Emerging Issues for In-House Counsel 2006 Presented by: The Corporate Litigation Practice Group of Blank Rome LLP October 27, 2006 2006, Blank Rome LLP Arbitration: Is It Arbitrary? Presented by: Edward Cahn, Blank Rome LLP Harris Cogan, Blank Rome, LLP, Moderator Stephen Orlofsky, Blank Rome LLP Diane Welsh, JAMS,Inc. Arbitration
Is it arbitrary? 3 Typical Clause Any controversy or claim arising out of or relating to this contract, or the breach thereof shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial [or other] Arbitration Rules [including the Optional Rules for Emergency Measures of Protection], and judgment on the award rendered by the arbitration may be entered in any court having jurisdiction thereof.
Source: American Arbitration Association, Drafting Dispute Resolution Clauses, A Practical Guide 4 Selection of Arbitrators Specific Qualifications Industry Specific Number of Arbitrators Party-Neutral Arbitrators 5
Particular Provisions Locale Time Periods Choice of Law Reasoned Opinion 6 Baseball Arbitration When is it advisable? 7
Mediation Typical Clause If a dispute arises out of or relates to this contract, or the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Procedures before resorting to arbitration, litigation, or some other dispute resolution procedure. Source: American Arbitration Association, Drafting Dispute Resolution Clauses, A Practical Guide 8 Mediation
Is mediation ever too early? Obtaining the necessary documents for mediation 9 Arbitration Pleadings and Procedures Narrative, Descriptive Pleadings Preliminary Conference Scheduling Order Motion Practice
10 Discovery in Arbitration Contractual Agreement on: Number of depositions Document production Interrogatories 11 Discovery from Out of
State Witnesses Generally subpoenas calling for the production of documents do not need to comply with FRCP 45(b)(2)s territorial limit. 865 Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404 (3d Cir. 2004) In re Security Life Ins. Co., 228 F.3d (8th Cir. 2000) 12 The Second Circuit disagrees with the recent
trend that subpoenas for the production of documents do not need to comply Rule 45(b) (2)s territorial limit. Trammochem, 2006) Dynegy Midstream Services LP v. 2006 WL 1612722 (2d Cir. 13 Injunctive Relief Under the FAA, arbitrators can grant preliminary injunctive relief. See Advisors Inc. v. Thorley, 147 F.3d 229, 230-31 (2d Cir. 1998); Commercial Arbitration Rules and Mediation Procedures, at R-31(b).
Under Pennsylvania law, arbitrators can grant any form of equitable relief. See 1980 Uniform Arbitration Act, 42 Pa.C.S.A. 7301; Dickler v. Shearson Lehman Hutton, Inc., 408 Pa. Super. 286 (Pa. Super. Ct. 1991) N.Y. C.P.L.R. 7502(c) grants the court only the limited authority to issue an order of attachment or a preliminary injunction in connection with an arbitrable controversy and does not, despite petitioners' contentions, endow the court with broad discretionary powers to fashion other injunctive orders "in aid of arbitration." Salvano v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 85 N.Y.2d 17 (1995) 14 Punitive Damages
Under the FAA, if contracting parties agree to include claims for punitive damages within the issues to be arbitrated, the Federal Arbitration Act ensures that their agreement will be enforced. 9 U.S.C.S. 3, 4, Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52 Under Pennsylvania law, if an agreement is silent as to remedies, arbitrators can award punitive damages. Phillips v. Babcock & Wilcox, 349 Pa. Super. 351 (Pa. Super. Ct. 1985) Under New York law, an arbitrator cannot award punitive damages. Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354 (1976) 15
The Manifest Disregard of Law Standard of Review for Arbitration Awards 16 Manifest Disregard of Law under the FAA? In order to overturn an award for manifest disregard, a court must determine that: the law that was allegedly ignored was clear, and in fact explicitly applicable to the matter before the arbitrators; the law was improperly applied, leading to an erroneous outcome and 3) arbitrator knew of the laws existence and that it should have
been applied to the case before him. 17 New York and Pennsylvania Under CPLR 7511, manifest disregard of the law is not a standard under which a court can overturn an arbitrators decision. Banc of Am. Secs. v. Knight, 2004 NY Slip Op 24232 (N.Y. Sup. Ct. 2004) Recently, there has been an indication that New York may adopt the manifest disregard of the law standard. Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471 (2006)
Pennsylvania law recognizes "manifest disregard of the law" as a ground for vacating an arbitration award. Republic W. Ins. Co. v. Legion Ins. Co., 2001 Phila. Ct. Com. Pl. LEXIS 58 18 Arbitration Clauses Are they always advisable? When should they be utilized? 19 Whose Privilege Is It Anyway?
