Ryan Mantia's Groups Activities

Strategies for Bringing Counterclaims or Separate Lawsuits Against Plaintiff Employees

Ryan Mantia — Wed, 07 Jun 2017 20:02:47 GMT

By: Daniel A. Kaplan, FOLEY & LARDNER LLP

This article provides guidance to employers on bringing counterclaims or separate lawsuits against plaintiff employees who have initiated claims against the employer. Employers and their attorneys are usually well versed in the types of claims that employees can bring. However, the employee might not be the only one with a potential claim after an employment relationship sours—the employer may also have various contract, tort, or statutory claims against its employee.

RECOGNIZING AND PURSUING THESE CLAIMS CAN ENABLE an employer to protect its relationships and confidential information from the departing employee and to obtain financial and equitable redress for employee wrongdoing. At the same time, you must be cognizant of the risks inherent in pursuing an unjustified claim.

Procedure for Bringing Counterclaims

Rule 13 of the Federal Rules of Civil Procedure governs counterclaims in federal lawsuits. In a federal employment case, the defendant-employer must generally assert claims arising out of the same transaction or occurrence as the plaintiff-employee’s claims in that lawsuit; the employer cannot bring such claims in a separately filed lawsuit. These types of claims are called compulsory counterclaims. For example, an employer’s claim that a former employee violated his duty of loyalty to the employer may be compulsory in a discrimination lawsuit brought by the employee based on the employee’s termination for those disloyal actions. This is because both the employer’s and employee’s claims would rely on much of the same evidence and derive from overlapping facts.

In contrast, a claim that does not qualify as a compulsory counterclaim is a permissive counterclaim, which an employer may assert either in the employee’s lawsuit or in a separate lawsuit. For example, an employer would likely not have to assert a counterclaim against its former employee for the employee’s post-termination breach of a non-compete agreement in a lawsuit that relates to the employer’s pretermination actions.

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

Daniel A. Kaplan is a partner and litigation attorney with Foley & Lardner LLP. Mr. Kaplan counsels employers in all aspects of the employer-employee relationship, including wage and hour, employment contracts, confidentiality and non-compete agreements, family and medical leave, disability accommodations and compliance with the Americans with Disability Act, and all state, federal, and local discrimination laws. Mr. Kaplan has experience litigating before various state and federal agencies, various state courts, and federal courts throughout the country, including before the U.S. Supreme Court. Assistance provided by Krista J. Sterken, former associate in Foley & Lardner’s Madison, Wisconsin office.

Taxation of New York City Real Property

Ryan Mantia — Wed, 07 Jun 2017 20:44:44 GMT

by Steven Tishco, Marcus & Pollack, LLP

Introduction

This article provides an overview of real estate taxation in New York City (the “City”) including (i) the process by which the City assesses real property, (ii) how property owners challenge the City’s assessments, (iii) benefit programs available to reduce property owners’ real estate tax burdens, and (iv) the importance of understanding real estate taxes in lease negotiations. In New York City, real estate taxes have become an increasingly greater expense for property owners and landlords in recent years. As such, they are an ever-growing factor that any potential purchaser or tenant must account for in its business decisions. Counsel on either side of any real estate transaction should possess at least a basic knowledge of the real estate taxation process to be able to appropriately account for such taxes in negotiations. The process is complex, involves interaction with many government agencies, and is often counter-intuitive. Therefore, a working knowledge of the process is also important in order to understand that, for more complex transactions, specialized real estate tax representation might be necessary and appropriate.

New York City’s Department of Finance (DOF) is the agency charged with assessing all real property in New York City. DOF reassesses all real estate (over one million parcels) each year. Income generated from real estate taxes is the top source of revenue for the City, currently comprising over 40% of the City’s revenue. As a result, real estate taxes are a major factor to account for in the sale / purchase, and leasing of real estate. Furthermore, the City offers numerous real estate tax benefit programs that builders, developers, purchasers, landlords, and tenants need to be aware of in considering any transaction.

Procedures for assessing real property, challenging real estate tax assessments, and qualifying for the various tax benefit programs are governed by the New York State Real Property Tax Law (RPTL) and the New York City Charter, Administrative Code, and Rules.

Arriving at a Tax Assessment

Unlike most jurisdictions around the country, New York City reassesses every property on an annual basis and adheres to a strict and consistent calendar for publication of its assessment roll. Below is a summary of the key dates in the assessment process.

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

Steven Tishco is an associate at Marcus & Pollack, LLP. Mr. Tishco concentrates his practice on real estate tax assessment and exemption matters (tax certiorari). He handles all types of real estate tax disputes and appears regularly before the Courts of the State of New York and various New York City agencies. His experience includes litigation and trial work involving the valuation of residential and commercial properties.

Contractual Joint Ventures – Drafting and Negotiating Joint Marketing Agreements

Ryan Mantia — Wed, 07 Jun 2017 19:55:43 GMT

By: Candice Choh and Kari Krusmark, GIBSON, DUNN & CRUTCHER LLP

A joint marketing agreement is a contract pursuant to which one or both of the parties will collaborate in order to promote the sale of product and service offerings of the other party. Such a contractual joint venture agreement may also be known as an alliance agreement, strategic alliance agreement, or co-marketing agreement, depending upon the client’s preference and the specific nature of the relationship.

THIS ARTICLE ADDRESSES THE KEY ISSUES THAT THE PARTIES should consider before and during the negotiation and drafting of a joint marketing agreement. The scope of this article includes those relationships where one party will independently promote the other party’s products to its customers and potential customers, as well as collaborative efforts by the parties, such as joint solicitations and bidding on requests for proposals (RFPs) from potential customers. This article does not address the terms and conditions of sale of products and services to customers.

Purpose

A joint marketing agreement can arise from a variety of circumstances. Companies typically enter into such an arrangement in order to take advantage of synergies between their respective products and services. In most cases, each party wants to sell the other party’s complementary products and services alongside its own products and services, or combine its products and services with the products and services of the other party in a bid to a customer in order to provide a comprehensive solution and make its proposal more competitive. Many such arrangements arise in the context of a divestiture of a company or business unit where the parties to the transaction desire to continue an intercompany arrangement that existed prior to the divestiture. A joint marketing agreement or similar agreement is necessary in order to set forth the rules of the road for the parties’ relationship.

Complexity of Terms and Conditions

Joint marketing agreements vary in their degree of complexity and specificity of terms. The purpose and nature of the alliance will determine the rigor of the terms and conditions that are included in the particular agreement. In some cases, the agreement might simply serve as a way for the companies to work together if and when they engage in joint marketing activities, with no firm commitments or obligations. In other cases, the success of the alliance might be vital to the ongoing success of one or both parties. For example, in the context of a divestiture, an acquirer’s commitment to continue to work with the divesting party and promote the divesting party’s remaining products and services may be part of the consideration for the transaction. In such circumstances, more extensive terms and detailed obligations, such as commitments to actively promote the products and services of the divesting party, quotas and remedies for failure to meet them, and governance and dispute resolution procedures, will be necessary in order to ensure compliance with the terms of the agreement and achievement of the objectives of the arrangement. Another factor that will determine the complexity and stringency of the terms and conditions is whether the parties will have mutual obligations to promote the products and services of the other party or whether the obligations will be unilateral. If the terms and conditions are mutually enforceable, then the drafter should carefully consider the strictness of terms and severity of remedies since the other party will likely expect the drafting party to be held to the same standards.

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

Candice Choh is a partner in the Corporate Transactions practice group at Gibson, Dunn & Crutcher, Los Angeles. Kari Krusmark is an associate in the Corporate Transactions, Fashion, Retail and Consumer Products, and Strategic Sourcing and Commercial Transactions practice groups at Gibson, Dunn & Crutcher, Los Angeles.

The Bona Fide Prospective Purchaser Defense in Bankruptcy

Ryan Mantia — Wed, 07 Jun 2017 20:13:42 GMT

By: Nicholas C. Rigano, Esq. RIGANO LLC

Under the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. § 9601 et seq.) (CERCLA), current owners and operators of real property are strictly liable for costs to clean up environmental contamination regardless of whether the contamination existed prior to their ownership. Upon closing, a purchaser becomes a current owner under the statute and, therefore, has strict liability for such costs.¹

THIS RESULTS IN ENVIRONMENTALLY CONTAMINATED properties typically having a significantly reduced market value and may render them completely unsellable. The rarely used Bona Fide Prospective Purchaser (BFPP) defense, however, may completely shield a prospective purchaser from CERCLA liability stemming from preexisting contamination and may facilitate the alienability of the contaminated property. The BFPP defense shields a prospective purchaser from liability relating to contamination existing at the time of purchase even where the purchaser has knowledge of the contamination prior to closing. To avail itself of the BFPP defense, the prospective purchaser must meet the requirements of 42 U.S.C. §§ 9601(40), 9607(r). Most notably the prospective purchaser must (1) complete “all appropriate inquiries” (typically, a Phase I Site Assessment and sometimes a Phase II Site Assessment); (2) not cause the contamination at issue; (3) provide legally required notices with respect to the release of hazardous materials or contamination at the property; (4) provide appropriate care with respect to the contamination, including taking steps to stop any continuing release and prevent any threatened future release; (5) comply with government requests in connection with the cleanup; and (6) not be affiliated with any party that is potentially liable for the contamination.²

The standards discussed above require an extremely factspecific inquiry and make it difficult for a prospective purchaser to acquire property with comfort that it is protected from environmental liabilities without a prior judicial determination. Since courts are hesitant to provide advisory opinions, the BFPP defense has rarely provided assurance to prospective purchasers.

A prospective purchaser, however, may find a way to avail itself of the protections of the BFPP defense through a bankruptcy sale. Upon a debtor’s bankruptcy filing, the bankruptcy court retains jurisdiction over the debtor’s assets. A debtor or bankruptcy trustee may sell the debtor’s assets pursuant to Section 363 of the Bankruptcy Code (11 U.S.C. § 363). A Section 363 sale may only close after the bankruptcy court authorizes the sale to proceed by court order either upon motion on 21 days’ notice to all interested parties or pursuant to a Chapter 11 plan, which requires a slightly longer timeframe but may provide other benefits such as exempting the transaction from transfer taxes.³

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

Nicholas C. Rigano is a partner at Rigano LLC. Mr. Rigano regularly represents clients in Chapter 7 and Chapter 13 bankruptcy, as well as clients facing environmental issues associated with real property, subsurface contamination, and cost recovery. He can be reached at nrigano@riganollc.com.

Brokered Deposits and Strategic Planning Considerations

Ryan Mantia — Wed, 07 Jun 2017 20:14:47 GMT

By: John Popeo

Overview

Brokered deposits are often viewed by insured depository institutions (IDIs) as a cost-effective source of liquidity and funding. Federal bank regulatory agencies, however, consider brokered deposits to be a less stable source of funding that contributed to the 2008 global financial crisis. This article provides an overview of brokered deposits and discusses applicable regulatory restrictions, including recent guidance by the Federal Deposit Insurance Corporation (FDIC) regarding the identification, acceptance, and reporting of brokered deposits (FDIC Guidance) by IDIs.

Core Deposits Compared to Brokered Deposits

The Federal Deposit Insurance Act (FDI Act), 12 USCS § 1811 et seq., broadly defines the term “deposit” as the “unpaid balance of money or its equivalent received or held by a bank or savings association.” This sweeping definition encompasses nearly all funds subject to transfer or withdrawal by depositors at an IDI. For regulatory examination purposes, the federal bank regulatory agencies primarily distinguish between core deposits and brokered deposits.

