 269 F.3d at 748; In re Hedged-Investments Assocs., Inc., 380 F.3d at 1298.

The Fifth and Ninth Circuits have found that recharacterization is required in appropriate circumstances by Butner v. United States, 440 U.S. 48, 54 (1979), when applicable non-bankruptcy law would characterize something that at first glance may look like a loan as a contribution to capital. In re Lothian Oil, Inc., 650 F.3d 539, 542–43 (5th Cir. 2011); Official Comm. of Unsecured Creditors v. Hancock Park Capital II, L.P. (In re Fitness Holdings Int’l, Inc.), 714 F.3d 1141, 1148 (9th Cir. 2013).

In Lothian Oil, the Fifth Circuit held that recharacterization of a purported debt as a capital contribution is permitted and that recharacterization is not limited to claims of insiders.² As stated above, the Fifth Circuit’s approach to recharacterization differs from the several circuits that rely upon the equitable powers of a bankruptcy court as the basis for recharacterization. Rather than relying on the Section 105(a) “all writs” provision of the Bankruptcy Code, the Fifth Circuit applied state law to recharacterize a claim as an equity security interest by employing Section 502(b)(1) of the Bankruptcy Code—the Bankruptcy Code section that provides for the allowance and disallowance of claims. The Fifth Circuit reasoned that resorting to the general equitable powers of the bankruptcy court was inappropriate because it was unnecessary to do so, since Section 502(b)(1) explicitly grants authority to bankruptcy courts to allow and disallow claims. Thus, the Fifth Circuit’s analysis focused on the governing agreement and applicable state law, and not bankruptcy law, when deciding what rights were actually created by the agreement of the parties, despite any descriptive labels used by the parties (i.e., substance over form).

To read the full practice note in Lexis Practice Advisor, follow this link.

Ira L. Herman is a partner at Blank Rome, LLP. He concentrates his practice on distressed public debt issues, insolvency matters involving upstream and midstream oil and gas companies, and distressed M&A, in addition to traditional bankruptcy and insolvency matters.

Real Estate Due Diligence in Corporate and M&A Transactions

Ashley Erazo — Wed, 12 Apr 2017 16:48:09 GMT

By: Joseph M. Marger, Reed Smith LLP.

In almost every asset purchase, stock purchase, and merger transaction (generally referred to in this article as M&A transactions), the purchaser will acquire an ownership or leasehold interest in at least one real estate asset. However, the real estate asset(s) do not drive a typical M&A transaction. In most cases, a particular real estate asset will only have significance because of how it will be used in the purchaser’s business operations after closing (i.e., the real estate only has incidental value).

IF REAL ESTATE IS NOT DRIVING THE TRANSACTION, the purchaser may be inclined to forego, substantially limit, or postpone the real estate due diligence commonly performed in a real estate transaction. This article provides general guidance and practice tips for a real estate attorney assisting with the real estate due diligence in such an M&A transaction.

Preliminary Items

Timing

The real estate component of an M&A transaction runs more smoothly if real estate due diligence is addressed in the early stages of the transaction. M&A transaction agreements rarely include a due diligence period, and much of the due diligence is performed before contract signing. By addressing real estate due diligence early in the transaction, the purchaser can:

Identify real estate costs (e.g., transfer taxes) that may be material in the purchaser’s pricing decision
Gain negotiating leverage on real estate issues
Modify the deal structure to mitigate real estate issues
Account for real estate due diligence items requiring significant lead time in the deal timeline
Otherwise factor real estate due diligence considerations into its decision-making process

Confirm the Transaction Structure

The real estate due diligence process varies depending upon how the M&A transaction is structured. At the outset, make sure you completely understand the applicable transaction structure. The three most common structures are asset purchases, stock purchases, and mergers.

Asset purchase. In an asset purchase, the purchaser acquires all (or a portion) of the seller’s assets. Unless successor liability is imposed pursuant to applicable laws, the purchaser is only liable for those obligations of the seller (if any) that the purchaser expressly assumes under the transaction documents.
Stock purchase. In a stock purchase, the purchaser acquires all of the ownership interests in the target company, and the target company’s assets and liabilities remain the same.
Merger. In a merger, two companies are combined, and the surviving company succeeds to all assets and liabilities of the disappearing company.

For a complete understanding of the applicable transaction structure, you must confirm specific factual information. For stock purchases and mergers, confirm whether the purchaser is acquiring an entire company or a division. For asset purchases, confirm the specific real estate assets to be acquired and how the purchaser intends to take title to those assets; for example, the purchaser may want each asset to be transferred to a separate single-purpose subsidiary company. For mergers, confirm the type of merger and whether the surviving entity is the target, the purchaser, or a subsidiary of the purchaser. Ask whether pre- and post-transaction structure charts are available. Structure charts provide a clear and concise summary of the transaction and are likely to include the above factual information.

To read the full practice note in Lexis Practice Advisor, follow this link.

Joseph Marger is a Partner in Reed Smith’s Real Estate group. He has substantial experience in all aspects of the sale and acquisition of real estate, both single asset and portfolio transactions, including industrial and commercial single-user facilities, shopping centers, hotels, office buildings and multi-family residential properties. He is equally experienced in real estate finance, including saleleaseback and build-to-suit financing transactions, traditional loan documentation for borrowers and institutional lenders for construction and development and stabilized assets, including securitized transactions.

Market Trends: High Yield Debt Offerings

Ashley Erazo — Wed, 12 Apr 2017 16:51:06 GMT

By: David Azarkh and John O’Connell, Simpson Thacher & Bartlett LLP.

Overview: The High Yield Roller Coaster Continues

The most appropriate word to describe the high yield market in 2016 is volatility. There were some rough patches when few issuers tested the waters—particularly during the first quarter—but over the course of the year, a number of windows opened up with favorable market backdrops for issuing new high yield bonds. For example, in February 2016 the United States saw a meager $8.6 billion of new high yield issuances, whereas April 2016 saw a robust $31.8 billion. The ebb and flow of 2016 was no different from 2015, with $38.4 billion of new high yield issuances in April 2015 and just a sparse $3.1 billion in December 2015.

After record issuance levels in North America and Europe in 2013 and 2014, the high yield market turned volatile in 2015 and into 2016, due in large part to falling oil prices and increased political and financial instability both in the United States and abroad. In the United States, new high yield issuance in 2016 declined for the fourth consecutive year to $229 billion, primarily due to commodity concerns, particularly with respect to defaults in the energy sector, which increased in 2015 and continued to rise in 2016. Throughout the year, investors remained concerned about macroeconomic weakness in many leading economies, the ever-present uncertainly around the timing of interest rate increases, and the potential for continued increased default levels in certain sectors exposed to commodity price unpredictability such as oil, natural gas, coal, and iron ore.

In addition, the Federal Reserve’s 2013 guidance to banks regarding limiting credit to finance acquisitions with high debt-to-EBITDA ratios continued to affect acquisition financing structures in 2016 and dampened the market for high yield bonds used to fund leveraged buy outs (LBOs). This policy has had a particularly disproportionate impact on acquisition financing strategies for private equity firms and their portfolio companies, which have historically relied on financing from banks as the primary source of acquisition funding, with such debt often refinanced in the high yield market. U.S. high yield issuers also grappled with important court decisions that have affected the ability of issuers to restructure their bonds outside of bankruptcy. The high-profile bankruptcy of Caesar’s Entertainment in January 2015, for one, gave investors heightened reason to proceed with caution before investing in bonds related to highly leveraged buyouts.

But 2016 also showed signs of promise for a high yield rebound in 2017. Notably, as issuers and investors adjusted to recent interest rate increases in the United States and stimulus measures from the European Central Bank, new high yield issuance volumes increased over the latter part of 2016. Notwithstanding widespread market volatility in December 2015 following the first interest rate increase by the Federal Reserve since the financial crisis, the U.S. economy has continued to expand and unemployment figures have continued to decline. In December 2016, another rate increase by the Federal Reserve signaled confidence in continued growth in the U.S. economy. Such rate increases are expected to continue in 2017. In addition, in the aftermath of the highly contentious U.S. presidential election, bond yield prices increased significantly, with investors seeming to show initial consensus that the incoming administration and Republican Congress could stimulate the U.S. economy if they follow through on their promises to invest in infrastructure, deregulate, and cut corporate tax rates. The effect of the new administration, however, remains to be seen. On the whole, most banks on the street expect an uptick in high yield volume in 2017, with the average consensus forecasting $237 billion in new issuances. In sum, the latter half of 2016 showed a few promising signs of life for the 2017 high yield market.

To read the full practice note in Lexis Practice Advisor, follow this link.

David Azarkh is a Partner in Simpson Thacher’s New York office and a member of the Firm’s Corporate Department. David’s primary area of concentration is capital markets. David regularly represents underwriters, corporate clients, and private equity sponsors in securities offerings ranging from high yield and investment grade debt offerings, leveraged buyouts, initial public offerings and other capital markets transactions. He also assists companies with compliance, reporting, and establishing corporate governance programs. John O’Connell focuses his practice at Simpson Thacher & Bartlett LLP on advising clients on capital markets transactions. He regularly represents investment banks, corporate issuers, and private equity sponsors in connection with securities offerings ranging from initial public offerings, follow-on and secondary offerings, high yield debt offerings, and investment grade debt offerings.

Guidance on Emerging Growth Companies

Ashley Erazo — Wed, 12 Apr 2017 16:49:32 GMT

Q&A with Michael Labriola, Michael Nordtvedt, and Megan Baier, Partners at Wilson Sonsini Goodrich & Rosati LLP.

What is an Emerging Growth Company (EGC)?

Under the Jumpstart Our Business Startups Act (the JOBS Act) (112 P.L. 106, 126 Stat. 306), which was passed in April 2012, a company qualifies as an emerging growth company (EGC) if at the time of its initial public offering (IPO) total annual gross revenues were less than $1 billion during its most recently completed fiscal year. EGC status affords an issuer the ability to enjoy certain reduced disclosure requirements, including providing fewer years of historical audited financials and reduced compensation disclosure, and reduced corporate governance requirements, particularly around internal controls over financial reporting and say-on-pay advisory votes. A company will retain EGC status until the earliest of the:

Fifth anniversary of the company’s IPO
Last day of the first fiscal year in which its annual gross revenue exceeds $1 billion
Date it becomes a large accelerated filer, meaning the last day of the fiscal year in which it (1) has a public equity float held by non-affiliates of $700 million or more (measured as of the last business day of its second fiscal quarter of such year); and (2) has been a reporting company under the Securities Exchange Act of 1934, as amended (the Exchange Act), for at least 12 calendar months
Date on which the company has issued more than $1 billion in non-convertible debt during the preceding three-year period

Other than excluding certain types of issuers, such as issuers of asset-backed securities and investment companies registered under the Investment Company Act of 1940, there are no restrictions on companies qualifying for EGC status. In addition, companies organized in foreign jurisdictions as well as in the United States can qualify as EGCs.

What are the relevant statutes and regulations governing securities offerings by EGCs?

A securities offering by an EGC is generally governed by the same statutes and regulations as those by non-EGCs, with the exception of the additional provisions of the JOBS Act and the Fixing America’s Surface Transportation Act (the FAST Act) that apply to EGCs. The following key statutes and regulations govern a typical securities offering by an EGC:

Securities Act of 1933 (the Securities Act) and the rules and regulations promulgated thereunder. The Securities Act regulates the offer and sale of securities, including those of EGCs. Generally speaking, any securities offered or sold in the United States must be registered or otherwise exempt from registration under the Securities Act.
Exchange Act and the rules and regulations promulgated thereunder. The Exchange Act addresses the ongoing obligations attendant with listing a class of securities on a national stock exchange, including periodic reporting and the initial registration of the class. In addition, a company with a large number of stockholders (excluding holders of most compensatory equity) may also be subject to the reporting requirements of the Exchange Act. Companies (other than banks and bank holding companies or savings and loan holding companies) with either (1) 2,000 or more stockholders or (2) 500 or more stockholders who are not accredited investors are required to register.
Regulation S-K promulgated under the Exchange Act. This set of rules interplays with the Securities Act forms on which the offering is filed to provide specific disclosure requirements. Regulation S-K is also the framework for non-accounting-specific disclosures in reporting under the Exchange Act.
Regulation S-X promulgated under the Exchange Act. This set of rules addresses the various accounting-specific disclosures required in Securities Act forms. Regulation S-X is also the framework for accounting-specific disclosures in reporting under the Exchange Act.
The JOBS Act. The JOBS Act specifically amended the Securities Act and Exchange Act to provide for certain reduced disclosure, reporting, and governance requirements for EGCs. Most notably, the JOBS Act reduced the audited financial statements required in a Securities Act filing from three prior fiscal years to two, deferred internal control reporting for up to five years following an IPO, reduced the executive compensation disclosures required, permitted testing-the-waters communications outside of the offering, and allowed EGCs to review their Securities Act registration statements with the SEC on a confidential basis.
The FAST Act. The FAST Act further enhanced certain benefits under the JOBS Act for EGCs. Most notably, the FAST Act provided further flexibility for EGCs to begin the SEC review process on Securities Act registration statements without all the required years of audited financial statements if those statements would not be required later when the registrant planned to launch the offering.
Regulation G promulgated under the Exchange Act. This set of rules addresses a registrant’s use of financial measures not calculated in accordance with generally accepted accounting principles (non-GAAP financial measures). Regulation S-K also addresses the use of non-GAAP financial measures included in a registration statement filed under the Securities Act for an offering by an EGC, but Regulation G extends broadly to any public disclosure of material information made by the registrant that contains a nonGAAP financial measure.
Regulation FD promulgated under the Exchange Act. This set of rules addresses the selective disclosure of material nonpublic information.
Regulation M promulgated under the Exchange Act. This often overlooked set of rules addresses the timing of certain purchases and sales by a registrant in its own securities. This is relevant to EGCs that are already listed and may be engaged in any activity, including activity by affiliates, to repurchase its securities at a time proximate to a distribution of securities.