Presented by: Sheila Branyan, Blank Rome LLP Lesli C. Esposito, Blank Rome LLP Jeremy A. Rist, Blank Rome LLP, Moderator Anthony Vidovich, The Hartford Financial Services Corp. The Privilege Is Under Attack! The attorney-client privilege is, more than ever, subject to increasing challenge: 1. 2. 3. of 4. for Aggressive government investigatory techniques
Increasingly insistent transaction partners Technology changing conditions and frequency communication Heightened auditor independence and demand information Each of these phenomena places the exercise of the attorney-client privilege at a higher risk than ever before. 21 Special Topics Waiver of the privilege through transaction disclosures
Waiver of the privilege through disclosure to the government Waiver of the privilege through disclosure to insurers and auditors Bonus Topic: Opinion-Shopping 22 I. Transactional Disclosures Whether a company waives the attorney-client privilege through due diligence or other disclosures to a transaction partner is a question that arises frequently, and increasingly often. Examples: Patent opinions; attorney
memoranda on litigation exposure; unredacted board minutes 23 Disclosure Destroys Privilege Basic Rule: A disclosure of privileged information to a potential transaction partner waives the privilege, as the confidential nature of that information has been destroyed. Confidentiality Agreement irrelevant.
Privilege waived even if disclosure is required by law (e.g., material information). Waiver of certain privileged information may waive privilege as to all communications on same subject. 24 Waiver of Privilege Identified Oaks Industries, Inc. v. Zenith Industries, Inc., 1998 WL 79614 (N.D. Ill. July 27, 1988): We decline to expand the coverage of the attorney-client privilege to information which a party freely shares with other business persons.
Such an expansion to all persons with whom the party may enter or consider entering into a business transaction would quickly swallow up the general rule that disclosure waives the attorneyclient privilege. Moreover, it would do little to promote the underlying purpose of the privilege, that of encouraging open discussions between clients and their attorneys. 25 Waiver of Privilege Identified Libbey Glass, Inc. v. Oneida, Ltd., 197 F.R.D. 342, 347-49 (N.D. Ohio 1999) (client waived privilege as to attorneys opinion on trade dress infringement issues by disclosing it during negotiations to representatives of an entity with whom a joint venture was eventually formed)
Intll Honeycomb Corp. v. Transtech Serv. Network, 1992 WL 314897 (E.D.N.Y. Oct. 9, 1992) (decision to reveal privileged information to potential investors for legitimate business purposes was rational, yet entailed consequence of waiver) 26 Waiver of Privilege Identified Cheeves v. Southern Clays, Inc., 128 F.R.D. 128, 131 (M.D. Ga. 1989)
AMCA Intl Corp. v. Phipard, 107 F.R.D. 39, 43 (D. Mass. 1985) (clients disclosure of counsels memorandum explaining royalty payments waived privilege on that memorandum and on all other communications with any attorneys regarding such payments) Paul R. Rice, Attorney-Client Privilege in the United States (2d ed.) (2003) 9:90 27 Privilege Deemed Preserved
Hewlett-Packard Co. v. Bausch & Lomb, Inc., 115 F.R.D. 308 (N.D. Cal. 1987) (disclosure of counsels confidential opinion letter in negotiations over sale of subsidiary did not waive privilege). Three factors identified: party had duty to disclose possibility that patent litigation could arise disclosure made only after special confidentiality agreement to protect this specific information real possibility that potential purchaser would purchase the business 28 Privilege Deemed Preserved
Tenneco Pckg Specialty and Consumer Prods., Inc. v. S.C. Johnson & Sons, Inc., 1999 WL 754748 (N.D. Ill. Sept. 14, 1999) (also stressed late stage of disclosure and extremely limited confidentiality agreement as to the specific information in question) Rayman v. Am. Charter Fed. Savings & Loan Assn, 148 F.R.D. 647 (D. Neb. 1993) Cavallaro v. United States, 153 F. Supp.2d 52, 62 (D. Mass. 2001) (dicta) (erroneously stating that disclosure of information during merger negotiations does not pose problems for privilege)
29 Can a Common Interest Agreement Preserve Privilege? Answer generally no in negotiation context. A community of interests exists among . . . separate corporations where they have an identical legal interest with respect to the subject matter of a communication between an attorney and a client concerning legal advice . . . The key consideration is that the nature of the interest be identical, not similar, and be legal, not solely commercial.