Core deposits are not defined by federal banking statutes and regulations. Rather, core deposits are defined in the Uniform Bank Performance Report (UBPR), a supervisory tool used by examination staff of the federal bank regulatory agencies. Under the UBPR definition, core deposits are “the sum of demand deposits, all negotiable order of withdrawal (NOW) and automatic transfer service accounts, money market deposit accounts, other savings and time deposits under $250,000, minus all brokered deposits under $250,000.” Notably, this definition specifically excludes brokered deposits. For regulatory examination purposes, core deposits include deposits that are “stable, lower cost [and] reprice more slowly than other deposits when interest rates rise. [Core] deposits are typically funds of local customers that also have a borrowing or other relationship with the institution.” As discussed below, federal bank regulatory agencies generally prefer core deposits to brokered deposits as a preferred method of funding.

Federal bank regulatory agencies consider the presence of core deposits and brokered deposits in evaluating liquidity management programs and assigning liquidity ratings for regulatory examinations. In connection therewith, the agencies assess whether an IDI has properly identified, measured, monitored, and controlled its funding risks. While federal bank regulatory agencies maintain there is no stigma attached to the acceptance of brokered deposits, regulatory examination staff tend to favor core deposits over brokered deposits as core deposits are viewed as a more stable, less costly funding source from long-term customers. Brokered deposits, on the other hand, are viewed as a more volatile funding source typically associated with interest rate sensitive deposits, or hot money, from customers consistently seeking a higher rate of interest.

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

John Popeo is a Content Manager for Lexis Practice Advisor. Previously he worked at Hogan Lovells US LLP, as a senior associate in the financial institutions group where he focused on representing FinTech companies, banks and their holding companies. Before Hogan, John spent nearly a decade in various roles at the Federal Deposit Insurance Corporation, the Federal Reserve Bank of Boston, and the Financial Litigation Unit of the United States Attorney’s Office.

Drafting a Trademark Cease and Desist Letter

Ryan Mantia — Wed, 07 Jun 2017 20:16:48 GMT

By: Roberta Jacobs-Meadway and Roger LaLonde, ECKERT SEAMANS CHERIN & MELLOTT, LLC

BEFORE SENDING A TRADEMARK CEASE AND DESIST LETTER on behalf of a client, it is imperative to conduct due diligence and to carefully consider the content and tone of the letter. Such letters may range from a polite invitation to negotiate terms for coexistence, to a request for information as to how the alleged infringer is willing to address your client’s concerns, to a stern demand that the alleged infringer cease all use of a mark by a defined date. Assessing these issues is crucial to drafting an effective letter and may ultimately curb the need for litigation and lead to a favorable resolution for your client.

This article discusses pre-drafting due diligence and the key issues that your client should consider before sending a cease and desist letter. The article also offers guidance on effective letter drafting, including evaluating the letter’s objective, tone, and demands.

Pre-drafting Due Diligence

A cease and desist letter should be viewed as a prelude to litigation. Thus, before sending a cease and desist letter, it is imperative to conduct an adequate investigation to identify the nature and extent of the allegedly infringing use. You should have a thorough understanding of the strength and viability of your client’s potential claim and the business consequences of sending a cease and desist letter, so that the letter will not backfire against your client’s interests.

The extent of diligence that is adequate in a given case depends on a number of factors. As discussed more fully below, you should take the following steps as part of the pre-drafting due diligence process:

Identify and research the alleged infringer(s)
Confirm priority of use
Assess strength of your client’s case, including (1) whether a likelihood of confusion exists between the alleged infringer’s mark and your client’s mark, (2) whether a pre-litigation survey should be commissioned, (3) the strength of any potential defenses, and (4) third-party issues/opportunities
Assess risk of a declaratory judgment action
Weigh business and legal ramifications
Consider alternatives to a cease and desist letter

Include your client in the due diligence process, where appropriate, and discuss the results of the investigation and potential options and consequences with your client. If the client decides to send a cease and desist letter, you should next assess when the letter should be sent, based on any relevant timing considerations, and then draft the letter itself.

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

Roberta Jacobs-Meadway is a partner with Eckert Seamans Cherin & Mellott, LLC, Philadelphia, and serves as co-chair of the firm’s intellectual property practice group. Roger LaLonde is an associate in the firm’s intellectual property practice group.

Private Equity Co-investments Guide: Issues to Spot and Raise When Making a Direct Co-investment

Ryan Mantia — Wed, 07 Jun 2017 20:43:55 GMT

By: Christopher Henry, Lowenstein Sandler LLP

INVESTORS OF MANY DIFFERENT STRIPES ARE EAGER to participate in private equity transactions as equity co-investors alongside private equity sponsors who source, lead, and execute on investment opportunities. These investors hail from portions of the financial landscape as diverse as hedge funds, strategic investors, high net worth individuals, and select limited partners in the sponsors’ funds. Some investment funds themselves are dedicated to making equity co-investments as their primary investment mandate. Direct co-investment opportunities are prized in these investor communities because they offer the potential for superior economic return. Direct co-investments reside outside of the lead sponsor’s fund. As a result, a co-investor’s economic return is not reduced by the carried interest paid by the fund to the sponsor. The trade-off, if there is one, is that investments made outside the fund may result in greater concentration of risk than an investment made in the fund itself, as co-investors will typically invest in only some (and perhaps only one) of the investments made by the fund. Co-investors can mitigate this risk by attempting to build their own portfolio of co-investments, similar to the way a lead sponsor builds a portfolio within each fund.

The market for co-investment opportunities can be quite competitive. A user-friendly reputation and an ability to execute on deals quickly can be important factors in attracting and securing these opportunities. Co-investors typically enter the scene later in the overall timeline of a transaction, after the sponsor has sourced the deal, completed substantial due diligence, and made significant progress in negotiating terms with the target company. Given these circumstances, co-investors may be asked to review and respond to draft documentation on short turnaround times, making decisions about what truly matters, what is a nice-to-have, and what they can live without in the deal’s terms.

This article is intended to provide a guide for co-investors to identify and understand key topics that should be raised in negotiating terms for their co-investments and which initial drafts of the co-investment documents often do not address or address inadequately. This article contemplates a transaction structured as a minority co-investment of typically less than 10% in a private company in the United States. Needless to say, this guide is not intended to cover every issue that could arise in co-investment transactions. Other issues may be relevant depending on various factors, including, for instance, the type of security being acquired, the specific economic terms of the security, and the structure and size of the investment. The focus of this article is to highlight select items that are typically not addressed in the initial drafts of co-investment documents and which most lead sponsors, when asked, will address.

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

Christopher Henry is a partner at Lowenstein Sandler in the Corporate Department, and their private equity, mergers and acquisitions, and investment management practice groups. Chris serves as counsel on sophisticated large and middle market deals representing public companies, privately-owned businesses, private equity sponsors and their portfolio companies in mergers and acquisitions, leveraged buyouts, growth investments, dispositions, joint ventures, and equity and debt financings.

Market Trends: JOBS Act

Ryan Mantia — Thu, 14 Sep 2017 16:51:19 GMT

By: Rebecca G. DiStefano, GREENBERG TRAURIG, P.A.

Overview

The U.S. economy was spotlighted during an unprecedented national Presidential election in 2016 with campaign debate focused on the preservation and initiation of new jobs. This topic, of course, is not a new one. In response to the economic malaise following the 2009 financial crisis, the Jumpstart Our Business Startups Act of 2012 (112 P.L. 106, 126 Stat. 306) (JOBS Act), signed into law by President Obama on April 5, 2012, implemented striking changes to the Securities Act of 1933, as amended (Securities Act).

The JOBS Act mandated that the Securities and Exchange Commission (SEC) relax historically rigid financial regulations to enable fledgling start-ups and developmental companies to advertise their ideas and solicit individuals for investments in emergent enterprises. The statute also provided an onramp of greater disclosure flexibility for smaller companies to transition to public companies. The economic rhetoric of the recent presidential election raises the question as to whether these changes made a difference. How is the JOBS Act playing out in reality? Based on economic studies conducted by the SEC, unregistered exempt securities offerings have eclipsed registered offering activity in the years following the financial crisis and passage of the JOBS Act.

Given the utility of unregistered offerings in post-recession capital formation, this article focuses on 2016 trends in small capital formation relating to JOBS Act-mandated changes, including amended Regulation A (known informally as Regulation A+) for raises up to $50 million, recently effective Regulation Crowdfunding (Regulation CF) for online raises to $1 million, and Rule 506(c) (17 C.F.R. § 230.506) of Regulation D permitting public solicitations to tap into unlimited quantities of capital from accredited investors. This article also examines progress under Title I of the JOBS Act, which was adopted to provide access to public markets by smaller companies known as emerging growth companies.

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

Rebecca G. DiStefano is a shareholder at Greenberg Traurig, P.A. in Florida. She is both a transactional and regulatory attorney and advisor in the areas of securities regulation, mergers & acquisitions, and corporate law. Rebecca primarily counsels clients in general capital formation matters, Regulation D, Regulation A+, Regulation Crowdfunding, registrations, general solicitation under the JOBS Act of 2012 and the Securities Act of 1933, and the continuing disclosure requirements of the Securities Exchange Act of 1934.

In-House Counsel Sanctions: Recent Trends

Ryan Mantia — Wed, 07 Jun 2017 20:36:09 GMT

By: Devika Kewalramani , Moses & Singer LLP

Disgorgement of legal fees is a harsh, but not unusual, penalty. Although this unforgiving sanction is more frequently imposed on outside counsel, it is not uncommon for in-house counsel to be required to disgorge and forfeit their compensation due to ethical violations.

CALIFORNIA HAS HISTORICALLY BEEN ONE OF THE stricter jurisdictions regarding disgorgement of outside counsel’s legal fees. For example, in 2016, the California Court of Appeals required a law firm to disgorge $3.8 million based on the firm’s failure to adequately disclose an actual conflict of interest between two existing clients.¹ California courts have also held fee forfeiture to be an appropriate remedy where outside counsel’s personal conflict involving business transactions with his client permeated their entire relationship, leading to egregious ethical misconduct.²

Similarly, the U.S. Court of Appeals for the District of Columbia Circuit ordered outside counsel to pay their former client nearly $500,000—an amount representing a portion of the legal fees the attorney collected from the client, plus interest—due to an undisclosed current client conflict.³ Likewise, New York courts have held that “[a]n attorney who engages in misconduct by violating the Rules of Professional Conduct [] is not entitled to legal fees for any services rendered.”⁴

In-house counsel, like their outside counsel counterparts, are not shielded from being compelled by courts to disgorge their compensation as a remedy for violation of their ethical duties. For example, in 2015, the Supreme Court of New Jersey held that a corporate employer may seek disgorgement of a disloyal general counsel’s compensation as a remedy for breaching the duty of loyalty, regardless of a finding of economic loss.⁵

Taking center stage in 2016 was another disgorgement case involving in-house counsel’s ethical breaches, where the court engaged in an in-depth comparative analysis of the ethical issues impacting in-house counsel in the corporate setting. In Chism v. Tri-State Constr., Inc., 193 Wn. App. 818 (Wash. Ct. App. 2016), the Court of Appeals of Washington addressed whether the general counsel violated his ethical obligations to his corporate client by examining the key distinctions between lawyer/employee–client/ employer arrangements on the one hand and conventional attorneyclient relationships on the other, with a particular focus on wages and legal fees.