What is the typical process for securities offerings by EGCs, including general steps, timeline, key transaction documents, due diligence process, and required regulatory and stock exchange filings?

The IPO Process for EGCs

EGCs receive key accommodations during the IPO process. The IPO on-ramp contemplated by the JOBS Act relaxed certain regulatory barriers that policy-makers believed were keeping EGCs from accessing the public markets. These accommodations include, among other benefits, confidential submission and review of IPO registration statements, reduced financial statement audit and disclosure requirements, and the ability to engage in oral or written test-the-waters communications with certain types of sophisticated investors before filing a registration statement with the Securities and Exchange Commission (SEC). This response focuses on the IPO process for an EGC, which is the principal point in its lifecycle where an EGC first benefits from its differentiated status as an EGC.

To read the full practice note in Lexis Practice Advisor, follow this link.

Michael Labriola is a partner working in Wilson Sonsini Goodrich & Rosati's Washington, D.C., and New York City offices, where he counsels public and private technology and emerging growth companies through all stages of their growth. His practice focuses on corporate and securities law, including general corporate representation, public offerings, venture capital financings, and mergers and acquisitions. Michael Nordtvedt is a partner at Wilson Sonsini Goodrich & Rosati, focusing on the representation of public and private technology, medical device, and life sciences companies through all stages of their growth, as well as investment banks and venture capital and private equity firms. Michael specializes in corporate and securities law, including general corporate representation, public offerings, private placements, and mergers and acquisitions. Megan Baier is a partner at Wilson Sonsini Goodrich & Rosati, specializing in corporate and securities transactions, with a focus on the life sciences, health care, and technology sectors. She also has considerable experience counseling publicly held companies on general corporate representation, SEC compliance, disclosure matters, and complex securities law issues. Assistance provided by Mark Bass, Keegan Drake, and Michael Moesel, Wilson Sonsini Goodrich & Rosati LLP.

Patent Litigation Strategies Against Patent Trolls

Ashley Erazo — Thu, 09 Feb 2017 20:13:11 GMT

By: Matthew Bernstein, Perkins Coie LLP.

THE MAJORITY OF PATENT CASES ARE BROUGHT BY non-practicing entities (NPEs), also called patent trolls or patent assertion entities (PAEs). These parties litigate or license their patents but have no real products or services. NPE Lawsuits are commonly brought against U.S. companies and pose unique challenges. For example, many NPEs are represented on a contingent fee basis, and because NPEs do not have products, a defendant typically cannot level the playing field by asserting its own patents against the NPE. Whether you should litigate aggressively through trial or try to negotiate a quick settlement depends on your view of NPEs and the circumstances of the case.

This article discusses possible ways to respond to an NPE presuit notice letter and complaint, discovery considerations, and how to approach settlement negotiations.

The NPE Assertion

A target company typically learns of an NPE assertion through either a pre-suit notice letter or a complaint. Regardless of the method of notice, you should immediately research:

The asserted patent
The NPE
The court, if applicable

Research the Patent

You should research whether the asserted patent has been the subject of a federal court case or a proceeding before the United States Patent and Trademark Office (USPTO) including:

Inter partes review (IPR)
Covered business method patent review (CBM)
Post-grant review (PGR)
Ex Parte Reexamination

Prior litigation documents may provide useful insight into the strength and weakness of the patent, as well as indicate a successful defensive strategy against the NPE. The NPE’s history of litigation may also provide some guidance as to how it will approach the current matter. In particular, you should check relevant dockets and proceeding histories for:

Early dismissals. Dismissals in federal litigation before responsive pleadings suggest the NPE is likely looking for a quick, nuisance value settlement.
Dispositive motions. Motions to dismiss and summary judgment motions may indicate potential arguments relevant in the current matter.
Claim construction filings. Claim construction filings can provide insight into the scope of the asserted patent (i.e., how broadly it is being applied).
Invalidity contentions. Obtaining invalidity contentions from earlier proceedings, and the underlying prior art, may jump-start your invalidity case.
Expert reports. Knowing that the previous case reached the expert report stage means that the NPE is willing to litigate instead of just looking for a quick settlement. The existence of expert reports means that defenses were investigated to their final or near final form, and obtaining these reports through the discovery process could jump-start or at least help your case.
Other accused infringers. Defendants in other pending cases who share a common interest with your client (defeating the NPE) may be willing to pool resources and share the costs of the defense. See Joint Defense Groups later in this article.

To read the full practice note in Lexis Practice Advisor, follow this link

Matthew Bernstein is the managing partner of Perkins Coie's San Diego Office, co-managing partner of the Taipei office, and a partner in the firm's Patent Litigation Group. His practice focuses on patent litigation and patent trial work. The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect the views or opinions of the law firm with which they are associated.

For a more detailed discussion on PTAB proceedings, see

> THE FUNDAMENTALS OF POST-ISSUANCE CHALLENGE PROCEDURES: IPR, PGR & CBM

RESEARCH PATH: Intellectual Property & Technology > PTAB Proceedings > Post-Issuance > Practice Notes > Post-Issuance Challenge Procedures

For information on patent pre-litigation notification letters, see

> PATENT INFRINGEMENT CEASE AND DESIST OR NOTIFICATION LETTERS

RESEARCH PATH: Intellectual Property & Technology > IP Litigation & Enforcement > Patent > Practice Notes > Notification Letters

For detailed information on responding to a patent notice letter, see

> RESPONDING TO PATENT NOTICE LETTERS

RESEARCH PATH: Intellectual Property &Technology > IP Litigation & Enforcement > Patent > Practice Notes > Notification Letters

For a detailed list of the steps to take upon the receipt of a pre-litigation notification letter, see

> CHECKLIST—RESPONDING TO PATENT NOTICE LETTERS

RESEARCH PATH: Intellectual Property & Technology > IP Litigation & Enforcement > Patent > Forms > Pre-Litigation Actions

For a sample response letter to a patent notice letter, see

> RESPONSE TO PATENT INFRINGEMENT CEASEAND DESIST OR NOTICE LETTER

RESEARCH PATH: Intellectual Property &Technology > IP Litigation & Enforcement > Patent > Forms > Pre-Litigation Actions

For a comprehensive explanation about post-grant proceedings for challenging the validity of patents before the PTAB, see

> NAVIGATING PTAB TRIAL PROCEDURES IN AIAPROCEEDINGS

RESEARCH PATH: Intellectual Property &Technology > PTAB Proceedings > Post-Issuance > Practice Notes > Post-Issuance Challenge Procedures

Best Practices to Reduce Litigation Risks When Hiring From A Competitor

Ashley Erazo — Thu, 09 Feb 2017 20:01:11 GMT

By: Michael P. Pappas, Michael P. Pappas Law Firm, P.C.

This article discusses ways to reduce the risk of litigation when hiring someone away from a competitor. Litigation involving trade secrets, non-compete agreements, and other postemployment restrictive covenants has grown exponentially, roughly doubling every decade since 1980. Often, these lawsuits are directed not only at the departing employee, but also at the employee’s new employer. Many unsuspecting employers have found themselves roped into costly and time-consuming litigation after hiring a competitor’s former employee.

ALTHOUGH IT IS IMPOSSIBLE TO COMPLETELY ELIMINATE the risk of litigation when hiring from a competitor, below are key issues to consider and steps to take to reduce that risk and be better prepared to defend any legal action that might arise:

Consider how litigious the industry is
Consider who you are hiring
Advise interviewers on interviewing candidates from competitors
Seek full disclosure from job candidates
Obtain written protections
Make sure the new hire leaves his or her former employer without incident
Create institutional protections (i.e., ethical walls)
Understand potential claims against the hiring employer
Effectively handle cease and desist letters
Consider pre-litigation settlement strategies
Ensure continued compliance
Leave the hiring employer an out

Know How Litigious the Industry Is

If an organization frequently hires from competitors, it should familiarize itself with general hiring customs in the industry, including how aggressively (if at all) employers seek to enforce post-employment restrictive covenants. In many industries, there is a general understanding that employees jump from employer to employer, or that employees take their personal clients with them when changing employers. In those industries (e.g., advertising, retail), enforcement of restrictive covenants is not a high priority, and litigation is relatively rare. Conversely, in hyper-competitive industries where information and clients are jealously guarded (e.g., technology, insurance), the risk of becoming embroiled in restrictive covenant litigation is significantly higher. In other fields, such as the financial sector, competitors have joined together to reduce costly litigation by establishing written protocols governing the recruitment and hiring of each other’s employees. See Protocol for Broker Recruiting. An understanding of restrictive covenant litigation practices in a particular industry can help an employer better evaluate the potential risks of hiring someone from one of its competitors.

To read the full practice note in Lexis Practice Advisor, follow this link.

Michael P. Pappas is the principal and founder of the Michael P. Pappas Law Firm, P.C., specializing in employment litigation, counseling, compliance, and administrative charge response. Prior to starting his own firm, Mr. Pappas practiced at the nation’s leading employment law firms for more than 25 years. He is also the President and C.E.O. of Employment Compliance Advisors, LLC, a legal consulting firm.

Corporate Counsel Oversight of the Risk Assessment Process

Ashley Erazo — Wed, 12 Apr 2017 16:42:05 GMT

By: Gary Deutsch M.B.A, C.P.A.

AS COUNSEL FOR ONE OR MORE BUSINESSES TYPES (for-profit and/or non-profit), you are often asked to advise on many different types of legal and regulatory compliance issues, but how well prepared is any business to incorporate your advice into its daily routine? At issue is the process a business uses to manage legal risk. Here are some key questions to consider:

What is the board’s (or owner’s) perspective on risk? Are they risk takers or risk averse?
What is their tolerance for risk? How much are they prepared to lose if they don’t follow your advice? Have they factored risk tolerance into their annual budget and strategic planning projections?
Do they establish controls over risks? Do they make sure that those controls are tested periodically to ensure the organization is adequately protected within their risk tolerance?
How do they communicate the controls that need to be in place? Do they include the controls in policies and procedures? If they do, are the policies and procedures routinely updated to ensure they include the most current controls needed to prevent or detect risks?
Do they receive routine reports from management indicating that employees responsible for implementing controls are doing so per updated policies and procedures?
Do they receive periodic risk assessments from management to identify risks inherent in the business as well as the effectiveness of management’s efforts in risk management and actions to mitigate risks when necessary to keep the organization moving toward the board’s plans within their risk tolerance?

The answers to these questions may expose some weaknesses in the risk management process that could lead to increased exposure to losses. Even if the answers do not expose significant risk management process weaknesses, attorneys need to review management’s risk assessments to form their own conclusions about the adequacy of the risk management process. Furthermore, even with a well-functioning risk management process, organizations are exposed to unexpected losses. For instance, significant changes in laws and regulations may be difficult to factor into plans until the structure of the changes have become clear. Risks that rarely occur, like natural disasters, or those occurring unexpectedly, like hacker attacks, cannot easily be included in plans except as contingency or reserve factors. Transferring those types of risks through insurance may be advisable if the transfer is cost-effective.

What Corporate Attorneys Need to Understand about Risk Assessments

Risk assessments evaluate an organization’s inherent risks or the risks that are imbedded in the nature of the business. Here are some examples:

Hospitals are at risk for violating HIPAA laws, medical billing errors, spreading diseases, and many other risks unique to the medical field.
Retailers are at risk for massive data breaches, exposing customers to fraud, and theft such as shoplifting.
Manufacturers are at risk for workplace accidents and OSHA violations.
Non-profits are at risk for fraud that could lead to tarnished reputations and reduced contributions.
Financial institutions are at risk for regulatory safety and soundness violations that could lead to onerous controls over operations.