In the Chism case, a lawyer who formerly acted as outside counsel for a closely-held construction company became its general counsel in 2008 and was compensated with an annual salary of $190,000. Around that time, he admitted to spending only an average of 7.5 hours per week on legal work for the company and worked primarily from home. In 2011, he proposed being paid a $500,000 bonus, and the company’s president, who was suffering from Alzheimer’s disease, agreed. Ultimately, the company refused to pay the requested bonus and an additional bonus of $250,000, and the general counsel sued the company.

At trial, the jury found that the general counsel’s bonus agreements were not the product of undue influence, and awarded him $750,000 for breach of compensation contracts by his former employer, plus $750,000 as exemplary damages for unlawful wage withholding. However, following the jury verdict, the judge ruled that the general counsel had violated his ethical and fiduciary duties when he negotiated his bonus payments with the company’s Alzheimer’s-stricken principal. The judge ordered him to disgorge $1.1 million of his award, premised on violations of Rule 1.5 (fees), Rule 1.7 (current client conflicts of interest), Rule 1.8 (business transactions with clients), and Rule 8.4 (misconduct) of the Washington Rules of Professional Conduct (which are based on the ABA Model Rules).

On appeal, the Court of Appeals of Washington reviewed the ethics rules individually to determine whether in-house counsel are bound by ethical and fiduciary obligations when negotiating compensation arrangements with their corporate employers and whether in-house counsel may be ordered to disgorge wages the same way outside counsel are required for breach of ethical or fiduciary duties to clients, as discussed below.

Legal Fees (Rule 1.5) Under Rule 1.5, a lawyer is prohibited from agreeing to, charging, or collecting an unreasonable fee. The Court of Appeals rejected the company’s claim that the general counsel violated the rule by negotiating substantial compensation in addition to his salary and benefits. The Court concluded that there is an absence of authority from Washington and elsewhere to support expanding Rule 1.5’s application to “fees” to “wages contracts” in order to allow disgorgement.
Current Client Conflicts of Interest (Rule 1.7) Rule 1.7 bars a lawyer from representing a client if there is a significant risk that the representation will be materially limited by the lawyer’s personal interest. The Court of Appeals disagreed with the trial court’s ruling that it was a conflict of interest for the general counsel to negotiate his $500,000 bonus withthe company, without fully disclosing his self-interest in the transaction and the potential risks to the company. The Court observed that for a conflict to exist, the general counsel had to have “represented [the company] in its negotiations over his own wages” which would “cast doubt on the wage negotiations of scores of Washington attorneys—not only in-house corporate counsel…but also government attorneys and numerous nonprofit attorneys.” The Court held that the trial court exceeded its authority by issuing a disgorgement order for a lawyer-employee's negotiation of a wage increase, noting its “unprecedented application of [Rule] 1.7 to in-house counsel” and the absence of supporting authority.
Business Transactions with Clients (Rule 1.8) Under Rule 1.8, a lawyer is forbidden from entering into a business transaction with a client, unless the transaction is fair and reasonable to the client, after making full disclosure and advising it to consult separate counsel on the transaction. The Court of Appeals rejected the trial court’s finding that the general counsel violated the rule by improperly negotiating his bonus arrangement and payment with the company without full disclosure and advice to confer with outside counsel. The Court clarified that there are “essential differences between fee agreements and wage contracts” and that if the rule were interpreted to include compensation agreements between a lawyer-employee and a current client-employer, then every agreement increasing a lawyer-employee’s wages or benefits would fall within the rule. Given the lack of authority, the Court of Appeals declined to extend application of Rule 1.8 to the general counsel’s conduct.
Misconduct (Rule 8.4) Finally, Rule 8.4(c) proscribes a lawyer from engaging in conduct involving misrepresentation. The trial court held that the general counsel violated the rule by making numerous misrepresentations and providing “unreliable estimates” to the company regarding the hours he worked during specific time periods relating to his bonus arrangement and compensation package. The Court of Appeals disagreed with the trial court, noting that he supplied a “best estimate” of hours worked, and left to the company’s discretion how to ascertain the bonus amount, without breaching the rule.

Ultimately, the Court of Appeals of Washington held that while a court has the authority to disgorge outside counsel’s legal fees for breaches of ethical duties, courts are not empowered to disgorge in-house counsel’s wages as a sanction for ethical violations. The Court noted that there are “important differences in the treatment of attorney fees versus wages” and observed that “whereas our Supreme Court has actively regulated attorney fees…it has not at all regulated attorney wages,” and eventually concluded that “lawyer-employees are protected by the same wage and hour laws that apply to employees in comparable positions.” Accordingly, the Court of Appeals reversed the trial court’s ruling based upon novel interpretations of the ethics rules and remanded the case for entry of judgment consistent with the jury’s verdict.

Disgorgement for ethical violations, while historically rare for in-house counsel, nonetheless appears to be an emerging trend as courts are more frequently awarding this form of remedy as a result of ethical violations. Review of Chism was sought and denied by the state’s highest court. Chism v. Tri-State Constr., Inc., 186 Wn.2d 1013 (Wash. 2016).

The Chism case has been closely watched with mixed reactions from a cross-section of the legal community. The case underscores some important considerations for in-house counsel to keep in mind whenever they negotiate compensation packages or other agreements with their corporate clients. When wearing different hats as legal/business advisors and corporate employees, in-house counsel may need to consider paying special attention to the context and content of their interactions with their companies, including making appropriate disclosures and obtaining written consents, advising their companies to consult separate counsel where necessary, and clarifying the nature, scope, and implications of any employer/employee agreements they may enter into.

Undoubtedly, Chism is a unique case that sheds light on a number of important issues involving in-house counsel’s relationship with a client-employer that appear to not have been addressed as closely by a U.S. court before. For example, what is the nature of in-house counsel’s role; how is in-house counsel to be compensated; what ethical duties are owed to a corporate employer; and are in-house counsel akin to outside counsel who are regulated by the ethics rules and have a fiduciary relationship with their clients, or are in-house counsel comparable to corporate executives who are not governed by the ethics rules, but may owe certain fiduciary type duties to the client-employer? These questions may arise for in-house counsel in jurisdictions around the country, regardless of where they are admitted or licensed and who their corporate employer is. The answers are not always clear.

1. Sheppard Mullin Richter & Hampton LLP v. J-M Mfg. Co., 244 Cal. App. 4th 590 (Cal App. 4th 2016). 2. Fair v. Bakhtiari 195 Cal. App. 4th 1135 (Cal App. 2d 2011). 3. So v. Suchanek, 670 F.3d 1304 (D.C. Cir. 2012). 4. Shelton v. Shelton, 151 A.D.2d 659 (2d Dept. 1989), citing Brill v. Friends World Coll., 133 A.D.2d 729 (N.Y. App. Div. 1987). 5. Kaye v. Rosefielde, 223 N.J. 218 (N.J. 2015).

Devika Kewalramani is a partner at Moses & Singer LLP and co-chair of its Legal Ethics & Law Firm Practice. Ms. Kewalramani focuses her practice on legal ethics, professional discipline, risk management, and compliance. She serves as the chair of the Committee on Professional Discipline of the New York City Bar Association.

To find this article in Lexis Practice Advisor, follow this research path:

RESEARCH PATH: Corporate Counsel > Ethics for In-House Counsel > Conflicts of Interest > Articles > Consequences of Failing to Address Conflicts of Interest

Proxy Season 2017 Q&A with Keir Gumbs

Ryan Mantia — Wed, 07 Jun 2017 20:27:34 GMT

By: Keir Gumbs, Covington & Burling LLP

PARTNER AT COVINGTON & BURLING LLP

Keir Gumbs, vice chair of the Securities & Capital Markets Group and partner in the Washington, D.C. office of Covington & Burling LLP, regularly provides insights about the trends he observes in securities law and shareholder activism. Prior to joining Covington & Burling, Keir served in the Office of Chief Counsel in the SEC’s Division of Corporation Finance and as Counsel to SEC Commissioner Roel C. Campos. He provides a unique perspective on corporate governance as a result of his public service and private practice experience. We recently sat down again with Keir and asked him to update our readers on the major issues that he is seeing during the 2017 proxy season.

Institutional Shareholder Services (ISS) and Glass Lewis have announced modifications and updates to some of their proxy voting guidelines for the 2017 proxy season. These include guidelines relating to issues such as equity compensation plans, cash and equity incentive plans, say-on-pay proposals, director compensation, director over boarding, and undue restrictions on shareholders' ability to amend the bylaws. Where do you think ISS and Glass Lewis will have the most significant impact on corporate governance during the 2017 proxy season?

I think that proxy advisory firms as a general matter have historically had the most influence, and will continue to have that influence, with respect to executive compensation, and specifically with respect to their evaluation metrics and methodology for executive compensation that’s been paid and for employee benefit plans, such as stock plans, incentive plans, and things of that nature. That is interesting because their recommendations with respect to director elections get a lot of attention, and their say-on-pay recommendations get a lot of attention, but I think that when you get down to it, where they have the most influence over decision making by companies is in executive compensation plan design.

As an example, if a client is working on an equity compensation plan, and we’re thinking about tax requirements, governance practices, best practices, and things of that nature, all of those things are very important because basically you want to comply with the law. But the place where otherwise a company would be unconstrained is with some of the elements of the plan design, such as limits on the types of awards that can be given, the level of specificity with respect to performance measures, limits on individual compensation that can be awarded under the plan, things of that nature, and most importantly, how much they can seek approval of for the plan to the extent that it is an equity incentive plan. And with respect to that question, particularly, I found in practice that ISS and Glass Lewis have an outsized influence.

I have seen clients dramatically change the incentive plans that they were going to seek shareholder approval of in response to expected concerns by ISS or Glass Lewis. I don’t think that is going to change in 2017. I don’t know that it’s going to be much more pronounced in 2017 than it was in prior years, but I do continue to think that’s the most significant influence that they have.

The next most important and influential area is probably around shareholder proposals, and this one I think can be a bit of a surprise because when people think about shareholder proposals, they think of them as the precatory requests that get sent in by shareholders that companies are not obligated to pursue. I think that’s generally right, except that if you have a shareholder proposal that is approved by a majority of the shareholders, then there is the expectation that you will take action on it, or there is a risk that ISS or Glass Lewis will recommend or withhold votes against your directors the following year. That has really changed the dynamic around shareholder proposals. So companies spend a lot more time and money thinking about proposals when they get them, thinking about whether to implement them and, if so, how. To the extent that a company is not going to implement a shareholder proposal, the company is thinking very hard about what it needs to do in order to ensure that the proposal does not pass, because if it does pass, they have to do something. Those are the two areas that ISS and Glass Lewis have had the most significant influence historically, and I don’t think that is going to change this year.

The SEC staff granted a number of no-action requests that were sought by companies in 2016. In light of the presidential election results, do you expect an increase in no-action requests by companies, and what do you expect the SEC response to be to no-action requests during 2017?

Regarding the influence that the Trump administration and the impending change at the SEC will have over shareholder proposals, for the most part, changes in administrations don’t really influence in a very meaningful way the manner in which the SEC evaluates and decides no-action requests related to shareholder proposals. When I was at the SEC under the Bush administration, the White House and the White House’s views on issues almost never, if ever, influenced decisions. I can’t think of any instances where it influenced our decision-making process. We certainly were aware of the environment in which the decisions that we were making would be received and how that might influence the debate that was taking place, but at the end of the day we always looked at what does the rule say, what does the case law say, what does our precedent say, and based our decision on those factors. So I don’t think that’s going to change under this administration.

However, I do think there are other ways in which the change in administration can indirectly impact shareholder proposals and corporate governance and actually proxy access is a tremendous example of that. I’ll give you two very specific ways in which the SEC and the leadership of the SEC influenced the proxy access debate. If you remember, 20 years ago proxy access did not exist. It was something that shareholders were asking for, but not something that the SEC had at that point been able to successfully address through rulemaking or otherwise.

Under Mary Shapiro’s tenure, the staff was evaluating two rule-making proposals relating to proxy access. One that would make proxy access universally required, and another where it would allow shareholders to submit proxy access shareholder proposals, which before they could not do. As I understand it, the SEC was debating these questions: Should we adopt both rules, should we just follow one approach, and if so, which approach is the best one? Should we just use the universal mandatory rule, or should we allow both of them? Ultimately after some significant debate, Chairwoman Schapiro decided to move forward with both proposals.

And at that time, most people, including me, looked at that decision and thought, “This is very odd.” Because on one hand you have the universal proxy rule that all companies will be subject to, and at the same time they were adopting shareholder proposal amendments that allowed shareholders to basically enhance or expand those proxy access rights through the shareholder proposal process. It seemed odd, almost like a “belt and suspender” approach to proxy access.

In hindsight it turned out to be a genius move for someone who was an advocate for proxy access. That’s because the rule that would have imposed proxy access on all public companies went away the following year. So then the SEC was stuck with the shareholder proposal amendments, which eventually allowed the creation and proliferation of proxy access regimes through the shareholder proposal process. When we look today at the number of companies that have adopted proxy access, which is somewhere over 400 in the beginning of March, we see the direct result of that decision by SEC Chairwoman Mary Shapiro. So that’s one example of how decision-making by leadership at the SEC can directly influence no action letters and ultimately corporate governance.

Similarly, two years ago SEC Chair Mary Jo White made a decision that significantly impacted the trajectory of proxy access. Under the shareholder proposal rule, there is an exclusion that lets a company exclude a proposal on the basis that it conflicts with a management proposal. The way it worked, as long as the two proposals addressed the same topic, even if the management proposal and the shareholder proposal were doing the opposite things, a company could exclude the proposal on the basis that they conflicted with each other. In the context of proxy access shareholder proposals, a lot of companies were thinking about adopting or putting forth their own management proposals relating to proxy access that would have taken a very different approach. For example, the shareholder proposal could have requested a proxy access bylaw with a 3% minimum ownership, and the company’s proposal could impose a 5% or 7% minimum ownership requirement. Many companies wrote into the SEC to exclude those shareholder proposals on the basis that they conflicted with management proposals seeking to impose more restrictive thresholds.

Initially, the SEC staff agreed with companies that they could exclude proxy access proposals under the conflicting proposal exclusion because that position was consistent with what the staff had done historically from a no-action letter perspective. Then came letters and other expressions of concern from a number of institutional investors, including the Council of Institutional Investors and CalPERS, all pointing out that this was an outcome that would permit companies to undermine proxy access through the adoption of management proxy access bylaws that were significantly more onerous and basically made it impossible for shareholders to use.

SEC Chair Mary Jo White heard some of the those concerns and directed the staff to stop issuing no-action letters based upon the conflicting proposal exclusion, at least until the staff could review the exclusion and decide if it made sense to apply it as had been applied historically. Following that review, the staff dramatically narrowed the way that they interpreted the conflicting proposal exclusion under Rule 14a-8, which meant that companies that wanted to exclude proxy access shareholder proposals either had to find a deficiency in the proposal, which is pretty hard to do since they are pretty well drafted, or they had to adopt their own proxy access bylaws and argue that they were substantially implemented. That result dramatically increased the uptick of proxy access bylaws between 2014 and 2017.

I think that decision by Mary Jo White is probably the single most significant decision impacting proxy access in the last 20 years, other than the previous decision by Mary Shapiro. But I think these illustrate the significant ways in which the next chair of the SEC could conceivably impact shareholder proposals going forward.

Dodd-Frank required companies to obtain shareholder approval of say-on-frequency, setting the time periods for shareholder votes on say-on-pay to one, two, or three years. The first round of say-on-frequency approvals occurred in 2011, and those companies are required to conduct the next round in 2017. How are companies handling this requirement in 2017, and what time period do you think most companies are asking for this year?

The first time around, I think companies went out with proposals that they actually wanted. Companies wanted three years because they thought it aligned well with their compensation plans, gave them more time to plan and prepare, and they weren’t in this constant cycle of responding to or preparing for say-on-pay votes. Nevertheless, shareholders overwhelming favored an annual say-on pay vote, so that’s what most companies ultimately ended up with. The last number I saw was that 90% of companies had adopted an annual say-on-pay vote. So looking forward to this year, I think most companies, with maybe a few exceptions such as controlled companies, have decided that they are just going to ask for annual votes.

Why create an issue with shareholders when they don’t have to? Most shareholders are used to doing oneyear; most companies are used to doing say-on-pay every year. In terms of votes, most votes have been in favor of say-on-pay. Somewhere around 89% of companies received more than 90% approval on their say-on-pay vote. Because of that, I think companies would be loath to go back to where we were in 2011 and upset the apple cart by asking for triennial votes rather than annual. There will certainly be some companies that request triennial votes, but I think most companies have decided that annual sayon- pay votes are something that they are used to, so why create a lot of drama around something that is unnecessary?

What is the status of Dodd-Frank in 2017 as it relates to corporate governance, and do you have a predication on what Congress and President Trump will do in 2017 with Dodd-Frank, both as to the existing regulations that have already been promulgated and the remaining areas where regulations have not yet been promulgated?

That is a million-dollar question. There are some things we can say with 100% certainty. I am 100% confident that the drafts or proposals or even the adopted Dodd-Frank rules relating to corporate governance and executive compensation are not going to stay the same. For example, the pay-ratio rule is set to go into effect for next year, and the acting chair has already taken steps against the rule. It is highly likely that the SEC will either give some sort of exemptive relief to categories of companies from that rule or there will be temporary relief for everyone. They may suspend the rule for a year so they can do more study and evaluation, or there is the possibility that they will go back to the well and try to amend the rule in a way that makes it more business-friendly or at least less onerous.

And that’s just at the SEC. Of course, there is the possibility that there may be a legislative attack on the pay-ratio rule that could eliminate the rule entirely or modify it substantially. My own view, and I think that of most observers, is that something is going to change and that the way that it is going to change is that these rules will either be amended substantially so that they are less burdensome for companies or that they will be temporarily halted. And of course there is the possibility that they will be repealed. I think that is the case for every single one of the Dodd-Frank rules.

Let me just say as an editorial, I thing getting rid of all of them is an overreaction. We just talked about the say-on-pay vote. The say-on-pay vote, while it had no direct correlation to the financial crisis, is easily one of the most significant corporate governance developments in the last decade because it has radically changed the way companies and investors engage. Before say-on-pay, some companies, maybe best-in-practice leading companies, engaged with their investors regularly. I’m not talking about dealing with analysts, I’m talking about going out and meeting with your investors and asking them what their governance concerns are, talking about company performance and executive compensation, all of those things. That happened, but a lot more sparingly than it happened after say-on-pay.

Today I think it is fair to say that most public companies that are subject to the say-on-pay vote engage in some form of investor engagement, whereas that was simply just not the case 10 to 20 years ago. I think that the rule has had a very meaningful positive impact on the way that companies engage with investors. So say-on-pay, while people could still engage without the rule, has given companies and investors good reason to get together and talk about how their relationship is going. A legislative focus on repealing on say-on-pay would miss the boat.

There is actually a great benefit that companies get from the say-on-pay vote, which I don’t think Congress is necessarily aware of. Right now the proxy advisory firms use the say-on pay vote to express their satisfaction or dissatisfaction with a company’s executive compensation practices. They like what you are doing, they vote for say-on-pay; they don’t like what you are doing, they don’t vote for say-on pay. But most importantly, they are not voting against your compensation committee members or the chair of your compensation committee. If you take say-on-pay away, you no longer have the say-on-pay vote as the buffer. I think it is much better for everyone to have this advisory vote where investors can register their dissent.

There appears to have been a move toward more transparency by corporations in dealings with shareholders, especially with large institutional shareholders. Do you think this is something that will continue?

It depends. People like transparency when they have good things to show. I think conceptually the idea of more transparency is definitely taking hold. But what that transparency looks like is the question.

I’ll give you a great example—political spending. I think the ship on political spending has sailed. Most companies provide some level of detail around political spending and lobbying. However, that transparency only goes so far right now. For example, even among leading political disclosures, you will find very little information about trade associations and 501(c)(4)s and other types of tax-exempt organizations to which or through which companies engage in political activities. There is more transparency around these types of expenditures than was the case historically, but there is still a pretty significant disagreement between companies and shareholders about what is relevant for transparency disclosures, such as payments to and participation in trade associations and 501(c)(4) organizations.

Large public pension plans, public advocacy groups, proxy advisory organizations, and public officials such as Mary Jo White, have called for increased board diversity, especially gender diversity. Will the push for board diversity be a significant issue during the 2017 proxy season, and what do you see as the future of proposals for increased board diversity?

I think that among the investor crowd it will continue to be an issue. Even globally, board diversity is an issue that is not going away. But I think there is an important question about whether there are going to be any regulatory requirements that companies take action with respect to diversity. Whether with respect to disclosure about their diversity or the lack thereof in many cases, or just disclosure about their policies with respect to diversity, I think that is an open question.

Under a Clinton administration, I would have taken it for granted that there would have been rulemaking on the subject. Mary Jo White had directed the staff to explore potential rules relating to board diversity, and most institutional investors, certainly the large public pension plans, had expressed very strong support for the idea of enhancing diversity disclosures. But with the new administration, I think there will be more of a do-noharm regulatory mindset. I think they are going to be a lot more focused on what do we need to do, what is an actual market requirement, as opposed to something that investors might like to have. So voluntary rulemakings, like board diversity, are likely to go away at least from a regulatory perspective even if shareholder advocacy on the topic continues.

Many institutional investors are considering a company’s position on environmental and social issues when making investment decisions and are also submitting shareholder proposals that relate to environmental issues and climate change. What does the environmental battlefield look like for the 2017 proxy season? And are companies going to feel pressure in the future to disclose the financial impact that climate change may have on their operations?

With respect to climate change and environmental-related rule-makings or interpretive guidance, I think it’s just not going to happen under this administration. Jay Clayton may come in as SEC Chair—from the perspective of a securities practitioner, he’s got the experience. He knows what it’s like to prepare these filings, he’s been advising companies on compliance, disclosure, and governance; I think he gets it. From the perspective of someone who deals with the agency, and who loves securities law and who loves the policy issues related to securities regulation, it’s comforting to know that he is someone who actually knows what the SEC does. Just like his predecessors, he is wellversed in securities regulation issues.

But for things like climate change and other environmental and social issues, it’s a much more complicated picture: trying to figure out whether those kinds of factors are material in all circumstances, and if material at all, what about those issues are material; how do you describe those issues; and in the context of a rulemaking, which is extremely relevant to this administration, how do you demonstrate from a cost-benefit analysis that the disclosure or enhanced transparency or governance is going to benefit investors? I think that’s a really hard thing to do.