Of course, this list is only a sampling of the types of risk that are unique to (inherent in) various organizations. Understanding risk assessments can help attorneys assess the legal risks that the board (or owner) needs to consider in their planning and risk tolerance determination.

The Risk Assessment Process

Before discussing the risk assessment process, it’s important to understand that even small organizations need to consider the interaction among the various functions, departments, divisions, products, and services that operate within an organization.

This interaction requires an enterprise approach to the risk management process (called enterprise risk management or ERM).

Here’s an example.

ABC Corp. makes widgets. They decide to launch a new widget and outsource the manufacturing process to XYZ LLC. The new widgets start selling well and ABC’s accounts receivable grow accordingly. However, shortly after the new widgets reached customers, there was feedback that the widgets weren’t operating as ABC marketed. After an investigation, it was determined that XYZ LLC had a defect in a component part of the widget. While the investigation was underway, ABC’s accounts payable department paid XYZ under the contract provisions for the new widget. The accounts receivable department, credit department, supply management function, and accounts payable did not communicate with one another, resulting in accounts payable paying an XYZ invoice that should have been withheld pending the results of the investigation. If accounts receivable, credit, or supply management had provided accounts payable with a copy of the manufacturing agreement with XYZ as well as a notification that there was a defect part investigation, accounts payable would have been alerted to the defect part provision, allowing for payment to be withheld pending investigation.

An assessment of payment risks focused solely on the accounts payable department may have identified the weakness noted in this example after the payment had been made to XYZ. However, an ERM risk assessment may have identified the lack of communications among the accounts receivable department, credit department, supply management function, and accounts payable as a control weakness that if corrected could have prevented the payment to XYZ.

Sample ERM Risk Assessment Questionnaire

This sample ERM risk assessment questionnaire for outsourced vendor contracts may have helped identify the payment issue discussed above. This assessment is not a legal review—it is a review of operational and security-related provisions to ensure that the organization’s interests are continuing to be protected.

When evaluating ABC’s outsourcing arrangement with XYZ, the following operational and technology contract issues should be considered:

Does ABC’s internal auditor have the right to periodically review vendor activities? This review should identify the areas of risk and the levels of risk to be reviewed and recommend and perform audit procedures as needed that may require the vendor’s cooperation.
Does the contract provide for ABC’s right to perform updates to due diligence to ensure that the vendor has a sufficient number of qualified staff members to perform the contracted work?
Does ABC have the right to receive timely notice from the vendor of any key staffing changes?
Does the contract adequately define the expectations and responsibilities for both parties based on the current operating environment?
Are the scope, frequency, and cost of work to be performed by the vendor subject to change as necessary to protect the operations and security of ABC?
Does the contract provide for the opportunity to reset responsibilities for providing and receiving information, such as the manner and frequency of reporting to senior management and the board about the status of contract work?
Does the contract establish the protocol for changing the terms of the service contract, especially for expansion of work if significant issues are found, and stipulations for default and termination of the contract?
Does the contract state that any information pertaining to ABC must be kept confidential?
Does the contract specify the reports and the related documents needed to evaluate the performance of contractual obligations?
Does the contract specify the period that vendors must maintain the reports and documents?
Does the contract state that outsourced services provided by the vendor may be subject to regulatory review and that examiners will be granted full and timely access to the appropriate reports and related documents prepared by the outsourcing vendor?
Does the contract state that reports are the property of ABC, that ABC will be provided with any copies of the related documents it deems necessary, and that employees authorized by ABC will have reasonable and timely access to the documents prepared by the vendor?
Does the contract prescribe a process (arbitration, mediation, or other means) for resolving problems and for determining who bears the cost of consequential damages arising from errors, omissions, and negligence?
Does the contract state that the vendor will not perform management functions, make management decisions, or act or appear to act in a capacity equivalent to that of an employee or a member of management of the institution, and will comply with professional and regulatory independence guidance?

This risk assessment together with a policy stating that all affected parties within ABC must be notified of outsourced contract provisions, changes to contracts, and violations of terms, if any, could have prevented the payment issue in this example. The discussion below will focus on an overview of the ERM risk assessments process.

Conducting ERM Risk Assessments

The Committee of Sponsoring Organizations (COSO) issued the "Enterprise Risk Management - Integrated Framework" in 2004 to assist organizations worldwide with principles-based guidance for designing and implementing effective enterprise wide approaches to risk management or enterprise risk management (ERM) as this process is appropriately named.

COSO defines its ERM framework as "a process, effected by an organization’s board of directors, management, and other personnel, which is applied in strategy setting and across the enterprise. The goal of ERM is to provide reasonable assurance regarding the achievement of organizational objectives by identifying events that may affect the organization and managing risk to be within the organization’s risk appetite."

The COSO framework provides guidance in the following general areas:

Definitions for essential ERM components
Key ERM principles and concepts
Ideas for developing a common language to communicate ERM risks
A development path for ERM

COSO’s ERM guidance moves beyond theory to explain how ERM integration into processes can help to balance risks and rewards. Consider the following risk assessment issues—does the institution’s ERM approach:

Align risk appetite and strategy
Identify and manage cross-enterprise risks
Provide integrated response to multiple risks
Link growth, risk, and return
Seize opportunities
Ration capital based on risk appetite
Enhance risk-response decisions
Minimize operational surprises and losses

The traditional non-ERM approach to conducting risk assessments is to have the organization’s financial function carry them out on a monthly, quarterly, or yearly basis. During the process, errors are detected and corrected and people are considered the primary source of risk. Operational plans focus on short-term risks.

Following the ERM performance approach, risk assessments are continuous and performed by management of the various organization functions. ERM stresses that everyone controls and achieves the organization’s strategic plan and controls are focused on all risks, not just a risk selected in isolation. Errors are prevented and processes are the primary source of risk, not people.

The strategic plan focuses on long-term risk. Therefore, a wellfunctioning ERM program will provide for the systematic internal assessment of risks based on the following criteria:

Place limited reliance on third-party risk assessments.
Identify and plan for contingent risks.
Create incentive for organizational units to minimize contingent risks.
Use multiple risk management tools and metrics.
Develop flexible and adaptive risk models.
Aggregate net and gross loss exposures in addition to plans for expected (routine) losses.
Implement credible stress testing that is actionable.

The ERM program should also provide for open communications among organizational units, risk management staff, senior management, and board members, as well as corporate counsel, to enhance enterprise level decision-making about major risks and to react faster to emerging issues.

However, look for signs that the ERM program is not working. Here are some signs to consider:

Increasing risk concentrations are not disclosed in reports to management and the board.
Organizational units use different risk models that do not produce consistent results.
There is a lack of buy-in that risk issues and assessments should be shared.
Risk models are rarely updated to reflect evolving risks.
The mindset that someone else will be performing the risk analysis and assessment.
Contingent risks and unintended consequences of risks are not identified.

To ensure that the organization’s ERM program is functioning as intended, ask management and the board the following questions:

Are risk-and-capital concepts used to quantify risk/return tradeoffs, in dollars where possible?
Does the ERM program quantify the destructive power of correlated risk factors across the enterprise?
Are operational risk ERM resources directed toward big risks?
Is out of the box thinking used on ERM to see all business risks and interactions?
Is ERM information embedded in business metrics (risk-adjusted pricing/performance)?

Although ERM may sound like a risk management approach that is best suited to large organizations, keep in mind that smaller organizations may be practicing ERM without a formal ERM program. In smaller organizations, owners, the board, and management may be the same people or certainly a small group who can recognize risks more easily due to the small size of the organization. Corporate counsel can also help by providing an objective combined legal and business perspective on risks that the others may not recognize as they are immersed in daily activities.

Core Risk Assessment Components

There are two core components of ERM risk assessments. The components should be designed to answer the following questions:

What is the organization’s inherent level of risk?
How well is risk being managed within the organization?

Below is a brief overview of each of these components.

Inherent Risk Assessment

Inherent risk is defined as the possible damage to earnings, capital, or reputation because of an organization’s involvement in a certain line of business. This risk exists in each line of business, regardless of the level of management control in place. For example, credit risk associated with attracting new business is typically higher than the risk of extending additional credit to existing customers. When a risk is inherent, the frequency with which a risk event occurs and results in a loss, and the extent of exposure to such losses, can be managed. The risk frequency and severity of exposure can be directly managed through the processes the organization uses to identify, measure, monitor, and control risk. The inherent risk assessment is intended to identify those risks that are specific to a line of business. The management of risk assessment discussed in the next section is designed to evaluate the processes the organization uses to identify, measure, monitor, and control risk.

The inherent risk assessment is divided into three main sections: historic, predictive, and impact. The first section, historic, is intended to assess past loss experience within the industry as well as the organization’s actual historical loss experience. Since the past is often a poor guide to what might happen in the future, the predictive part of the assessment is intended to assess the potential for future adverse events in each risk category. The impact section addresses the expected result from significant adverse events.

Exhibit A includes sample assessment standards and a rating system to measure inherent risk. In this exhibit, a rating of 9 indicates that there is a strong likelihood of an adverse impact on earnings, capital, or reputation, but only if management controls are not in place or functioning properly. Since effective management controls can mitigate risks, the assessment should evaluate the organization’s total inherent risk exposure separately from the assessment of current management policies and processes in place to control the risk as discussed in the following section.

It is important to assign a score for each category of risk. Any categories that are not applicable should be scored zero. Also, comment on reasons for assigning any score of 7 to 9 since those risks will need to be evaluated for risk mitigation controls.

Management of Risk Assessment

Organizations profit by taking measured risks. However, they can lose money or even fail by not managing those risks. Effective risk management means integrating several elements, including strategy, organization, policies and procedures, process and controls, measurement/monitoring, technology, and reporting.

Management of risk can significantly reduce volatility and the potential damage to earnings, capital, or reputation. Management cannot, however, eliminate risk, especially when an organization assumes levels of inherent risk associated with their line of business.

In the preceding section, we discussed the need to assess an organization’s inherent risks. The second core risk assessment component is to evaluate the quality of the management of those inherent risks.

Exhibit B includes sample assessment standards and a rating system for the management of risk assessment. A rating of 9 indicates that there is a strong likelihood of an adverse impact on earnings, capital, or reputation, but only if current management controls are not in place or functioning properly. Accordingly, as with the inherent risk assessment, evaluate the organization’s total risk exposure separately from the management policies and processes that are currently in place to control the risk.

It is important to assign a rating for each category of risk. Also, comment on reasons for assigning a grade of 7 to 9 since those risks will need to be evaluated for risk mitigation controls.

Corporate Counsel’s Role in Risk Assessment Compliance

Corporate counsel can have a significant impact on compliance with the board’s objectives through oversight of the ERM risk assessment process in the following manner:

Communicate the legal implications of business (for-profit and nonprofit) risk issues to risk managers to assist them in preparing ERM risk assessments.
Provide effective guidance to the board and management on how to implement and enforce strong corporate governance to protect shareholders, stakeholders, members, and donors.
Review policies and procedures (which include risk management controls) to ensure the documents are properly vetted from a legal perspective.
Assist with quantifying risks through an understanding of regulatory fines, costs of litigation, and other related costs.
Provide routine risk management guidance to risk managers throughout the organization based on the results of court cases.

To accomplish these and other related roles, counsel must participate as an advisor to the risk management team that creates and implements the periodic ERM risk assessments. Counsel should:

Review all risk assessment questionnaires to ensure they incorporate legal guidance and risk trends.
Monitor the results of risk assessments to evaluate the potential implications for meeting the board’s strategic objectives within their risk tolerance.
Provide guidance to the board on risk trends and ranking risk priorities.

Counsel’s oversight role should be objective as well as a routine part of the oversight process, which traditionally includes the internal and external audit functions as well as other oversight positions such as the chief risk officer. In addition, the board should allow counsel to work directly with the oversight functions and human resource and regulatory compliance managers to assist with evaluating risks inherent in the organization and the effectiveness of management in managing those risks.

Identifying Trending Risks

Corporate counsel can assist the board and management in identifying trending risks that should be considered in ERM risk assessments. Below are some examples of the types of risks that counsel might consider.

Invasion of Privacy

A hacker accesses ABC, Inc.’s account information through a financial institution’s website and sells the information to a third party. ABC sues the institution, alleging that it was negligent in safeguarding the account information and that ABC suffered economic loss as a result of the account breach.

Loss or Damage to Electronic Customer Data

ABC, Inc. applies for a loan on an institution’s website. A loan officer sends an e-mail to ABC concerning the status of the application. ABC later alleges that the e-mail contained a virus that deleted all financial records from one of ABC’s servers. ABC demands that the institution compensate them for the cost of reconstructing the data and for losses suffered when ABC could not access data to file tax returns on time.

Denial, Impairment, or Interruption of Service

A hacker institutes a denial of service attack on ABC, Inc.’s website, shutting down the site for more than 24 hours. During that time, a customer attempts to access his account to pay an outstanding invoice. Because ABC’s website is down, the payment is deemed late before the customer can complete the electronic payment. The customer alleges that the delay caused by the denial of service caused a loss of service from ABC that resulted in a loss of business for which ABC is responsible.

Unauthorized Access to a Customer Account

A hacker accesses ABC, Inc.’s account through their financial institution’s website and uses personal information in the account records to obtain credit cards in ABC’s name. When the credit card issuers attempt to hold ABC liable for the unpaid charges, ABC sues their financial institution for failing to safeguard their confidential information.

Loss of Business Opportunity

ABC, Inc. wires funds online from their corporate account at Bank A to their payroll account at Bank B. The funds are not transferred due to a systems malfunction at Bank A. When ABC’s payroll processor cannot verify that ABC has sufficient funds on deposit to pay employees through direct deposit, ABC is late paying its employees. ABC sues Bank A, alleging that their business was adversely impacted when their employees were not paid on time.

Libel, Slander, and Defamation, or Other Actionable Oral or Written Disparagement

ABC states on its website that its product is superior to competitor products. A customer sues ABC after he purchases a product from them, alleging that he could have obtained a better product from a competing vendor. Although ABC obtains dismissal of the complaint, significant defense costs are incurred.

Infringement of Copyright, Misappropriation of Ideas, or Plagiarism

ABC, Inc. obtains a report from a consultant concerning issues facing ABC’s market to support their claims of superior service. In preparing the report, the consultant copies extensively from another report, written by the consultant’s former partner. ABC places the report on its website for informational purposes, along with other information ABC provides to attract new customers. The consultant’s former partner sues ABC, alleging that ABC plagiarized his work.

Infringement of Trademark, Trade Name, or Service Mark

ABC, Inc.’s marketing department develops several slogans and phrases to emphasize the quality of their new service. ABC includes these slogans on the home page of its website. However, the marketing department neglects to seek the advice of an intellectual property attorney as to whether any of the slogans are already in use by other companies. A national corporation, which has registered two of the slogans as service marks, sues ABC.

Extortion

ABC, Inc. terminates an employee who feels he has been unjustly treated. In retaliation, he threatens to disseminate confidential information over the Internet unless a year’s salary is wired to a specified account within 24 hours.

Ransomware

Ransomware is malware that restricts access to an infected computer system until the user pays a ransom to the malware operators to remove the restriction. For instance, ransomware might systematically encrypt files on ABC, Inc.’s server hard drives. The drives become difficult or impossible to decrypt without paying the ransom for the encryption key.

Payment Systems

ABC Inc.’s financial institution incurs credit risk in different forms, depending on the type of transaction and the institution’s role in the transaction. Here are examples:

ACH Credit Entries

For ACH credit entries, the Originating Depository Financial Institution (ODFI) incurs credit risk upon initiating the entries until ABC funds the account at settlement. The Receiving Depository Financial Institution (RDFI) incurs credit risk if it grants ABC funds availability prior to settlement of the credit entry.

ACH Debit Entries

For ACH debit entries, the ODFI incurs credit risk from the time it grants ABC funds availability until the ACH debit can no longer be returned by the RDFI. ODFIs generally charge back a returned ACH debit to the originator. But the ODFI may suffer a loss if, for example, the originator’s account has insufficient funds or has been closed. The RDFI’s credit risk from a debit entry arises if it allows the debit to post and overdraw its customer’s account.

Institutions implement credit-risk controls that:

Establish underwriting standards
Require analysis of originators’ creditworthiness–and–
Set appropriate credit exposure limits

Institutions with more complex ACH programs or institutions that do not mitigate credit risk through holdbacks or reserve accounts have more expansive credit-risk management systems. These credit risk issues can adversely impact ABC’s ability to maintain its banking relationships.

Human Resources

The risk assessment of Human Resources (HR) functions requires input from leaders in all disciplines within the organization. Leaders in marketing, sales, operations, finance, etc.—all should be asked for their opinions, ideas, and thoughts on risk areas such as:

Hiring and selection
Training and development
Productivity
Organizational planning
Reward and recognition
Administration

It may be helpful to have an HR expert participate or provide leadership in the process, but it would be a mistake to hand off assessment of the HR functions to one or two HR staff people when the assessment questions and considerations require input from many disciplines within the organization.

Data Theft Risk Mitigation Example

The risks described above would require an assessment of their potential impact on the organization (ABC, Inc. in the examples). In addition, the assessment should identify and prioritize risks and provide for risk mitigation controls where necessary. Since this type of risk assessment is focused on specific risks, it is less comprehensive than the organization-wide ERM risk assessments previously described.

Below is an example of a risk assessment that is focused on a specific risk. This risk topic is data theft technology risks. When evaluating how to protect against technology risks, it is important to identify the ways that an organization can be attacked. Attacks take many forms, from breaking into a computer room and stealing data files to a trusted employee who gets around controls because of their trusted position. A summary follows of the typical ways that hackers and thieves carry out their attacks and typical risk mitigation control procedures that may prevent the attacker from succeeding.

Posing as a Customer

Risks

A thief uses an assumed or stolen identity to pose as a customer of ABC, Inc. and attempts to open an account with ABC.
A thief uses a stolen credit card number from ABC to illegally purchase goods and services from ABC.

Procedures

Implement, update, and manage:

Customer identification procedures
User signup procedures
Transaction limitation procedures
Dollar limits per transaction
Credit lines access limits
Cash management user approval criteria
Wire limitations
ACH origination limits
Transaction settlement procedures

Using Technology to Launch an Attack

Risks

A thief attempts to break through Internet security measures to illegally gain access to ABC’s online banking services.
A thief attempts to steal data from ABC’s customer databases, using hacker tools over the Internet.

Procedures

Install, update, and manage:

Network perimeter controls (firewalls and intruder detection)
Data integrity controls (encryption)
Virus prevention management
Software patch management

Taking Advantage of a Trusted Employee Position

Risks

An ABC employee uses his or her knowledge of network security weaknesses to access systems and steal customer data.
An employee does not enforce security controls and allows another person to steal customer data.

Procedures

Manage and monitor:

Human access controls (passwords)
System overload and capacity management
Backup and recovery procedures (protection from unexpected shutdowns)

Identifying Industry-Specific Inherent Risks

In addition to identifying risk trends as discussed above, counsel can assist the board and risk managers with identifying industry-specific risks. These risks are the inherent risks that were discussed earlier in this article. Below are some examples of the risks inherent in a sampling of industries. Counsel should work with the board of each organization they represent to understand, monitor, and evaluate through ERM risk assessments the risks inherent in those industries.

Banking

Credit risk is the current and prospective risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with the bank or otherwise to perform as agreed. Credit risk is found in all activities in which success depends on counterparty, issuer, or borrower performance. It arises any time bank funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether reflected on or off the balance sheet.

Risk assessments should consider both the quantity of credit risk and the quality of credit risk management. Quantity of credit risk is derived from the absolute amount of credit exposure and the quality of that exposure. How much credit exposure a bank has is a function of:

The level of loans and other credit/credit-equivalent exposures relative to total assets and capital–and–
The extent to which earnings are dependent on loan or other credit/credit-equivalent income sources

Quality of credit risk management involves the adequacy of controls over the process of originating, funding, and overseeing loans until they are paid according to the loan agreement.

All else being equal, banks that have higher loans-to-assets and loans-to-equity ratios and that depend heavily on the revenues from credit activities will have a higher quantity of credit risk. The quality of exposure is a function of the risk of default and risk of loss in assets and exposures comprising the credit exposure. However, the risk of default and loss is not always apparent from currently identified problem assets. It also includes the potential default and loss that will be affected by factors such as bank risk selection and underwriting practices; portfolio composition; concentrations; portfolio performance; and global, national, and local economic and business conditions.

To determine the quantity of credit risk, risk assessments must consider an array of quantitative and qualitative risk indicators. These indicators can be leading (rapid growth), lagging (high pastdue levels), static (greater/less X%), relative (exceeds peer/historical norms), or dynamic (trend or change in portfolio mix). Many of these indicators are readily available from call report and Uniform Bank Performance Report information. Other indicators, such as a bank’s risk tolerance or underwriting practices, are more subjective.

It is important to note that banks can exhibit an increasing or high level of credit risk even though many, or all, traditional lagging indicators or asset quality indicators are low. Although a qualitative indicator may have the opposite effect on credit risk that a quantitative indicator has (the one may mitigate the other’s effect), the indicators can also work together (the one may add to the other’s effect). While each type of measure can provide valuable insights about risk when viewed individually, they become much more powerful for assessing the quantity of risk when viewed together.

Health Care Workers

Every health care worker can influence the risks related to the health, safety, and welfare of patients. Health care workers are defined as everyone that works within a health care facility.

A risk assessment within a health care facility should provide for a thorough evaluation of the workplace to identify anything that may cause harm to patients. The assessment should consider how probable and severe the risk is and determine what measures should be taken to prevent or control the harm from occurring.

Here is a sample outline of the typical risk assessment:

Identify hazards to patient health.
Decide what patients are at risk and how the risk might arise.
Conduct and evaluate the seriousness of the risks identified.
Document assessment findings.
Propose action steps to improve patient safety.
Identify who will be responsible for implementing revised policies, procedures, and personnel training.
As risks are identified, update the risk assessment and take corrective action.

The outcome of the risk assessment should be to create awareness of hazards and risks, identify who may be at risk, and determine if existing control measures are adequate or if alternative controls should be implemented. Ideally, controls will be designed to prevent injuries or illnesses based on a prioritization of the seriousness of health hazards.

Health care facilities have a legal obligation to limit unprotected exposures to pathogens, the transmission of infections associated with procedures, and the transmission of infections associated with use of medical equipment, devices, and supplies. Risk assessments should address the adequacy of control measures to manage the facility’s obligations to safely care for patients.

Retailers

Retailers are exposed to many risks due to the need to provide customers with direct physical and online access to their products and services. One access point that has resulted in losses for many retailers is incidents in which a skimming device is physically implanted (tampering) on an asset that reads magnetic stripe data from a payment card (e.g., ATMs, gas pumps, POS terminals, etc.).

Some of the risk assessment issues to consider are:

Does the retailer design (or buy) tamper-resistant terminals?
Do they use tamper-evident controls?
Do they have cameras to watch for tampering?
Are consumers encouraged to protect their PINs?
Are consumers encouraged to let the retailer know if something looks out of the ordinary at an ATM, payment terminal, or gas pump?

The objective for risk mitigation controls is to make it harder for criminals to carry out their plans or to detect the heist more quickly if prevention isn’t possible.

Cybersecurity Insurance

Cybersecurity has become a significant risk issue for all organizations. Hackers can attack from throughout the world and mostly remain undetected. These criminals are well funded and can attack for profit or to achieve political objectives. Often the risk implications of successful attacks can be debilitating and can result in reputational damage. There is also the potential for significant costs related to remediating these attacks, which is why the insurance industry has created cybersecurity insurance policies.

Since there is presently little actuarial basis for underwriting these policies, actual underwriting requires a due diligence investigation into an organization’s internal risk management practices and external business dependencies, including vulnerabilities related to the organization’s suppliers, sub-suppliers, and vendors. In addition, the underwriter’s risk analysis considers threats arising from insiders, inadequate physical security, and international travel. Underwriting also evaluates how consistently the organization has adopted, implemented, and enforced an engaged cybersecurity culture that works toward risk prevention and prompt detection if prevention fails.

The results from the insurer’s underwriting provide an objective look at the organization’s enterprise risk including potential highpriority vulnerabilities. Once the insurance is in place, the insurer will conduct periodic risk assessments to gain insight into evolving cybersecurity risks.

Even if the organization decides not to purchase cybersecurity insurance, the insight gained from participating in the underwriting process may uncover invaluable cyber risk insight based on the insurer’s exposure to multiple industries.

Gary M. Deutsch, CPA, MBA, CMA, CBA, CIA, has worked extensively with financial institutions in audit, lending, financial, and operational areas. He has served in senior positions for regional banks as VP of Finance, Real Estate Loan Officer, and Senior Audit Manager. Mr. Deutsch served as a consultant to financial institutions in strategic planning, profit improvement, financial management, and merger- and acquisition-related studies while working at KPMG. Mr. Deutsch is the President of BRT Publications LLC, a professional authoring company serving the financial industry. He has written numerous financial industry books and guides, including Risk Assessments for Financial Institutions, a LexisNexis/Sheshunoff publication.