I personally think these are important issues, but it is one thing to say that they are important qualitatively, but an entirely different thing to be able to say that investor confidence will go up this much, that the stock market will benefit that much, or that such disclosures would benefit the economy by a specified amount. In the absence of compelling data of that nature, it is highly unlikely that the SEC will do anything beyond what it has already done, which is basically saying that these issues are important and putting out guidance that explains for markets and for companies how they think climate change and environmental issues can be material, or the circumstances in which they can become material. I’d be very surprised if they do anything more than that.

Do you have any other observations or predictions about the 2017 proxy season? Are there any common themes emerging in the advice that clients are seeking related to this year’s proxy season?

First, more of an observation rather than a prediction—proxy access continues to proliferate every day. We have a chart that we prepare that keeps track of proxy access adoptions and what provisions are included. It’s hard to keep up. We had 32 new proxy access adoptions last month, and I think that is going to continue. Right now, many of the proxy access shareholder proposals that have been submitted or the bylaws that have been adopted are concentrated among the larger public companies, and I don’t think people should assume that will continue to be the case. I think some institutional and retail investors are starting to take the concept of proxy access and try to push it down to smaller public companies. So we may end up in a world where more companies have proxy access.

The role of no-action letters is also incredibly important. Last year, a number of companies were able to exclude proxy access proposals under Rule 14a-8(i)(10) on the basis that they were substantially implemented by proxy access bylaws that those companies had adopted. This year there has been a change in the approach by shareholders. In addition to submitting proxy access shareholder proposals to companies that have not adopted proxy access, they have also started submitting what we call “fix-it” or “proxy access 2.0” shareholder proposals. These basically seek to ask companies to modify proxy access bylaws that they adopted in prior years.

These proposals raise a real question for the SEC staff. If a company has adopted proxy access already, such that they have adopted eight out of eleven provisions that the shareholders are asking for, what do you do when you have a shareholder that comes in the following year and is just focused on one of those provisions, like aggregation? That is what has happened this year. You have a bunch of companies that have adopted proxy access that this year received shareholder proposals that were only focused on the aggregation provisions included in those bylaws. Most of those proposals were looking to require companies to allow larger groups of shareholders, up to 50 shareholders as opposed to 20, to aggregate their shares in order to satisfy the minimum ownership requirements of their proxy access bylaws.

There have been a number of no-action letters from the SEC that addressed those proposals, and they are very hard to parse. There are a number of letters that came out on February 10, and in about half of them the SEC granted no-action and about half were denied. I think it is now pretty clear that companies that have adopted proxy access that receive one of these proxy access 2.0 proposals can exclude them if they can demonstrate through a share analysis, which is what many companies have done, that the amendment being sought by the shareholder proposal will have an immaterial impact on the number of shareholders that can rely on the company’s proxy access bylaw.

Finally, it’s very clear to me that the pendulum from a regulatory perspective is swinging in the opposite direction. Historically there has been a broadening and expansion of the SEC’s influence in corporate governance and in securities regulation more broadly. In light of the changes in administration, that pendulum is going to swing in the opposite direction, at least from a regulatory perspective. But I don’t think that is the end of the story.

The other piece of the ecosystem that is corporate governance is shareholders. My expectation is that going into the 2018 proxy season, as companies begin to get shareholder proposals, companies will get more shareholder proposals than they have received historically and that there will be more shareholder advocacy than there has been historically.

In addition, if some of the Dodd- Frank-related rules that the SEC adopted or is considering are repealed or watered down, I would fully expect that shareholders will pick up those additional provisions or requirements and incorporate them into shareholder proposals. For example, more shareholder proposals on pay ratio, shareholder proposals on pay for performance, proposals on clawbacks, hedging—all of those things that shareholders may have taken for granted because they were part of the regulatory scheme implemented following Dodd-Frank. So the pendulum of shareholder activism may swing toward more activism.

Keir Gumbs is a partner at Covington & Burling LLP, Washington, D.C., and vice chair of the Securities & Capital Markets Group. He advises public and private companies, nonprofit organizations, institutional investors, and other clients in corporate, corporate governance, securities regulation, and transactional matters. He is widely recognized as a “go-to” expert for a variety of securities law matters, including the Dodd-Frank Act and related rulemakings. Prior to joining Covington & Burling, Keir was with the SEC, where he served as Counsel to SEC Commissioner Roel C. Campos. Before serving the commissioner, Keir was a staff attorney and later a Special Counsel in the Office of Chief Counsel in the SEC’s Division of Corporation Finance.

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Avoiding Company Liability When Using Cross-Device Tracking Data

Ryan Mantia — Wed, 07 Jun 2017 19:48:28 GMT

By: Nicholas R. Merker and Blaine L. Dirker, ICE MILLER LLP

As Internet-connected mobile devices (e.g., smartphones, laptops, tablets, wearables, smart appliances, etc.) have become seemingly ubiquitous, consumers now have more ways than ever to access the Internet to interface with social media accounts, check e-mail, purchase goods and services, seek medical advice, watch cat videos, etc. However, consumers may not realize that such browsing behavior and account accesses can be monitored.

TRADITIONAL BROWSER TRACKING METHODS, SUCH AS web cookies and local shared objects, have typically not been as reliable in the mobile space. As such, the traditional methods are being replaced or supplemented with a method for tracking consumer behavior across multiple devices, commonly referred to as cross-device tracking.

In practice, various entities (e.g., service providers, content publishers, advertising companies, etc.) actively monitor consumer behavior, both online and offline, to generate detailed profiles of consumers. Cross-device tracking allows companies to further refine such profiles using data gathered for consumers across more than one of their devices. For example, a consumer may browse a particular vendor’s website for an article of clothing via a web browser on their tablet, and an advertisement for that same vendor and/or article of clothing may show up in their social media feed accessed on their smartphone.

Two Main Approaches to Cross-Device Tracking

Advertisers typically rely on two main approaches to cross-device tracking: deterministic matching and probabilistic matching. Deterministic matching relies on some explicit identification by the consumer themselves, such as a username, e-mail address, mobile phone number, etc. Probabilistic matching methods may be used to associate the consumer between their devices by using device information such as the operating system, device make and model, IP address, etc. For example, if both devices have accessed content using the same IP address, one can make a calculated guess that the same consumer is using both devices. Further, if both devices have been used to access the same e-mail address, a stronger inference can be made that both devices are associated with the same consumer.

Privacy Concerns

While cross-device tracking can provide certain benefits to the user, such as a seamless experience across devices and applications, and provide a level of fraud protection and account security, crossdevice tracking also presents a number of privacy concerns. As the International Association of Privacy Professionals (IAPP) noted in its practice guide to cross-device tracking, “[t]he variety of technologies used for cross-device tracking creates challenges for consent, notice, and opt-out standards.”¹ For example, the data gathered as a result of monitoring consumer behavior can be stored, aggregated, and analyzed by various entities, all unbeknownst to the consumer. As a result, government agencies and industry trade groups alike have introduced guidelines and self-regulatory initiatives to address such privacy concerns.

Guidelines and Self-Regulatory Initiatives to Address Privacy Concerns

In one such example, in May 2015, the Network Advertising Initiative (NAI), an industry trade group of third-party network advertisers that develops self-regulatory standards for online advertising, introduced its Guidance for NAI Members: Use of Non-Cookie Technologies for Interest-Based Advertising Consistent with the NAI Code of Conduct.² The NAI Guidance covers, among other things, the transparency and notice requirements for NAI members. In particular, the NAI Guidance requires that for noncookie technology, the privacy policy includes whether data is being collected using a non-cookie technology and a description of an easy-to-use opt-out mechanism that allows consumers to opt out of Internet-Based Advertising (IBA) with respect to a particular browser or device.

Another such example is from the Digital Advertising Alliance (DAA), an independent non-profit organization led by the leading advertising and marketing trade associations, which released specific guidance on the Application of the Self-Regulatory Principles of Transparency and Control to Data Used Across Devices³— enforcement of which began on February 1, 2017.⁴ Similar to the NAI Guidance, the DAA’s Principles require an opt-out mechanism; however, the DAA’s Principles further require a disclosure that lists all third parties engaged in the collection of cross-device tracking data. Additionally, in accordance with the DAA’s Principles, data collected from an opted-out device cannot be used for behavioral advertising on other devices, nor can data collected from other devices inform advertising on the opted-out device.

More recently, in January 2017, the Federal Trade Commission (FTC) released a Staff Report detailing the findings of a Cross-Device Tracking Workshop conducted by the FTC in November 2015 (Cross-Device Tracking: A Federal Trade Commission Staff Report (January 2017)). Research undertaken by the FTC concluded that an increasing number of companies have advertised using cross-device tracking services. To that end, the FTC Staff Report provided the following recommendations for those companies engaged in cross device tracking:

Be transparent about data collection and use practices.
Provide choice mechanisms that give consumers control over their data.
Provide heightened protections for sensitive information, including health, financial, and children’s information.
Maintain reasonable security of collected data.

Further, the FTC Staff Report highlighted various circumstances in which cross-device tracking companies, publishers, and device manufacturers can run afoul of the Federal Trade Commission Act (FTC Act). Such circumstances that could implicate the FTC Act can include:

Failure to provide truthful information about tracking practices5
Failure to disclose cross-device tracking as a data collection/ tracking method6
Failure to properly identify the types of information being collected and used7
Failure to clearly and conspicuously disclose the limits of an optout that is limited to only certain types of tracking technologies8 To safeguard data collection practices associated with cross-device tracking, the FTC Staff Report advises companies to:
Clearly and conspicuously disclose cross-device tracking practices by explaining to consumers what information is collected from the device, the entities that are collecting the information, and how they use and share the information collected.
Offer consumers choices about how their cross-device activity is shared, and respect those choices.
Do not refer to raw or hashed usernames/e-mail addresses as anonymous or aggregated data—the FTC has repeatedly held that data that is reasonably linked to a consumer or a consumer’s device is personally identifiable. Accordingly, do not make blanket statements to consumers about not sharing personal information with third parties if such data is being shared.
Refrain from engaging in cross-device tracking on data that the FTC has recognized as sensitive, warranting higher levels of protection, including health, financial, and children’s information, as well as precise geolocation information, without the consumer’s affirmative express consent.
Take efforts to maintain reasonable security and properly secure data in order to avoid unexpected and/or unauthorized uses of data (e.g., as may be otherwise compromised via a data breach).

Conclusion

In summary, if your company uses data collected via cross-device tracking collection methods, be transparent about the data collected, how it is collected, and the intended use for the data. Additionally, allow consumers to have control over their data (e.g., opt-out mechanisms), recognize how collected and disseminated data collected via cross-device tracking can be classified (e.g., as personal information, sensitive data, etc.), and maintain reasonable security.

1. https://iapp.org/resources/topics/cross-device-tracking/. 2. Network Advertising Initiative, Guidance for NAI Members: Use of Non-Cookie Technologies for Interest-Based Advertising Consistent With the NAI Code of Conduct 2 (2015) (“Beyond Cookies”), http://www.networkadvertising.org/sites/default/files/NAI_BeyondCookies_NL.pdf. 3. Digital Advertising Alliance, Application of the Self-Regulatory Principles of Transparency and Control to Data Used Across Devices 2 (2015), https://www.aboutads.info/sites/default/files/DAA_Cross-Device_Guidance-Final.pdf 4. Press Release, Dig. Advert. All., Digital Advertising Alliance Announces Enforcement of Cross-Device Guidance to Begin February 1, 2017 (Jan. 31, 2017), http://digitaladvertisingalliance.org/press-release/digital-advertising-alliance-announcesenforcement- cross-device-guidance-begin.