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Market Trends: Indemnification Provisions in Asset Purchase Transactions

Ashley Erazo — Thu, 09 Feb 2017 20:12:39 GMT

Indemnification provisions are among the most highly negotiated and critical deal points in private M&A transactions. In general, the parties provide mutual indemnification to each other for breaches of representations, warranties, and covenants. In practice, indemnification provisions are a tool to allocate the risk of known and unknown liabilities between the buyer and seller.

Key terms that are typically negotiated are:

De minimis threshold
Baskets & deductibles
Caps
Survival period of representations and warranties

The following analysis is based on asset acquisitions announced between January 1, 2016 and September 30, 2016 involving companies valued at $100 million and higher, generated by Lexis^® Market Tracker, lexismarkettracker.lexisnexis.com.*

Indemnification by Seller and Acquirer

For the nine-month period ending September 30, 2016, data are available for a total of 154 asset purchase transactions involving companies valued at $100 million and higher. Of these, indemnification data were available for 148 transactions, of which 141, or 95%, contained indemnification obligations by the seller. Of the 148 transactions for which data on indemnification were available, 131, or 89%, contained indemnification obligations by the acquirer. Of the 148 transactions for which indemnification data were available, 142, or 96% transactions included indemnification obligations of either party or both parties.

Indemnification as Exclusive Remedy

The parties to the transaction may agree that indemnification will be the sole and exclusive remedy for any claims arising out of the purchase agreement. Certain claims, such as fraud and knowing or willful misconduct, are typically carved out from the exclusivity, giving the indemnified party the right to pursue other legal or equitable remedies for those claims. Of the 142 asset purchase deals announced between January 1, 2016 and September 30, 2016 with indemnification provisions, 85, or 60%, provided for indemnification as the exclusive remedy.

De Minimis Threshold

Indemnification packages may include a requirement that claims brought for indemnification exceed a de minimis threshold or minimum claim amount. This threshold prevents acquirers from bringing immaterial claims. Of the 142 asset purchase deals announced between January 1, 2016 and September 30, 2016 with indemnification provisions, 45, or 32%, contained a de minimis threshold or minimum claim amount.

Baskets and Deductibles

Beyond a de minimis claim amount, many deals include a “tipping” basket or a deductible, both of which require that the aggregate amount of all claims exceed a specified dollar threshold before the indemnifying party becomes obligated to compensate the other party for the claims. With a basket, once the threshold is reached, the indemnifying party becomes liable for the full amount of claims. In contrast, with a deductible, once the threshold is reached, the indemnifying party becomes liable for only the amount in excess of the deductible. Of the 142 asset purchase deals announced between January 1, 2016 and September 30, 2016 with indemnification provisions, 43, or 30%, contained a basket.

For the deals with a basket, the minimum basket amount expressed as a percentage of the deal value was 0.01%, the maximum basket was 6%, the median was 0.1%, and the mean was 0.55%.

Of the 142 asset purchase deals announced between January 1, 2016 and September 30, 2016 with indemnification provisions, 74, or 52%, contained a deductible.

For the deals with a deductible, the minimum deductible amount expressed as a percentage of the deal value was 0.06%, the maximum deductible was 10%, the median was 0.67%, and the mean was 0.94%.

Exceptions

Most deals contain exceptions to the basket and deductible limitations. While the exceptions may be specific to each deal, so-called “fundamental” representations (e.g., due organization, authorization, capitalization, noncontravention, etc.) and tax and environmental representations may be excluded from the limitations of the basket and deductible. Of 117 transactions with a basket or deductible, 67, or 57%, contained exceptions for certain breaches of representations from the basket or deductible.

Indemnity Caps

Indemnifying parties typically impose a limit on the total claims amount that they will indemnify. This limit, or cap, is generally calculated as a percentage of the overall deal price. Of the 142 asset purchase deals announced between January 1, 2016 and September 30, 2016 with indemnification provisions, 126, or 89%, contained a cap.

Among the deals with a cap, the minimum cap was 0.06% of the purchase price, the maximum cap was 100% of the purchase price, the median cap was 9% of the purchase price, and the mean was 8.89% of the purchase price.

Exceptions

As with baskets and deductibles, indemnity caps may be subject to certain exceptions for specified types of claims, such as fraud, willful misconduct, or breaches of certain representations and warranties. Of the 126 transactions that contained an indemnity cap, 83 transactions, or 66%, included exceptions to the cap. The most common kind of exception was fraud, which appeared in 46 transactions. Note that many transactions contain multiple exceptions to the indemnity cap.

Survival Period

Indemnifying parties will also limit their indemnification obligations by imposing a time period during which the other party may bring a claim for indemnification for a breach of a representation or warranty. Most deals will typically include multiple survival periods, including a shorter period for breaches of general representations, with longer periods for claims arising out of breaches of fundamental representations (e.g., due formation, authorization, capitalization) and tax and environmental representations.

Of the 142 asset purchase deals announced between January 1, 2016 and September 30, 2016 with indemnification provisions, 51, or 36%, had a single survival period for claims arising out of breaches of representations and warranties.

For this set of deals with a single survival period, the minimum length was 159 days, the maximum was 730 days, the median was 270 days, and the mean was 284.56 days (approximately 10 months).

For the same period, 87 transactions contained extended or unlimited survival periods for at least some representations and warranties. The most common extended representations are with respect to organization, authorization, and taxes (appearing in 90%, 92%, and 70% of transactions, respectively).

Key Considerations for Indemnification Provisions

Scope

When negotiating an indemnification provision, it is important to keep in mind that indemnification is designed to allocate risks between parties to a transaction. Therefore, it is essential to have a full understanding of the risks inherent in the assets or business being purchased in the transaction, whether you are representing the seller or the acquirer. Counsel should also weigh the potential magnitude of the risks to be indemnified versus the economics of the transaction, so that the scope of its client’s indemnification obligations is appropriate to the benefits to be conferred upon the parties in the deal. Typically, indemnification in M&A agreements covers losses resulting from breaches of representations and warranties and breaches of covenants. Depending on the nature of the assets or business being acquired, the parties may also agree to indemnification obligations for losses resulting from deal-specific liabilities. The purchase agreement should specify whether thirdparty claims are covered under the indemnification.

Parties

As counsel, you should ensure that the right parties are subject to, and beneficiaries of, indemnification obligations. In an asset purchase transaction, the seller and acquirer typically indemnify each other for losses arising from the agreement. Each party may also add their directors, officers, employees, and other affiliates and subsidiaries as indemnified parties. The circumstances of the transaction may dictate that parties other than the seller and acquirer provide indemnification. For example, if the seller will liquidate and dissolve after the asset purchase, the acquirer may require the seller’s shareholders or other affiliated parties to provide indemnification for losses that might arise post-closing. In this circumstance, the seller will want to limit the number of parties obligated to indemnify the acquirer as well as the scope of the indemnification and the maximum potential liability.

Limits on Indemnification

As discussed above, indemnification provisions often include baskets, deductibles, and caps to limit the overall amount for which the indemnifying party will be held liable. Survival periods also limit a party’s indemnification obligation by setting a time limit on when claims may be brought. Counsel should negotiate these limits with an understanding of the potential liabilities associated with the assets or business being purchased and the economic realities of the transaction for the seller and acquirer. With respect to survival periods, the length of time can vary depending on the nature of the claim. For example, claims arising out of contract breaches can have a shorter survival period than environmental liabilities, which may not manifest for many years. Counsel should also take into account the statutes of limitations for various types of claims when determining the appropriate length of indemnification obligations.

Procedures and Dispute Resolution

The purchase agreement should set forth the procedures for asserting an indemnification claim. If part of the purchase price will be set aside in escrow, the purchase agreement should specify whether the escrow covers indemnification claims. If so, the agreement should include procedures for satisfying indemnified claims out of the escrow account (or refer to the escrow agreement for such procedures). The purchase agreement should also include provisions for resolving disputes relating to indemnification— whether such disputes will be resolved through litigation or alternative dispute resolution.

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Attorney Cloud Computing for Technology Clients: A Patent and Trade Secret Perspective

Ashley Erazo — Tue, 08 Nov 2016 14:59:01 GMT

By: Eric M. Dobrusin, Kristen L. Pursley, and Daniel P. Aleksynas, The Dobrusin Law Firm.

A broad range of attorneys represent technology companies in some capacity, and therefore, potentially handle and store sensitive information related to patents or trade secrets.

FOR EXAMPLE, YOU MAY BE A PRODUCT LIABILITY attorney engaged in discovery about product redesign by a client. You may be a mergers and acquisition attorney conducting due diligence concerning assets of a technology company. You may be a corporate counsel engaged in drafting warranties for a product or a technology offered for sale by a client. You may be an environmental attorney seeking permits for a manufacturing plant. You may be a banking attorney negotiating a security agreement in technology of a client. For all of the above, and for attorneys in other disciplines as well, the likelihood that you will encounter issues involving confidential technical information affecting trade secrets or patent rights of a client continues to increase. Additionally, it is likely that you will be faced with handling sensitive privileged information affecting the enforcement of patent or trade secret rights. This article provides insights for counsel, such as those listed above, who represent technology companies and whose firms plan to migrate to the cloud.¹

The list of ethical considerations you and your firm will face as you transition your practice to cloud computing continues to grow. The manner in which you handle client technical information and privileged information in the cloud may affect your clients’ patent and trade secret rights. In this era of cloud computing infancy, various ethics governing bodies have stepped in to urge caution in the handling of sensitive client information.

Cloud computing, often referred to as simply the cloud, is Internetbased computing in which large groups of remote servers are networked to allow sharing of data-processing tasks, centralized data storage, and online access to computer services or resources.² Traditional data storage means involved the use of on-site servers. In using traditional storage methods, the location of data is always certain. Use of the cloud, however, means that the exact location of data is never certain.

This article looks at the trend toward cloud computing from the eyes of attorneys who represent technology clients in patent and trade secret matters. This article further hopes to provide guidance to those involved in commercial litigation and corporate practice by identifying where cloud-based data storage could present risks to sensitive trade secret and patent-related information that may be encountered during litigation or corporate work. Attorneys practicing in all disciplines are likely to encounter and be expected to handle various aspects of client confidential technical information in the course of rendering legal advice. It therefore may be prudent for any attorney representing clients in the technology sector to be aware of the issues that could arise when dealing with client technical information involving trade secret, patent, or attorney-client privilege considerations.

As a practical matter, precautions taken to protect against a data breach generally will likely not impact the patent and trade secret rights of your clients, especially if steps are taken to make clients aware of how and where their data is being stored. Plus, there are a number of provisions in the law to help mitigate consequences of a data breach. However, in the intellectual property field of practice, it can be argued that a sea change has occurred in the law, with the America Invents Act and a patent-active Supreme Court.³ As a result, there may be some uncertainty for technology companies based upon the new “first to file” provisions of the America Invents Act, among others. Thus, as attorneys move to the cloud, it may be worth keeping these patent and trade secret considerations in mind.⁴

Cloud computing has some potential pitfalls, but the pitfalls are analogous to those historically faced by counsel before the advent of the cloud. This article addresses:

Ethical obligations that may impact your practice via the cloud
Certain patent and trade secret considerations related to attorney client privilege, and the potential for loss of rights resulting from client confidentiality breaches in the cloud
Assistance in identifying potential cross-border implications of cloud computing in regard to technology export laws
Guidance for structuring your practices to mitigate potential issues in the coming generation of cloud computing law practice

The Ethics

Legions of articles have been written about the ethical obligations of attorneys who utilize cloud-based data storage. In general, the focal point of the analysis has centered on American Bar Association (ABA) Model Rule 1.1 which states: “A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.” Particular attention has been paid to Comment 8, which requires attorneys “[t]o maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology, engage in continuing study and education and comply with all continuing legal education requirements to which the lawyer is subject.”

Even more prevalent of late has been Model Rule 1.6 (c), stating that “[a] lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.”

Since the advent of the computer age, the ethics governing bodies have been relatively liberal in conforming ethical obligations with changing technologies. For example, the ABA in 1999 (Formal Opinion No. 99-413) paved the way for attorneys to utilize e-mail correspondence while still maintaining compliance with ethical obligations. As with e-mail, the initial response of the ethics governing bodies is that there should be no bar forbidding cloud computing.⁵ Rather, opinions so far have been permissive, while expressing an expectation that attorneys approach the issue with a certain amount of prudence, by using “reasonable precautions”. Additional discussion on these reasonable precautions can be found in the Survey of Ethical Considerations set forth below.

Attorney-Client Privilege Considerations

As with the representation of any client, a data breach resulting from storage of privileged subject matter in the cloud may invite possible consequences affecting the attorney client privilege for technology clients.⁶ For such technology clients, at least in the patent area, the attorney-client privilege has historically served a unique role.

Section 284 of the Patent Act⁷ authorizes a U.S. District Court to award up to treble damages for certain patent infringement undertaken willfully. From the advent of the Court of Appeals for the Federal Circuit, it has been a common practice for an accused infringer to rely upon an advice of counsel defense to avoid the increased damages.⁸ This practice has evolved and moderated over the years, to a point where a party need not have secured an opinion of counsel to obviate the risk of increased damages.⁹

However, if a party relies upon advice of counsel, then the party must waive the privilege as to all communications surrounding the advice.¹⁰ In some instances, the risk of such waiver may be unpalatable to a party. For instance, the waiver may be sufficiently broad that it would disclose positions against the interest of a party or the proverbial smoking gun. Thus, a party may rely upon other factors to defend against a claim of increased damages.

It has become the law that no adverse inference can be drawn if a party is unwilling to waive the privilege and rely upon an advice of counsel defense.¹¹ Though it is not mandated that clients obtain advice of counsel to avoid a risk of increased damages,¹² many clients still observe this as a preferred practice and may depend upon preservation of confidentiality of counsel’s communications regarding his or her opinion. That is, though a client may invariably waive privilege in any event, many clients likely have a desire to choose if and when they will invoke the waiver.¹³

In addition to the above, the behavior of a party to patent litigation (patent owner or accused infringer) has become and will continue to grow as a focal point based upon recent Supreme Court decisions.¹⁴ In these cases, the Court liberalized the standards for fee shifting. Litigation conduct of a party is a relevant factor. Proofs regarding that conduct might require discovery of litigation strategies and other privileged communications stored by litigation counsel in the cloud.

From the above, some of the primary concerns that law firms may have pertain to the security of the privileged matter in the cloud and the potential for breaches. Additionally, law firms may want to consider the long term viability of its cloud service provider. The need for access to privileged matter and the full scope of potentially waived privileged information may not arise for many years after the communications are created and transmitted to the cloud (many patent risks may last for the duration of a patent—in many instances, 20 or more years). It may be important to ensure that the service provider will remain in business or that future access to the information is otherwise assured.

Confidential Technical Information

Another consideration that may arise when representing technology clients is the relative frequency with which confidential technical information is shared between client and attorney. Such information may be contained in any of a number of electronic documents (whether in draft form or final form) that clients share with counsel, and the relative sensitivity of the documents may not be immediately apparent to client or counsel. It is quite possible that the legal advice sought may not even be related to patenting. Indeed, as mentioned in the introduction, these documents may enter the cloud files of counsel in the course of drafting routine non-patent business filings. However, they may also be relate to shareholder reports, documents produced during discovery of a non-patent commercial litigation, environmental permits, land use considerations in real estate transactions, employee safety, product liability, regulatory approvals, securities, or other matters. The confidential technical information may be embodied in strategic plans, competitive analyses, test reports, intellectual property committee meeting minutes, formula sheets, process control sheets, and even more ordinary documents like invoices, shippers, and the like.

A relatively well-known consideration affecting protection of intellectual property of technology clients depends upon the transition of technical information from a confidential state to a publicly available state. Under the Uniform Trade Secrets Act, adopted in most states, a trade secret is defined as:

(4) “Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and

(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.¹⁵

Similar language is employed in the newly adopted Defend Trade Secrets Act.¹⁶ As is apparent, upon losing its secrecy, a trade secret may cease to exist.¹⁷

Under patent law, in the United States and elsewhere around the world, a party may lose the right to patent upon public disclosure of technical information. Section 102(a) of the United States Patent Act states:

(a) Novelty; Prior Art.—A person shall be entitled to a patent unless—

(1) the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention.¹⁸

As can be appreciated, a breach of security that results in public accessibility to confidential technical information can thus be seen as a risk with potential to jeopardize both trade secret and patent rights.¹⁹ Note that “public” is arguably broad enough to encompass any third party.²⁰

Data Subject to Export Laws

Yet another consideration that might arise when representing a technology client relates to a law firm receiving data that is the subject of restrictions against export without an export license. Perhaps the two most prominent sources of restrictions of concern for U.S. firms arise from the International Traffic in Arms Regulations (ITAR)²¹ and the Export Administration Regulations (EAR).²² Also of potential relevance may be the restriction against filing abroad certain patent applications for U.S. inventions before obtaining a foreign filing license.²³ To illustrate, the definition of technical data under ITAR is broad:

§120.10 Technical data.

(a) Technical data means, for purposes of this subchapter:

(1) Information, other than software as defined in §120.10(a)(4), which is required for the design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification of defense articles. This includes information in the form of blueprints, drawings, photographs, plans, instructions or documentation.

(4) Software (see §120.45(f)) directly related to defense articles.

In the most general sense, the U.S. technology and data export restrictions are structured to prevent dissemination of the restricted subject matter to foreign countries, as well as to foreign citizens, even those within the United States.²⁴ In recognition of the growing trend of cloud computing,²⁵ on June 3, 2016, updated rules for the EAR were published (effective September 1, 2016) with an eye towards “update[ing] and clarify[ing] application of controls to electronically transmitted and stored technology and software, including by way of cloud computing.” That same date, amended ITAR rules were also published.²⁶ Among amendments in those rules was an amendment to 22 C.F.R. § 125.4(b)(9)(ii), in which security precautions are mandated to prevent unauthorized release of exported, re-exported, or retransferred technical data. The amended provision states:

Such security precautions may include encryption of the technical data; the use of secure network connections, such as virtual private networks; the use of passwords or other access restrictions on the electronic device or media on which the technical data is stored; and the use of firewalls and other network security measures to prevent unauthorized access.

As can be seen, law firms that represent technology clients may encounter technology or technical data subject to export restrictions. To the extent such firms engage in cloud computing, they may have obligations to assure that any cloud computing servers employed are located within the United States, are secure from access by foreign persons, and employ one or more access restrictions (e.g., encryption, passwords, firewalls, etc.).

Survey of Ethical Considerations from Various Jurisdictions

As discussed above, as more and more law firms move from storing data on servers that are located within the law firm to storing data in the cloud, ethics committees around the country have rendered opinions and have provided attorneys with recommendations. Provided below are a few such illustrative recommendations. While there are a plethora of differing suggestions, as will be seen, the general themes and requirements so far tend to be fairly consistent. The following table provides some of the factors attorneys may want to consider when choosing a vendor and implementing their cloud computing. As will be seen, so much of whether counsel is in compliance will depend upon reasonableness.²⁷

Given the potential pitfalls identified above and the guidelines that have been enumerated by ethics governing bodies, there are a few steps that an attorney or law firm may take in an effort to more safely navigate the storage options for client information:

Safeguards to Consider

1. As seen from the discussion on attorney-client privilege, at least in the context of patent situations, the consequences of an unintended disclosure potentially may be obviated, or there may be no consequence at all if the privilege is to be waived. However, to preserve the choice of if or when to waive for the client, opinions of counsel can be stored in a segregated location within the cloud or even in a local storage location that is not shared with other client information and possibly in a location not accessible via the Internet. For some situations, such opinions may also be the subject of additional precautions (e.g., password protection of a file, encrypted email communication, or otherwise).

2. It may prove valuable to investigate the ability to retrieve documents from the cloud at a subsequent date. As attorneys of technology clients are no doubt aware, many years may pass before a client document must be accessed. In the patent and trade secret context, needs for accessing data may not arise until many years after an opinion is rendered. It is therefore important to know where your data will be if your service provider ceases to exist.

3. It may be worth exploring with a provider the identity of the provider’s employees to which your data may be exposed. It may be important to ensure they are U.S. citizens for technology export purposes. It may also help assure you that the provider is sensitive about its customers’ security concerns and that the provider will take measures to prevent a rogue employee from accessing and disseminating data.

4. It may prove helpful to communicate with technology clients about the sensitivity of the client’s data and remind the client to be proactive to inform you when sensitive technical information is to be provided. Affording the client an active role to participate in the decisions regarding the destiny of the data may allow you to identify opportunities for clients to select alternative storage if they have concerns.

5. It is possible that your data storage service provider contracts with additional facilities for space. It may be useful to understand what obligations (if any) these facilities have for maintaining the security of your client data.

6. It may be worth exploring if data storage providers include any contract language that claims ownership of some or all data stored on its servers or access to such data (such as for analytics use).

7. It may be worth exploring the possible ongoing maintenance of on premises data storage, which may have only limited or no access to the Internet, or the possibility of local storage of a backup of your cloud-based files. The move to cloud computing does not necessarily mean that attorneys must immediately abandon local storage media.

Conclusions

As the article describes, in the course of migrating to cloud computing, attorneys who represent technology clients may encounter conventional concerns for data security, as well as some potential concerns unique to patents and trade secrets of the technology clients. Notwithstanding the concerns, the way is being paved for these attorneys to employ cloud computing. After all, many such concerns also existed before the computer age, but were deemed acceptable risks (e.g., it was a standard practice to use conventional postal services for many communications and store documents in third party off-site facilities). Ethics opinions of various governing bodies have supported cloud computing for attorney use when reasonable precautions are employed. In the context of representing technology clients, additional sensitivity to issues of attorney-client privilege and the consequences of public dissemination of confidential technical information may encourage these attorneys to adopt appropriate safeguards for that information. Though a data breach remains a relatively low frequency occurrence (e.g., as compared with instances of conventional viruses and malware), exercise of at least some of the reasonable precautions identified in this article will hopefully mitigate the potential severity of a breach.

Eric M. Dobrusin , Kristen L. Pursley, and Daniel P. Aleksynas are shareholders in The Dobrusin Law Firm, PC, Pontiac, Michigan, where they concentrate their practice in Intellectual Property Law. They are coauthors of Intellectual Property Culture: Strategy and Compliance (Matthew Bender 2015 Ed.). Bryan Lemanski provided research and support for this article.

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EEOC'S Final Rules on Wellness Programs

Ashley Erazo — Fri, 02 Sep 2016 16:05:51 GMT

By: Jonathan R. Mook, DiMuroGinsberg, P.C.

Given concerns over rising health care costs and missed workdays by employees suffering from various illnesses, many employers have implemented employee wellness programs and activities to promote healthier lifestyles or to prevent disease with the expectation that such programs will reduce healthcare costs.¹ However, these programs must be appropriately designed so as not to run afoul of existing anti-discrimination laws, including laws prohibiting discrimination based on disability or genetic information, among others.

ON MAY 16, 2016, THE U.S. EQUAL EMPLOYMENT Opportunity Commission (EEOC) took a big step forward by providing guidance on how wellness programs should be fashioned to comply with the requirements of the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA) by issuing Final Rules on the application of both laws to employer wellness programs.²

ADA Final Rule

The ADA contains a number of exceptions to its general rule prohibiting employers from making disability-related inquiries or requiring medical examinations. One of the exceptions applies to certain voluntary wellness programs.³ The ADA Final Rule makes it clear that medical inquiries or medical examinations as part of an employee health or wellness program are allowed under the ADA as long as the inquiries and examinations are conducted in connection with an “employee health program” (as defined below) and are truly voluntary, and the information obtained is used only for purposes of the program and satisfies confidentiality requirements.⁴ While employees may not be required to participate in an employer’s wellness program, the ADA Final Rule allows a company to offer incentives to encourage employees to participate. However, the incentives must be consistent with the nondiscrimination provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Affordable Care Act (ACA),⁵ which generally limits incentives to 30% of the total cost of employeeonly coverage.⁶

The ADA Final Rule specifically revises Section 1630.14 of its regulations⁷ in the following manner to address when and how medical examinations and inquiries are permitted in the context of an employee health or wellness program.