Nicholas R. Merker is a partner at Ice Miller LLP and co-chair of its Data Security and Privacy Practice. Blaine L. Dirker is of counsel in the firm’s Intellectual Property and Data Security and Privacy practices. The authors may be reached at nicholas.merker@icemiller.com and blaine.dirker@icemiller.com, respectively.

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U.S. Patent Office Launches PTAB Procedural Reform Initiative - Practice News, Summer 2017

Ryan Mantia — Wed, 07 Jun 2017 19:53:27 GMT

THE UNITED STATES PATENT AND TRADEMARK OFFICE (USPTO)

With the enactment of the America Invents Act in 2011, the PTAB was charged with conducting proceedings to address challenges to existing patents. Those proceedings “have significantly changed the patent landscape by providing a faster, cost-efficient quality check on issued patents,” the USPTO said. “Since AIA trials debuted in 2012, the USPTO has continuously looked for ways to improve the proceedings. Over time, we have listened to our stakeholders’ experiences, and we have now compiled data derived from thousands of case filings and dispositions.”

The USPTO said that the purpose of its initiative is to “ensure that the proceedings are as effective and fair as possible within the USPTO’s congressional mandate to provide administrative review of the patent ability of patent claims after they issue.”

Among the procedures to be examined are those relating to multiple petitions, motions to amend, claim construction, and decisions to institute review.

In addition to evaluating input already received from businesses, inventors, intellectual property associations, trade groups, and patent practitioners, the USPTO is seeking additional feedback on its procedures and potential enhancements. Information may be submitted at PTABProceduralReformInitiative@uspto.gov. Updates on the progress of the initiative will be available on the PTAB’s website.

-Lexis Practice Advisor Journal Staff

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PRESIDENT TRUMP ISSUES EXECUTIVE ORDER ON FOREIGN WORKERS, PRODUCTS

PRESIDENT DONALD TRUMP HAS ISSUED AN EXECUTIVE order entitled “Buy American and Hire American,” aimed at strengthening the federal government’s preference for American companies and products in its procurement process and reforming the H-1B visa program for foreign workers.

The president ordered the heads of all federal agencies to “assess the monitoring of, enforcement of, implementation of, and compliance with Buy American laws within their agencies” and to “develop and propose policies for their agencies to ensure that, to the extent permitted by law, Federal financial assistance awards and Federal procurements maximize the use of materials produced in the United States.”

Regarding the visa program, the president ordered the attorney general and the secretaries of state, labor, and homeland security to “suggest reforms to help insure that H-1B visas are awarded to the most-skilled or highest-paid petition beneficiaries.”

The H-1B program, which was established in the Immigration and Nationality Act, allows foreign workers who meet educational and proficiency standards to live and work legally in the United States for up to six years when there is a shortage of American workers in fields such as science and information technology.

The president’s order came several weeks after the U.S. Department of Justice (DOJ) issued a statement cautioning employers hiring workers under the H-1B program not to discriminate against American workers and two federal agencies announced plans to tighten H-1B procedures.

“The Justice Department will not tolerate employers misusing the H-1B visa process to discriminate against U.S. workers,” Acting Assistant Attorney General Tom Wheeler of the Civil Rights Division said. “U.S. workers should not be placed in a disfavored status, and the department is wholeheartedly committed to investigating and vigorously prosecuting these claims.”

Expressing its support for the DOJ’s statement, the U.S. Department of Labor (DOL) has announced plans to step up its oversight of the H-1B program, saying that it will “rigorously use all of its existing authority” to investigate violations; consider changes to the Labor Condition Application, part of the H-1B application process; and “engage stakeholders on how the program might be improved to create greater protections for U.S. workers.”

In conjunction with the DOL’s initiative, the U.S. Citizenship and Immigration Services (USCIS) component of the Department of Homeland Security, said it “will take a more targeted approach” during visits to worksites where H-1B workers are employed, focusing on three areas: cases in which USCIS cannot validate an employer’s basic business information through commercially available data, employers who have a high ratio of H-1B workers as compared to American workers, and employers seeking to hire H-1B workers to work offsite at another company’s location.

USCIS has established an e-mail address (reportH1Babuse@USCIS.dhs.gov) for individuals to report suspected fraud. Individuals can also report suspected fraud by submitting Form WH-4 to the DOL’s Wage and Hour Division or by submitting the HSI Tip Form to U.S. Immigration and Customs Enforcement.

-Lexis Practice Advisor Journal Staff

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FINANCIAL CRIMES ENFORCEMENT NETWORK RENEWS REAL ESTATE GEOGRAPHIC TARGETING ORDERS TO IDENTIFY HIGH-END CASH BUYERS

THE FINANCIAL CRIMES ENFORCEMENT NETWORK (FINCEN) has announced the renewal of existing Geographic Targeting Orders (GTO) that temporarily require U.S. title insurance companies to identify the natural persons behind shell companies used to pay all cash for high-end residential real estate in six major metropolitan areas.

FinCEN has found that about 30% of the transactions covered by the GTOs involve a beneficial owner or purchaser representative that is also the subject of a previous suspicious activity report. This corroborates FinCEN’s concerns about the use of shell companies to buy luxury real estate in all-cash transactions.

“These GTOs are producing valuable data that is assisting law enforcement and is serving to inform our future efforts to address money laundering in the real estate sector,” said FinCEN Deputy Director Jamal El-Hindi. “The subject of money laundering and illicit financial flows involving the real estate sector is something that we have been taking on in steps to ensure that we continue to build an efficient and effective regulatory approach.”

The GTOs include the following major U.S. geographic areas: all boroughs of New York City; Miami-Dade County and the two counties immediately north (Broward and Palm Beach); Los Angeles County; three counties in the San Francisco area (San Francisco, San Mateo, and Santa Clara counties); San Diego County; and the county that includes San Antonio, Texas (Bexar County).

-Pratt’s Bank Law & Regulatory Report, Volume 51, No. 4

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MORTGAGE PERFORMANCE CONTINUES TO IMPROVE

THE OVERALL PERFORMANCE OF FIRST-LIEN MORTGAGES continues to improve, and the number of loans in delinquency continues to decline, according to the Office of the Comptroller of the Currency’s (OCC) most recent quarterly report on mortgages.

The report is based on data on first-lien residential mortgage loans serviced by seven national banks with large mortgage-servicing portfolios. The first-lien mortgages included in the OCC’s quarterly report represent 35% of all residential mortgages outstanding in the United States or approximately 19.8 million loans totaling $3.45 trillion in unpaid principal balances.

The OCC Mortgage Metrics Report, Fourth Quarter 2016, showed 94.7% of mortgages included in the report were current and performing at the end of the quarter, compared with 94.1% a year earlier.

The report also showed that servicers initiated 45,495 new foreclosures in the fourth quarter of 2016, a decrease of 5.1% from the previous quarter and a decrease of 28.2% from a year earlier.

As first-lien mortgage performance improves, the number of loss mitigation actions declines. Servicers implemented 32,312 mortgage modifications in the fourth quarter of 2016, a 9.3% decrease from the previous quarter. More than 89% of the modifications reduced borrowers’ monthly payments.

-Pratt’s Bank Law & Regulatory Report, Volume 51, No. 4

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NORTH CAROLINA PASSES A NEW VERSION OF ITS CONTROVERSIAL BATHROOM BILL

ON APRIL 3, THE UNIVERSITY OF NORTH CAROLINA TAR Heels won their sixth NCAA basketball championship, just months after the NCAA relocated preliminary rounds in its tournament from Greensboro, N.C., to Greenville, S.C. The NCAA’s decision to relocate the games was a reaction to the North Carolina legislature’s enactment of H.B. 2, the so-called “bathroom bill,” which barred transgender individuals from using restrooms that match their gender identities.

Just four days earlier, on March 30, following a year of economic losses resulting from the refusal of a number of organizations— including the NCAA—to do business in the state, the North Carolina legislature repealed and replaced H.B. 2 with H.B. 142. The move came one week before the deadline for consideration to host future NCAA championship games.

H.B. 2 was enacted after the city of Charlotte passed a nondiscrimination ordinance expanding protection against discrimination based on sexual orientation and gender identity and expression, and permitted transgender individuals to use the restrooms of their choice. Those protections were lost with the passage of H.B. 2 in March 2016.

In an effort to promote repeal of H.B. 2, the city of Charlotte repealed its nondiscrimination ordinance in December 2016, leaving LGBT individuals with no protections at the local level.

H.B. 142 removed the explicit ban on transgender individuals using the bathroom of their choice but added language stating that access to bathrooms based on gender can be regulated only by the state legislature and prohibiting local governments from enacting anti-discrimination laws related to public accommodations until December 2020.

On April 5, the NCAA announced that its board had voted “reluctantly” to allow post-season play in North Carolina. As a result, first- and second-round games will be played in Charlotte, N.C., in next year’s NCAA men’s basketball tournament.

-Adapted from Bender’s Labor & Employment Bulletin, Volume 17• Issue No.5

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CALIFORNIA SUPREME COURT INVALIDATES ARBITRATION AGREEMENT’S WAIVER CLAUSE

A PROVISION CONTAINED IN A CREDIT CARD’S arbitration agreement that waives the right to seek injunctive relief is contrary to public policy and is therefore unenforceable under state law, the California Supreme Court has ruled (McGill v. Citibank, N.A. 2017 Cal. LEXIS 2551).

The state high court held further that the Federal Arbitration Act (FAA) does not preempt state law on the issue.

As a result, the court said, Citibank, N.A., cannot force credit card customer Sharon McGill to arbitrate claims brought under the California unfair competition law (Bus. & Prof. Code, § 17200 et seq.), the Consumers Legal Remedies Act (CLRA) Civ. Code, § 1750 et seq.), the California false advertising law (Bus. & Prof. Code § 17500) and the state insurance code.

McGill, seeking to represent a class of Citibank customers, filed suit in California state court, challenging Citibank’s marketing and application of a credit protector plan under which the bank agreed to defer or credit certain amounts on a customer’s credit card account if a qualifying event such as unemployment or hospitalization occurred. Customers paid a premium for the plan based on their credit card balances.

Citibank petitioned to require McGill to arbitrate her claims on an individual basis, citing a provision in its arbitration agreement stating in part, “All Claims are subject to arbitration, no matter what legal theory they are based on or what remedy (damages, or injunctive or declaratory relief) they seek.”

The trial court denied the petition with respect to the statutory claims; a state appeals court reversed and remanded, directing the trial court to order arbitration on all claims. McGill successfully petitioned the state Supreme Court for review.

Reversing the appeals court, the state high court held that public injunctive relief “remains a remedy available to private plaintiffs” under the three state statutes and that the arbitration provision “is invalid and unenforceable under state law insofar as it purports to waive McGill’s statutory right to seek such relief.”

The court also rejected Citibank’s argument that the FAA preempts California law, finding the bank’s interpretation of the statute “overbroad.”

-Lexis Practice Advisor Journal Staff

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Preparing for Artificial Intelligence in the Legal Profession

Ryan Mantia — Wed, 07 Jun 2017 20:12:36 GMT

By: Dennis Garcia, Microsoft Assistant General Counsel

One of the very hot topics so far in 2017 is artificial intelligence (AI) and its potential disruptive impact on the legal profession. Questions ranging from, “Will AI replace lawyers?” to “Does it make sense to attend law school with the rise of AI?” to “How will AI impact the delivery, cost, and quality of legal services?” are being asked by those in and around the legal industry.

IN FACT, THE INTERSECTION OF AI AND THE LAW HAS recently captured the attention of major media outlets including The New York Times (“A.I. is Doing Legal Work. But It Won’t Replace Lawyers, Yet”¹) and The Atlantic (“Rise of the Robolawyers”²). In addition, nowadays you would be hardpressed to attend a legal conference without a session, panel, or presentation on AI.

This article reviews the basics of AI, key use cases for AI in the legal profession, some primary AI-related legal issues, and steps that your law firm or in-house legal department may want to take to become AI-ready.

AI 101 for Lawyers

In his book “The Fourth Industrial Revolution,”³ Klaus Schwab, executive chairman and founder of The World Economic Forum, begins by briefly reviewing the three earlier industrial revolutions that transformed our society and then devotes the remainder of the book to describing how our world recently entered a whole new era in which we will witness unprecedented major and rapid technological innovations. According to Schwab, these innovations will largely center in the physical, digital, and biological areas. AI has the potential to be a disruptive force in our “Fourth Industrial Revolution.”

Like many newer and transformational technologies, there is no uniform definition for AI. An October 2016 report issued by the White House called “Preparing for the Future of Artificial Intelligence” states the following: “Some define AI loosely as a computerized system that exhibits behavior that is commonly thought of as requiring intelligence. Others define AI as a system capable of rationally solving complex problems or taking appropriate actions to achieve its goals in whatever real world circumstances it encounters.” In addition, the concept of machine learning is an application of AI based on the premise that systems can learn by having access to data.

Leading technology companies are making major investments in the AI space and are actively recruiting AI talent. For example, last September my company, Microsoft, announced the formation of the Microsoft Artificial Intelligence and Research Group—consisting of more than 5,000 computer scientists and engineers—under the leadership of Microsoft Executive Vice President Harry Shum.

While AI has certainly received much attention and hype so far this year, it is important to remember that the AI field is very much in its infancy—which provides various opportunities and challenges for the legal profession.

Use Cases for AI in the Legal Profession

There are a number of potential applications for the utilization of AI systems in the legal industry—especially as they relate to the automation of repetitive and routine tasks to help lawyers provide superior legal counsel at a higher level. Let’s review a non-exhaustive list of those use cases.

Conducting Legal Research

As most lawyers know, conducting legal research can be a tedious, monotonous, and time-consuming task. However performing timely and comprehensive legal research on a particular matter—especially as the law continues to evolve— is critically necessary and important for lawyers as they serve their clients. AI systems may be able to aid lawyers by performing legal research on relevant case law and applicable statutes in a faster and more thorough manner than what lawyers may be able to do on their own. Such AI systems may also be powerful enough to use data to predict the outcome of litigation and enable lawyers to provide more impactful advice to their clients in connection with dispute resolution issues.

Administrative Legal Support

I was recently asked if I had an administrative assistant. I said yes, I do, and my administrative assistant’s name is Cortana— Microsoft’s high-powered personal digital assistant. While the person who asked the question chuckled at me, the reality is that lawyers will increasingly be able to rely upon AI-powered digital assistants that become smarter as they learn more about you to perform the various necessary administrative functions that are part of any legal practice. Do you need to follow up with others, schedule travel, set up a meeting, or manage expenses (including in-house counsel’s review of outside counsel invoices)? Some of my Microsoft legal department colleagues have even developed an AI-powered chatbot tool that they use along with their automatically generated out-of-office e-mail response when they are away from the office without any e-mail access. All of those tasks, and more, can be performed by digital assistants and free up time for you to provide higher value-added legal services to your clients.

Legal Document Generation and Review

An AI system may serve as a virtual concierge for the intake of client information and the preparation of standard and routine legal documents and agreements for the benefit of your clients. In addition, lawyers specializing in contract negotiation matters would appreciate an AI system that could provide a fast and thorough contract comparison whenever there is a battle of the forms between contracting parties regarding which standard contract terms should be utilized. An additional welcome step would be for an AI system to suggest suitable fallbacks or alternative contract provisions from a contracting party’s repository of negotiated contracts to help address a particular contractual issue.

Performing Due Diligence

All lawyers know that conducting a comprehensive due diligence review in connection with the huge amounts of data that are part of any merger, acquisition, or other sophisticated corporate transaction is absolutely necessary. An AI system may provide an opportunity to perform such due diligence in a faster, cheaper, and more thorough fashion instead of relying on a high-priced and bleary-eyed team of lawyers.

Promoting a Stronger Compliance Culture

A sophisticated AI system with the capability to actively identify and analyze data patterns regarding internal company matters and employee activities may be helpful to an organization’s compliance department. Using such a system could help organizations thwart the kinds of damaging highprofile ethics and integrity issues that have unfortunately become commonplace over the past few years.

Building More Robust Cybersecurity

AI systems with built-in data analytics capabilities can provide all organizations with the ability to become more cybersecure. For instance, AI systems could be utilized by law firms—which are increasingly being targeted by cybercriminals—to monitor and assess the data involving attempts to penetrate their information technology infrastructure so they can proactively identify trends and patterns and close security gaps to attain more robust cybersecurity. Law firms may be able to use such AI tools to their advantage by demonstrating to potential clients that they are more cybersecure than their competitors.

Complying with e-Discovery Requirements

Properly managing the production of the massive volumes of electronically stored information is of paramount importance during the litigation process. There are many e-Discovery technology solutions available in this growing marketplace. As an example, the Microsoft legal department uses the e-Discovery features of the Microsoft Office 365 cloud computing solution to improve the accuracy and usefulness of discovery results and save time and money—$4.5 million annually. AI-fueled systems could further transform e-Discovery technology solutions by providing additional levels of efficiency and cost savings to lawyers and legal departments tasked with managing their e-Discovery needs.

Enhanced Self-Help Legal Resources

Law firms, in-house legal departments, and non-profit legal aid organizations are increasingly providing legal self-help resources directly to their clients via web portals as a form of de-lawyering. Clients may often resist using those resources since they may lack a personal touch. An AI-powered chatbot and/or digital assistant could serve as a personal navigator to help clients utilize such self-help resources and may drive greater usage and adoption by clients.

Potential AI Legal Issues

Because AI is still an emerging technology, the various legal issues associated with it are also emerging. In the coming months and years lawyers will have plenty of opportunities to advise their clients on issues such as the following, and many others.

Data Privacy

In order for AI systems to provide valuable services, fundamentally they need to have access to and use large amounts of data. AI systems will also probably generate significant amounts of information. As a result, a buyer of AI-related services should understand how an AI solutions provider protects and uses its data. Since the AI world does serve to increase the surface area for potential targets for cybercriminals and because data privacy laws continue to evolve—for instance the European Union’s new General Data Protection Regulation takes effect in May 2018—consumers of AI-related services should carefully evaluate AI providers and clearly understand what specific steps they take to appropriately safeguard data.

Law Enforcement Access to Data

Because the amount of data continues to grow and our laws have not been updated to keep pace with the change in the technology landscape, during the past few years we have seen various legal challenges between technology companies and the U.S. government pertaining to law enforcement access to data. Such challenges will likely become more common with the rise of AI systems. For instance, there was a recent well-publicized matter involving a search warrant request for Amazon to provide data involving its AI-powered Echo device as part of a murder case.⁴

Lack of Regulatory Framework & Standards

Since AI is still very much in its early stages, there are no meaningful AI-related laws or standards that can be relied upon—although given AI’s dependence on data, applicable data privacy laws will be relevant. From a regulatory perspective, some may view AI as the Wild West. While this lack of an AI regulatory framework or standards can create some confusion and ambiguity, it does provide opportunities for lawyers to help build and develop this area from the ground up.

Legal Ethics

As lawyers use AI systems to deliver legal services, how do they ensure that they still comply with legal ethics rules such as the American Bar Association (ABA) Model Rules of Professional Conduct? Are lawyers exercising competence as required by ABA Model Rule 1.¹ when they use AI systems to provide legal advice? How are a lawyer’s responsibilities for nonlawyer assistance in ABA Rule 5.3 affected by AI systems? As AI systems are increasingly used by lawyers, it will be interesting to see whether the ABA Model Rules will evolve to specifically address AI use by lawyers and if state legal ethics associations will issue ethics opinions on AI—just like they have done for cloud computing.

Intellectual Property Protection

Elements of an AI system may be subject to intellectual property protection—including patents. Presumably companies that are developing and investing in AI technologies are also devising their AI intellectual property strategies and seeking patents where applicable. As AI becomes more popular and advanced, only time will tell whether we will see AI patent litigation that is reminiscent of the smartphone patent litigation wars that we have witnessed in the past.

Liability As lawyers adopt AI systems to render legal advice to clients, it is inevitable that such systems will make mistakes that may result in damages. How will liability be determined in such situations? Will lawyers be subject to negligence or malpractice claims from clients? How do lawyers mitigate these risks and other potential liability issues associated with AI?

Become AI-Ready

In all likelihood, AI will be a transformational technology that impacts all industries, not just the legal profession. These are some steps that lawyers can take to become AI-ready.

Establish an AI Legal Center of Excellence

Appoint members of your law firm or legal department who can serve as your team’s subject matter experts on AI to your AI Center of Excellence. Provide them with opportunities to train up and learn more about AI so they can be an AI Center of Excellence resource to other lawyers and your clients.

Embrace the Growth Mindset and Learn from Others

Remember there is so much to learn about AI, and this technology will continue to evolve and develop. Invest the time and energy to understand the basics of AI and how lawyers can use it as a tool to provide high-quality legal services. Since AI is currently such a top of mind subject, be sure to collaborate with fellow lawyers at law firms, in-house legal departments, and non-profit legal organizations to understand how they plan on deploying AI in their delivery of legal support. In addition, actively use social media resources like LinkedIn and Twitter to follow and keep abreast of developments in the AI space. Also, gain knowledge by attending AI-focused sessions and panels that are part of CLE programs, conferences, and webinars.

Don’t Be Afraid to Fail

Traditionally, many lawyers have been viewed as being conservative and resistant to change. There may be a concern among lawyers that leveraging AI systems as part of their practice may be too risky. While there is no doubt that there will be some growing pains associated with AI, lawyers should not fear AI, as the potential long-term benefits in leveraging AI to help automate aspects of their legal services far outweigh the potential risks.

Develop Appropriate Internal AI Practices

As AI technology continues to evolve, consider developing some thoughtful guidelines and practices as to how your law firm or company may use AI as part of its business. Perhaps such procedures can be incorporated into your law firm’s or company’s overall technology strategy to address other disruptive Fourth Industrial Revolution innovations like cloud computing, the Internet of Things, big data, etc.

Over the next few years it will be fascinating to observe the impact that AI will have on the legal profession. Although some are of the mindset that AI may serve to replace lawyers and other legal professionals, I believe Al will result in a redeployment of legal resources and free up time for lawyers to perform more mission-critical work for their clients. While AI may offer lawyers leading technology and data-driven tools to provide efficient, quick, and impactful legal counsel to clients, AI is still not a substitute for a lawyer’s own empathy, judgment, instinct, and personal relationship with clients.

1. Steve Lohr, A.I. Is Doing Legal Work. But it Won’t Replace Lawyers, Yet, N.Y. Times, (March 19, 2017), https://www.nytimes.com/2017/03/19/technology/lawyers-artificial-intelligence.html?_r=0
2. Jason Koebler, Rise of the Robolawyers: How Legal Representation Could Come to Resemble Turbo Tax The Atlantic (April 2017), https://www.theatlantic.com/magazine/archive/2017/04/rise-of-therobolawyers/517794/
3. Klaus Schwab, The Fourth Industrial Revolution, (World Economic Form 2016).