Definition of Employee Health Program

The EEOC, for the first time, defines what constitutes an employee health program that may rely on the wellness program exception to the ADA’s prohibition on requiring medical examinations and making health-related inquiries: it is a program “reasonably designed to promote health or prevent disease.” Under the regulations, a program will satisfy this standard if the program (1) has a reasonable chance of improving the health of, or preventing disease in, participating employees; (2) is not overly burdensome nor a subterfuge for violating the law; and (3) is not highly suspect in the method chosen to promote health or prevent disease.⁸

According to the EEOC, this definition is satisfied if an employer institutes a program to conduct a health risk assessment or biometric screening of employees for the purpose of alerting them to health risks of which they may not be aware. An employer’s use of aggregate information from employees’ health risk assessments to design and offer health programs aimed at specific conditions that are prevalent in the workforce will also pass regulatory muster. On the other hand, the EEOC explains that if an employer collects medical information on a health questionnaire without providing employees any follow-up programs, information, or advice, this activity will not satisfy the definition of an employee health program and will not be eligible for the wellness program exception to the ADA rules.⁹

Also excluded from the definition are programs designed mainly to shift costs from the employer to targeted employees based on their health and programs where an employer imposes overly burdensome amounts of time for participants to achieve a reward, requires unreasonably intrusive procedures, or places on the employee significant costs related to medical examinations.¹⁰

When an Employee Health Program Is Voluntary

Under the ADA, medical inquiries or required medical examinations in connection with a wellness program must be voluntary. The ADA Final Rule sets forth four factors that must be met for employee medical inquiries or medical examinations to be voluntary. These factors are as follows:

The employer does not require employees to participate in the program.
The employer does not deny coverage under any of its health insurance or benefit plans for employees who do not participate.
The employer does not take any adverse action or retaliate against any employee for not participating (or for participating).
The employer provides employees with a written notice, which is reasonably likely to be understood, that describes (1) what medical information will be obtained as part of the wellness program; (2) who will receive the information; (3) how the medical information will be used; and (4) the restrictions on its disclosure.¹¹

To ensure that participation in an employee wellness program is truly voluntary, the Final Rule makes clear that it would be unlawful for an employer that offers both a traditional preferred provider health plan and a high deductible plan to limit the traditional plan coverage only to those employees who participate in a wellness plan that includes a health risk assessment. It would also be unlawful for an employer to condition participation in the employer’s group health plan on an employee completing a health risk assessment.¹²

Incentives Offered for Employee Health Programs

Read in isolation, the requirement that participation in a wellness program must be voluntary might be construed as preventing employers from offering rewards to their employees for their participation or imposing penalties for non-participation in wellness programs (at least to the extent they are not de minimis). However, as the EEOC explained in discussing its Final Rule, the ADA, as interpreted in light of the HIPAA non-discrimination rules, as amended by the ACA, “does not prohibit the use of incentives to encourage participation in employee health plans,” although the ADA “does place limits on them.”¹³

Accordingly, the ADA Final Rule clarifies that the use of incentives in an employee health program, either in the form of a reward or penalty, does not render the program involuntary.¹⁴ In doing so, the EEOC concluded that regulatory limits on incentives to participate in wellness programs “cannot be so substantial as to be coercive.”¹⁵ In general conformity with HIPAA’s regulations, the ADA Final Rule, therefore, allows an employer to offer incentives of up to 30% of the total cost of employee-only coverage under the employer’s group health plan (or, in the absence of an employer plan, an ACA Exchange plan), whether in the form of a reward or penalty, to promote an employee’s participation in a wellness plan that includes disability-related inquiries or medical examinations.¹⁶

The incentive rule applies to all employee health programs whether they are offered only to employees enrolled in an employer sponsored group health plan, offered to all employees whether or not they are enrolled in such a plan, or offered as a benefit of employment where an employer does not sponsor a group health plan or group health insurance coverage. The 30% limit is in reference to the cost of employee-only coverage (including both the employee’s and the employer’s contribution) under, as applicable: (1) the wellness program offered if it is a stand-alone group health plan; (2) the group health plan in connection with which the wellness program is offered; (3) the employer’s lowest-cost group health plan if the wellness program is not offered in connection with a particular plan and the employer has more than one plan; or (4) if the employer does not offer health insurance, the second-lowest-cost Silver Plan on the ACA Exchange for the jurisdiction of the employer’s principal place of business (applicable to a 40-year-old non-smoker).¹⁷

Significantly, the ADA Final Rule goes beyond the existing HIPAA requirements, which impose a 30% limit on incentives for health contingent wellness programs (i.e., programs where the incentive is contingent in part on an activity or outcome related to a health factor). The ADA Final Rule’s incentive limit applies to both health contingent and participatory wellness programs that include a health risk assessment (in a participatory program, the reward or penalty is based only on participation). The HIPAA rule places no limits on incentives for participatory wellness programs.

Confidentiality of Employee Health Program Information

The EEOC’s proposed ADA wellness program regulations already required that medical records developed in the course of providing voluntary health services to employees, including wellness programs, be maintained in a confidential manner, be kept separately from other records, and not be used for any purpose violative of the statute.¹⁸ The ADA Final Rule includes added confidentiality protections by limiting the information received by an employer as part of an employee health program only to aggregated data in a format that does not disclose, nor is reasonably likely to disclose, the identity of specific individuals, except to the extent necessary to administer the plan.¹⁹ Additionally, medical information collected from employees as part of a wellness program that is part of a group health plan also comes within the confidentiality protections of HIPAA as protected health information.²⁰ Thus, in the Interpretive Guidance to the ADA Final Rule, the EEOC opines that a wellness program governed by HIPAA “likely will be able to comply with its [confidentiality] obligations under [the ADA] by complying with the HIPAA privacy rule.”²¹

The Interpretive Guidance also sets forth various steps the Commission believes an employer should take in order to protect the confidentiality of employee medical information:

Properly train individuals who handle medical information about the confidentiality requirements of applicable laws, including HIPAA and the ADA.
Promulgate clear privacy policies and procedures related to the collection, storage, and disclosure of medical information.
Ensure that online systems and other technology have safeguards against unauthorized access, such as encryption.²²

Importantly, the EEOC suggests that, as a best practice, those individuals who are privy to medical information disclosed as part of an employee health program be separate from those persons responsible for making decisions relating to a worker’s employment, such as hiring, termination, or discipline. The EEOC opines that the use of a third party vendor to administer a wellness program may reduce the risk for employers that medical information may be disclosed improperly to individuals who make employment decisions.²³

Reasonable Accommodation Obligations

Although not specifically referenced in the text of the ADA Final Rule, the EEOC’s Interpretive Guidance makes it clear that even if a wellness program is deemed voluntary and provides incentives of no more than 30% of the total cost of employee-only coverage, this does not end an employer’s obligations under the ADA. That is because, in addition to prohibiting discrimination on the basis of disability and the collection of disability-related information, the ADA requires employers to provide reasonable accommodations to employees with disabilities. This statutory obligation includes assisting disabled employees in participating in wellness programs as well as achieving any health-related goals and incentives that the plan may incorporate. As the EEOC’s Interpretive Guidance states, an employer must provide “reasonable accommodations . . . , absent undue hardship, to enable employees with disabilities to earn whatever financial incentive an employer or other covered entity offers.”²⁴

For example, the EEOC advises that in a situation where an employer may offer employees a financial incentive to attend a nutrition class, the employer will need to provide a sign language interpreter for an employee who is deaf and needs an interpreter to understand the information communicated in the class. The only exception is if providing the interpreter would create an undue hardship for the employer. If a wellness program distributes written materials, an employer will also need to provide the materials in an alternative format, such as enlarged print or on a computer disk, to an employee with a vision impairment. Additionally, the EEOC’s Interpretive Guidance opines that if an employee has a disability that makes drawing blood dangerous, the employer must exempt that employee from any biometric screening that includes a blood draw or provide an alternative test that the employee can safely undergo.²⁵

Smoking Cessation Programs

As with reasonable accommodation, the ADA Final Rule does not specifically address smoking cessation programs. In its Interpretive Guidance, however, the EEOC explains that because these rules apply only to employee health programs that include disability related inquiries or medical examinations, a smoking cessation program that merely asks employees whether or not they use tobacco is not a program that implicates the ADA’s limitations on disability-related inquiries or medical examinations. Thus, the EEOC takes the position that the ADA Final Rule does not apply to incentives that an employer may offer in connection with a smoking cessation program. Accordingly, the EEOC opines that an employer can offer incentives as high as 50% of the cost of employee coverage under such a program, pursuant to the HIPAA regulations, without implicating or running afoul of the disability-related inquiries or medical examinations provision of the ADA.²⁶

EEOC’s Final GINA Regulations

Like its ADA Final Rule, the EEOC’s GINA Final Rule clarifies the limited circumstances in which an employer can offer incentives under a wellness program. In particular, the regulations permit an inducement for an employee’s spouse who participates in the program to voluntarily provide medical information.²⁷ The GINA Final Rule does not allow an employer to ask for the spouse’s genetic information, nor to seek either the genetic information or the current or past health status of the employee’s children.²⁸ Instead, the GINA Final Rule limits the type of information that may be sought in a health risk assessment solely to the spouse’s manifestation of disease or disorder.²⁹

More specifically, the GINA Final Rule provides that an employer’s wellness plan may offer a limited incentive (either in the form of a reward or penalty) for an employee’s spouse to provide information about the spouse’s manifestation of disease or disorder as part of a health risk assessment if (1) the health or genetic services offered under the program to the employee’s spouse are “reasonably designed” to promote health or prevent disease,³⁰ and (2) the spouse gives prior, knowing, voluntary, written authorization to collect the information.³¹ Additionally, the Final Rule adds a provision stating that employers may not require employees (or employees’ spouses or dependents covered by the employer’s health plan) to agree to the sale or waive the confidentiality of their genetic information as a condition for receiving an incentive or participating in a wellness program.³² The Final Rule also includes a provision, not specifically contained in the proposed regulations, stating that it is a violation of Title II of GINA for an employer to deny access to health insurance or health benefits, or to retaliate against an employee, because the employee’s spouse declined to provide information as to the spouse’s manifestation of disease or disorder.³³

The GINA Final Rule provides that where an employer provides an incentive for an employee’s spouse to participate in an employer sponsored wellness program with a health risk assessment, the inducement for the spouse to complete the assessment may not exceed over 30% of the total employee-only cost of the employer’s relevant group health plan (where the relevant plan is determined under similar rules as for the ADA Final Rule limitation discussed above).³⁴ As with the ADA Final Rule, where the employer provides no group health plan, the 30% limit is in reference to the cost of insuring a 40-year-old non-smoker on the ACA Exchange’s secondleast- costly Silver Plan.³⁵

Note that the GINA limitation is applied separately from the ADA limitation, so that the total incentive value can be up to 60% of the employee-only coverage if both apply. Thus, if an employer offers a health plan at a total cost of $14,000 (including both employer and employee contributions) for family coverage, and the plan costs $6,000 for self-only coverage, the inducement to the employee to participate and to the employee’s spouse to provide information about a manifested disease or disorder in a wellness program may not exceed $1,800 to the employee and $1,800 to the spouse.³⁶ The value of any inducement is taken into account for this purpose whether it is in the form of financial or in-kind rewards, such as paid time off for the employee, prizes, or other items of value, or penalties, such as increased medical plan premiums.

The GINA Final Rule 30% inducement limit generally parallels the limitations set forth in HIPAA, as amended by the Affordable Care Act, for health contingent wellness program inducements. The limit is also in line with the ADA Final Rule, which authorizes employers to provide incentives for employees to participate in a wellness program that collects information about the current or past health status of the employee. In promulgating that rule, the EEOC determined that allowing “incentives in excess of 30% of the cost of self-only coverage . . . would be coercive.”³⁷ As the EEOC explained, it could “see no reason for adopting a different threshold where the employee’s spouse is the individual whose health information is being sought.”³⁸

Effective Date of Final ADA and GINA Rules

The EEOC considers many of the changes in the ADA and GINA Final Rules to be mere clarifications of the existing rules, and these have immediate effect. However, the new rules specifically concerning (1) the notice that must be provided to employees under the ADA Final Rule regarding the information being sought through medical inquiries or medical examinations and (2) the level of incentives permissible under GINA to induce an employee’s spouse to provide information about the spouse’s manifestation of disease or disorder apply only prospectively to employer wellness programs. The applicability date is the first day of the first plan year of the group health plan used to calculate the level of incentives that begins on or after January 1, 2017.³⁹ Thus, if the plan year for the health plan used to calculate the permissible incentive limit begins on January 1, 2017, that is the date on which those provisions of the Final Rules apply to the wellness program.

Importance of the EEOC’s Final Rules

The EEOC’s rules recognize that wellness plans can have an important role to play in health care, both in terms of promoting employee health as well as in controlling healthcare costs. Additionally, by allowing incentives in line with those allowed under HIPAA, the Commission’s regulations are particularly good news for employers.

The ADA Final Rule provides some necessary clarity as to how the EEOC views wellness programs and how the programs should be structured to be consistent with the ADA.

The GINA Final Rule also represents a significant step in eliminating past uncertainty as to whether offering an inducement to obtain health information from an employee’s spouse violates the requirements of the statute. The Final Rule clarifies that an employer will avoid GINA liability if it limits inducements to those permitted under the rule, which like the ADA Final Rule are in line with the HIPAA requirements. As the EEOC has said, “allowing inducements in return for a spouse providing information about his or her manifestations of disease and disorder, while limiting inducements to prevent economic coercion, is the best way to effectuate the purposes of the wellness provisions of GINA and HIPAA.”⁴⁰

Thus, one of the major benefits that should flow from implementation of the EEOC’s Final Rules will be its assistance to practitioners in drafting effective wellness plans that include health risk assessments for both employees and spouses, yet still pass EEOC scrutiny. Accordingly, all practitioners who advise employers on health and benefit plan matters should carefully review the ADA and GINA Final Rules and take appropriate steps to ensure that wellness plans are drafted in a manner that conforms to the regulatory requirements.