Dennis Garcia is an Assistant General Counsel for Microsoft based in Chicago. He leads the legal support function to Microsoft’s U.S. Central Region Enterprise & Partner Group team that is based in an 18-state region and across six Microsoft districts. Prior to joining Microsoft, Dennis worked as an in-house counsel for Accenture and IBM. Dennis received his B.A. in Political Science from Binghamton University and his J.D. from Columbia Law School. He is admitted to practice in New York, Connecticut, and Illinois (House Counsel). Dennis is a Fellow of Information Privacy, a Certified Information Privacy Professional/United States and a Certified Information Privacy Technologist with the International Association of Privacy Professionals. He serves on the Board of Directors of Illinois Legal Aid Online and the Association of Corporate Counsel – Chicago Chapter. Contact Dennis through Twitter at https://twitter.com/DennisCGarcia or LinkedIn at https://www.linkedin.com/in/dennisgarciamicrosoft.

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Profiles of Lexis Practice Advisor Journal™ Advisory Board Members Glen Lim & Kristin Wigness

Ryan Mantia — Wed, 07 Jun 2017 20:44:13 GMT

Glen Lim Partner: Katten Muchin Rosenman LLP

GLEN LIM IS A PARTNER IN KATTEN’S Commercial Finance group. His principal focus is the representation of banks and other financial institutions as lenders and strategic investors, buyout funds and corporations as borrowers in connection with domestic and international financings. His areas of expertise include financings of mergers and acquisitions, debtorin- possession and exit financings, first and second lien financings, and working capital and asset-based financings. Glen has successfully represented a crosssection of leading global alternative asset managers, investment management firms, private equity firms, and specialty finance companies in connection with a variety of acquisition and commercial financing deals. Glen received his J.D. from New York University School of Law and his B.A. from the University of California, Los Angeles. He is licensed to practice law in California and New York.

Kristin C. Wigness: First Vice President and Associate General Counsel, Israel Discount Bank of New York

KRISTIN C. WIGNESS, FIRST VICE President and Associate General Counsel at Israel Discount Bank of New York, concentrates on secured and unsecured lending transactions, debt restructurings, loan workouts, debtor-in-possession financing, and creditors’ rights and insolvency. Prior to joining IDB, Kristin was a partner at Katten Muchin Rosenman LLP in New York. At IDB, Kristin oversees all lending related matters for the bank, including loan originations and workouts. Prior to joining IDB, Kristin represented numerous agents and lenders in loan originations, loan workouts and debtor-in-possession financings, including in the Chapter 11 cases of United Airlines, Tower Automotive, American Commercial Lines, Mariner Post-Acute Network, Polaroid Corporation, Burlington Industries, Guilford Mills, and Sea Island Company. He also represented various sellers and buyers of assets through bankruptcy, debtors, licensors and creditors, and assisted mortgage lenders in connection with sales of mortgage pools and in restructuring financing transactions of mortgage portfolios. Kristin is a frequent speaker at seminars and universities. He is licensed to practice in New York and New Jersey. Kristin received his J.D. from Rutgers University School of Law. He is a member of the New York State Bar Association and American Bar Association.

Contract Drafting Concerns: Beware Browsewrap

Ryan Mantia — Wed, 07 Jun 2017 19:56:52 GMT

By: Timothy Murray, MURRAY, HOGUE AND LANNIS

With the e-commerce explosion, sellers are peddling goods and services over their websites at unprecedented rates. From a contract law perspective, this ought to be a seller’s nirvana: the seller alone establishes the legal terms to govern transactions conducted over its website without any haggling or negotiating, and without any battle of the forms in which a transaction is subject to the buyer’s competing boilerplate.

BUT IN AN ALARMING NUMBER OF CASES, THE TERMS OF USE drafted to govern website transactions are held to be outright unenforceable due to the most basic failure imaginable: there’s no mutual assent.

In the brave new world of Internet contracts, mutual assent isn’t a fossil from first-year contract law class with no relevance to the real world; it’s the rock star of contract jurisprudence. The failure to make sure the buyer assents to the website’s terms of use is perhaps the ultimate contract drafting landmine about which every commercial lawyer ought to be aware.

The Problem: Browsewrap

There are two main types of Internet contracts, with all manner of variations in between: clickwrap and browsewrap. Clickwrap agreements require users to expressly manifest assent (by clicking a button) to the website’s terms of use before being allowed to conclude a transaction or continue using the site. From a contract law perspective, there is little controversy surrounding clickwrap agreements. They are akin to signing a traditional pen and ink contract.

The problem lies with browsewrap-type agreements, in which contractual terms of use are hyperlinked and presented on aseparate page of the website, and the user is not required to click a button to manifest his or her assent. The user’s assent is inferred from his or her use of the website. Browsewrap-hyperlinked terms are frequently held to be unenforceable, but they will be enforced if the user (1) has actual or constructive notice of them and (2) manifests assent to them.

Actual notice. If the user has actual knowledge of browsewrap terms (typically demonstrated by circumstantial evidence as opposed to the user’s admission that he or she has read them), the terms will be enforced. Since the terms will almost always favor the website owner, if the terms would not otherwise be enforceable, a user will be punished for reading and admitting to having read the contract—a peculiar state of affairs that might be worthy of a policy debate.
Constructive notice.The law generally does not hold the Internet user to any duty to go searching for a hyperlink to a website’s terms of use. But even if a user does not have actual notice of the hyperlinked terms, he or she will be deemed to have constructive notice of them if the content and design of the website puts a reasonably prudent user on inquiry notice that the hyperlinked terms govern transactions involving that website.

Note a common problem: it is not enough that the hyperlinked terms themselves explicitly state that the terms govern use of the website. If the website that hyperlinks to the terms fails to alert a reasonable user that the terms govern, there is no reason for a user to visit the terms, and they won’t be enforced.¹

A. The hyperlink must be conspicuous. To show that a browsewrap agreement is enforceable, it is essential to prove that the hyperlink was conspicuous on the web page. To assess conspicuousness, courts examine a variety of factors, including size, color, typeface, and placement—and these factors must be viewed in the context of the web page’s overall design.² That last point is crucial: it is not enough for a hyperlink to be in large font if the web page is chock-full of other hyperlinks in equal or larger font (because if everything is conspicuous, nothing is).

Classic inconspicuousness. If the hyperlink is relegated to the bottom of the web page in inconspicuous font, and if there is no reason for the user to see it, courts will find the hyperlinked terms unenforceable. A common mistake is to put the hyperlink below the order button where there is no reason for a user to continue to scroll down to it.³ Inconspicuous because of clutter. If the hyperlink is just one item on a web page filled with all manner of other links and information, courts likely will hold it’s not conspicuous—at the very least, it raises a fact issue as to whether the hyperlinked terms are enforceable. A hyperlink that might otherwise be conspicuous on a less cluttered page is rendered inconspicuous when there is too much on the page competing with the user’s attention.⁴
Bottom line.The hyperlink has to stand out—and it has to be very close to the button that the user will click in order to proceed to use the site or to conclude a transaction.

B. Website must alert user that continued use will manifest assent to hyperlinked terms. Conspicuousness and the placement of the hyperlink are not enough. The web page also needs to contain an explicit notice that continued use of the website will manifest the user’s assent to be bound by the hyperlinked terms. Merely including a Terms of Use hyperlink near the relevant button a user must click to proceed is not enough—it does not tell the user that the hyperlinked terms will be binding if he or she proceeds. The website must alert the user to review the terms, or otherwise admonish him or her that by clicking a button to complete a transaction “you agree to the terms and conditions”—or words to that effect.⁵ The more explicit, the better.

The Lessons

In one of the cases that held a browsewrap agreement unenforceable due to the absence of mutual assent, the court wrote this stinging indictment: “Very little is required to form a contract nowadays—but this alone does not suffice.”⁶ Yet, the absence of mutual assent with respect to browsewrap agreements is a problem that afflicts even sophisticated companies that are synonymous with Internet sales. The client needs to be made aware that it isn’t just the terms of use themselves that have contractual significance—the websites that hyperlink to them do, too. In short, attorneys need to be directly involved in decisions about the design and content of websites that hyperlink to terms of use. The best set of terms in the world can’t create a binding contract when the website that hyperlinks to them doesn’t require users’ assent. A Timothy Murray is the coauthor of the Corbin on Contracts Desk Edition (2017) and the biannual supplements to Corbin on Contracts. He practices law as a partner in Murray, Hogue & Lannis in Pittsburgh, Pennsylvania, where he has represented all manner of clients in business disputes and transactional matters.

1. Nguyen v. Barnes & Noble Inc., 763 F.3d 1171 (9th Cir. 2014); Herman v. SeaWorld Parks & Entm’t, Inc., 2016 U.S. Dist. LEXIS 181173 (M.D. Fla. Aug. 26, 2016); Hines v. Overstock.com, Inc., 668 F. Supp. 2d 362 (E.D.N.Y. 2009). 2. Be In v. Google, Inc., 2013 U. S. Dist. LEXIS 147047 (N.D. Cal. 2013); Long v. Provide Commerce, Inc., 200 Cal. Rptr. 3d 117, 125–126 (Cal. App. 2d Dist. 2016). See also, Metter v. Uber Techs., Inc., 2017 U.S. Dist. LEXIS 58481 (N.D. Cal. 2017). 3. Specht v. Netscape Communs. Corp., 306 F.3d 17 (2d Cir. N.Y. 2002); Herman v. SeaWorld Parks & Entm’t, Inc., 2016 U.S. Dist. LEXIS 181173 (M.D. Fla. Aug. 26, 2016); Hines v. Overstock.com, Inc., 668 F. Supp. 2d 362 (E.D.N.Y. 2009). See also, Metter v. Uber Techs., Inc., 2017 U.S. Dist. LEXIS 58481 (N.D. Cal. 2017) (alert about terms of use blocked by keypad so user could enter payment information). 4. Nicosia v. Amazon, 2016 U.S. App. LEXIS 15656 (2d Cir. 2016) (webpage had multiple buttons and promotional advertisements—between 15 to 25 different links and various text in four font sizes and six different colors—and commercial notices that distracted from the legal terms); Meyer v. Kalanick, 2016 U.S. Dist. LEXIS 99921, at *31 (S.D.N.Y. July 29, 2016) ("[I]t is hard to escape the inference that the creators of Uber’s registration screen hoped that the eye would be drawn seamlessly to the credit card information and register buttons instead of being distracted by the formalities” of the Terms of Service hyperlink.). See also, Nghiem v. ***’s Sporting Goods, Inc., 2016 U.S. Dist. LEXIS 89429 (C.D. Cal. July 5, 2016). 5. Nguyen v. Barnes & Noble Inc., 763 F.3d 1171 (9th Cir. 2014). See also, Nghiem v. ***’s Sporting Goods, Inc., 2016 U.S. Dist. LEXIS 89429 (C.D. Cal. July 5, 2016).

Timothy Murray is the coauthor of the Corbin on Contracts Desk Edition (2017) and the biannual supplements to Corbin on Contracts. He practices law as a partner in Murray, Hogue & Lannis in Pittsburgh, Pennsylvania, where he has represented all manner of clients in business disputes and transactional matters.

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