In this regard, practitioners should consider the following guidance for their clients implementing wellness programs:

Do not require employees to participate in the wellness program.
Do not deny health insurance to employees who do not participate in the program.
Do not take any adverse action or retaliate against employees who do not participate in the wellness program or who fail to achieve certain health outcomes.
Provide reasonable accommodations to allow disabled employees to participate in the wellness program and to obtain any incentives offered for certain health outcomes.
If the program seeks medical information or requires medical examinations, provide employees with a notice that:
- Is written in a way the employee is likely to understand
- Describes the type of medical information that will be obtained and the purposes for which the information will be used
- Describes the restrictions on the disclosure of medical information, the parties with whom it will be shared, and the methods the employer will use to ensure confidentiality
If the program uses inducements, either in the form of a reward or penalty, to encourage employees to participate in the program or to encourage employee spouse’s to provide information regarding a manifested disease or disorder, limit the value of the inducement to a maximum of 30% of the total cost of self-only coverage under the employer’s group health plan (including both the employee’s and the employer’s contribution).

By following this guidance, practitioners can help ensure that the wellness plans they draft will not only lead to a healthier workforce, but also not become subject to a successful legal charge under the ADA or GINA.⁴¹

Jonathan R. Mook is a partner at DiMuroGinsberg, P.C. He represents employers and businesses on matters relating to employment law, business torts, and business disputes. He frequently counsels employers on issues involving compliance with the ADA and accommodating disabled employees, as well as other employment related matters. Mr. Mook is a nationally recognized practitioner in employment law and has written two treatises on the Americans with Disabilities Act, Americans with Disabilities Act: Employee Rights and Employer Obligations and Americans with Disabilities Act: Public Accommodations and Commercial Facilities, both published by LexisNexis.

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RESEARCH PATH: Labor & Employment > Employee Benefits > Health and Welfare Plans > Articles > Fringe Benefit and Wellness Programs

Introduction to Acquisition Financing & Recent Trends

Ashley Erazo — Wed, 03 Aug 2016 14:02:24 GMT

By: Linda Curtis and Andrew Cheng, Gibson, Dunn & Crutcher LLP.

Business acquisitions vary widely in terms of size and structure, the parties involved, and the nature of the financing involved. The parties typically involve one or more buyers, one or more sellers, and one or more lenders.

A STANDARD ACQUISITION STRUCTURE IS THE PURCHASE of the target company’s equity, but acquisitions by merger are also common. An acquisition may also be structured as the purchase of all or substantially all of the target company’s assets. Even within each structure category there may be variations, and these variations may drive the structure and terms of the financing.

A leveraged buyout (or LBO) can be loosely defined as an acquisition that is funded all or in part with a material amount of debt, usually where the target’s assets and business are used as a source of potential repayment for the debt. Often, the buyer in an LBO is a private equity fund. A variant of the leveraged buyout is the management buyout (or MBO), where the target company’s management team, alone or with the help of a private equity partner, participates in the buyer side of the acquisition. A strategic acquisition typically refers to a transaction where the buyer is an operating company rather than a private equity firm. Given that the buyer in a strategic acquisition operates an independent business (unlike the buyer in an LBO, which is often a shell acquirer with no real assets or revenue formed by a private equity firm), the lender for the acquisition financing will often have a potential source of repayment from the old business as well as from the acquisition target. Although this article focuses primarily on debt acquisition financing for leveraged buyouts, a significant part of the discussion is relevant to strategic acquisitions, because many common LBO terms and conditions have crept into acquisition financings involving strategic buyers in the past few years.

Recent Trends in Acquisition Financing

A number of trends in acquisition financing have become evident since the 2008 financial crisis. First, the low interest rate environment since 2008 (that continues as of the date of this article) has made debt financing a very attractive source of funds for potential acquirors, both private equity funds and strategic buyers. Second, certain funds-type financing commitments (and acquisition agreements that do not contain financing conditions) have become standard in U.S. acquisition finance during this time period. Another general development since the financial crisis has been an increase in the sheer complexity of acquisition financing terms through the inclusion of incremental loan (also called accordion) and related provisions, amend and extend provisions, equity cures, and other innovations. For a sample incremental facility provision, see Sample Provisions: Incremental Facility (Credit Agreement). For a sample amend and extend provision, see Sample Provisions: Amendand Extend (Credit Agreement). For a sample equity cure provision, see Sample Provisions: Equity Cure Right (Credit Agreement).

A final general development is the increasing scrutiny of debt financings, including acquisition financings, by U.S. financial institution regulators—including, most importantly, the implementation of the interagency guidance on leveraged lending initially proposed by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency in March 2013. 78 Fed. Reg. 17766 (Mar. 22, 2013). In November 2014, the agencies jointly published supplemental guidance on the issue of leveraged lending practices along with their answers to certain frequently asked questions by banks regarding the March 2013 guidance report, available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20141107a3.pdf.

In effect, in the November 2014 guidance, the agencies confirmed and clarified their position on expected underwriting practices for regulated financial institutions and reiterated their position that they expect compliance with these standards. Since the 2014 supplemental guidance, both anecdotal evidence and league tables support the proposition that regulated lenders are now taking seriously the regulators’ concerns about excessive leverage; however, as of the date of this article, the full implications of such regulatory developments are yet to be determined. See also The Impact of Dodd-Frank and Capital Requirements on Commercial Lending.

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RESEARCH PATH: Finance > Acquisition Finance >Sources of Acquisition Financing> Practice Notes >Introduction

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Employee GPS Tracking: There's an App for That

Ashley Erazo — Fri, 11 Mar 2016 07:49:26 GMT

By: Courtney King, Ice Miller

LEXIS PRACTICE ADVISOR RESEARCH PATH: Labor & Employment > Privacy, Technology, and Social Media > Monitoring and Testing Employees > Articles > Video and Audio Surveillance and Eavesdropping of Employees

Utilizing global positioning system tracking to monitor employees’ on-duty conduct is not uncommon. This article discusses a recently filed lawsuit that presents questions about the balance between an employer’s right to monitor and an employee’s right to privacy.

WITH THE TOUCH OF A SMARTPHONE APP, WE NOW HAVE instant access to otherwise inaccessible information. Like the rest of society, employers frequently take advantage of the benefits of recent technological advances. Many companies now provide employees with cell phones, laptops, or other electronic devices to increase efficiency. Certain apps allow employees to clock in and out from their smartphones, communicate with supervisors and clients, and participate in meetings from remote locations via video conferencing software. Some employers—particularly employers with field or mobile employees—also use smartphone apps to monitor employee productivity and performance during work hours. Utilizing global positioning system (GPS) tracking to monitor employees’ on-duty conduct is not uncommon. However, a recently filed lawsuit presents questions about the balance between an employer’s right to monitor and an employee’s right to privacy.

The Lawsuit

A woman recently filed a lawsuit in California state court alleging that her former employer fired her for uninstalling a GPS tracking app from a company-issued smartphone. Prior to her termination, plaintiff Myrna Arias worked as a sales executive for Intermex Wire Transfer, LLC. Arias’s job consisted of traveling throughout central California to persuade business owners to install the company’s money transfer machines. In April 2014, Intermex required employees to download “Xora,” a smartphone timecard app with a GPS function that “tracked the exact location of the person possessing the smartphones on which it was installed.” Arias alleges in her complaint that Intermex required employees to leave their smartphones powered on at all times.

Arias claims that when she and other employees questioned a manager about Intermex’s use of the app’s tracking data, the manager admitted that Intermex would monitor the employees’ off-duty movement. According to Arias, the manager even bragged that whenever Arias drove her car, he could tell how fast she was driving. Arias told the manager that she had no issue with the company monitoring her on-duty activity, but monitoring her location during non-work hours served as an illegal invasion of privacy. She likened the app to a prisoner’s ankle bracelet. In response, the manager advised Arias that she should simply accept that Intermex would monitor her activity because Intermex paid Arias more than NetSpend Corporation—a rival company where Arias worked part-time. According to the complaint, Arias ultimately uninstalled the Xora app from her company-issued smartphone “in order to protect her privacy.” Intermex terminated Arias’s employment a few weeks later. Arias also claims that NetSpend fired her because Intermex’s CEO told NetSpend’s vice president that Arias was disloyal because she had also worked for Intermex.

Arias’s lawsuit accuses Intermex of invading her privacy, wrongful termination, unfair business practices, retaliation, and other related claims. She seeks $500,000 in lost wages.

GPS Tracking and the Law

Generally, courts have found that an employer’s use of GPS tracking technology is reasonable and not necessarily an invasion of an employee’s legitimate expectation of privacy. These decisions have essentially been based on the rationale that employers are expected to monitor employee performance in the workplace, so it follows that an employer would monitor an employee whose workplace happens to be her car. However, does this type of monitoring turn from reasonable to invasive when it extends to an employee’s offduty conduct?

No federal statute directly regulates private employers’ use of GPS tracking to monitor employees, and only a few states have enacted laws directly on this point (including California, Connecticut, Delaware, and Texas). However, GPS surveillance could possibly implicate certain state tort laws, including laws prohibiting the invasion of privacy. Unionized employees could also challenge GPS monitoring as an unfair labor practice or an infringement on the right to engage in protected concerted activity under the National Labor Relations Act.

Conclusion

In light of the pending Intermex case, employers with existing GPS related policies (and those considering implementing such policies) should take the following points into consideration:

Ensure that GPS monitoring is justified by a legitimate business need. The Intermex case demonstrates the potential ramifications of implementing an employee GPS tracking program. Due to the substantial costs of litigation, employers should consider whether tracking employees is necessary for work-related purposes, e.g., a need to monitor employee productivity, the use of an employer’s resources (such as a company car), security and safety concerns, etc.
Ensure that the GPS tracking policy sets forth monitoring parameters. Due to potential disputes regarding employees’ privacy expectations, an employer that uses GPS tracking software should implement a sound policy that outlines the purpose of the company’s use of GPS monitoring, the manner in which the employer will monitor its workers, and how the employer will use the data. The policy should also explain the logistics related to tracking employees, including when an employee should expect to be monitored and when employees may turn off an app’s tracking function. If disabling a device’s tracking function could result in discipline, notify the employees of this consequence in advance.
Effectively communicate the policy. GPS tracking could convey a essage that an employer lacks trust in its employees, which could negatively affect employee morale. An employer should communicate honestly with its employees about its GPS monitoring program and welcome questions about how the employer will use it. This could help build rapport with employees to enlist collaboration as opposed to resistance. To alleviate potential privacy concerns, employers may consider certain timecard apps that automatically disable the GPS function when the employee is off the clock.

To avoid legal ramifications that could result from tracking employee activity using GPS software (or any form of electronic monitoring), employers are encouraged to consult legal counsel to ensure that your monitoring policies do not run afoul of applicable laws.

Courtney King is an associate in Ice Miller’s Labor and Employment Group and Data Security and Privacy Group. Resident in the firm’s Indianapolis office, the author may be reached at courtney.king@ icemiller.com.

Article Courtesy of Pratt’s Privacy & Cybersecurity Law Report, Volume 1, Issue 3.

Copyright © 2016. Matthew Bender & Company, Inc., a member of the LexisNexis Group. All rights reserved. Materials reproduced from Pratt’s Privacy & Cybersecurity Law Report with permission of Matthew Bender & Company, Inc. No part of this document may be copied, photocopied, reproduced, translated or reduced to any electronic medium or machine readable form, in whole or in part, without prior written consent of Matthew Bender & Company, Inc.

Guidance for Employers on Navigating Paid Sick Leave Laws

Ashley Erazo — Wed, 12 Apr 2017 16:50:23 GMT

This chart summarizes state paid sick leave laws and notes which states do not have such laws. It does not discuss municipal ordinances but does indicate local governments that do have such laws where there is no statewide law. This chart is intended for private employers.

Note also that while no federal statute requires that employers provide paid sick leave for employees, Executive Order 13706 mandates that, effective January 1, 2017, covered federal contractors give employees up to seven days of paid sick leave each year. See 80 FR 54697. It remains to be seen if the Trump Administration will rescind this executive order.

The chart covers the following:

Jurisdictions that have paid sick leave laws
Employers and employees who are covered under paid sick leave laws
How employees accrue sick leave and when they can use it
Whether unused paid sick leave carries over from year to year
Notice and posting requirements under paid sick leave laws Penalties for non-compliance
For more information on sick leave requirements, see Additional Resources below.

The following states have no applicable state law: Alabama, Alaska, Arkansas, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin, and Wyoming

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RESEARCH PATH: Labor & Employment > Attendance, Leaves,and Disabilities > Other Types of Leave > Practice Notes >Miscellaneous Leaves under State Law or Employer Policy

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