Duplan Corp. v. Deering Milliken, Inc., 397 F. Supp. 1146, 1172 (D. S.C. 1975). Transaction-related interests are usually deemed commercial, at least until final stages where regulatory scrutiny may be at hand. 30 When Privilege May Be Preserved Despite Disclosure
Legal duty to disclose Transaction is near closing Transaction is a merger or a stock transaction (i.e., not an asset sale) Special precautions are taken to ensure the confidentiality of the privileged information in question Formal regulatory inquiry has begun or is imminent 31 II. Waiver Through Disclosure to the Government
Incentives to produce privileged information to the government in connection with an investigation Effects of such disclosure Attempts to ameliorate consequences of disclosure or refusal to disclose 32 Incentives to Produce Privileged Information Intense pressure Required for favorable treatment
Thompson Memorandum: one factor a prosecutor may weigh in assessing the adequacy of a corporations cooperation is the completeness of its disclosure, including, if necessary, a waiver of the attorney-client and work product protections. 33 The Effects of Voluntary Disclosure
Effect on communications with attorneys Does the disclosure to the government constitute a waiver with respect to the materials produced? With respect to all materials on the same subject matter? 34 Waiver of the Privilege With Respect to the Materials Produced The law regarding selective waiver is in a state of hopeless confusion.
Most of the Courts of Appeals have held voluntary disclosure to the government to constitute a waiver with respect to the materials produced. See, e.g., Columbia/HCA Healthcare Corp. Billing Practices Litig. , 293 F.3d 289 (6th Cir. 2002). See, e.g., Permian Corp. v. United States, 665 F.2d 1214 (D.C. Cir. 1981). However, the Eighth Circuit has accepted the theory that disclosure taking place in a non-public setting may preserve the privilege, with or without special confidentiality agreement.
See, e.g., Diversified Indus. v. Meredith, 572 F.2d 596, 611 (8th Cir. 1978). A party may selectively waive the privilege as to the government, but preserve it against outsiders. Most other courts have rejected this. 35 Waiver of the Privilege With Respect to the Materials Produced Some courts, however, have noted that special confidentiality agreements may be effective in preserving the privilege. See, e.g., Enron Corp. v. Borget, 1990 WL 144879 (S.D.N.Y. Sept. 22, 1990)
Confidentiality agreements are generally ineffective. See, e.g., Columbia/HCA 36 3 Basic Positions as to Selective Waiver Selective waiver never permissible Selective waiver permissible Selective waiver permissible where government agrees to special confidentiality protections The first position is dominant
37 Waiver of the Privilege with Respect to all Materials on the Same Subject Matter Some courts have determined that partial waiver of some privileged information waives privilege as to all other privileged communications related to the same subject. See, e.g., In re Sealed Case, 676 F.2d 793, 818 (D.C. Cir. 1982); In re Martin Marietta Corp., 856 F.2d 619 (4th Cir. 1988).
Probably only triggered at a certain point after a significant quantum of privileged information related to the subject has been disclosed. May not apply where partial information is not put into public record. What does fairness dictate? 38 Efforts to Preserve the Privilege H.R. 2179 (2004) would have limited waiver of privilege to any information disclosed to the S.E.C. pursuant to a written confidentiality agreement.
Sentencing Commission: April 5, 2006, Commission voted to remove language from 8C2(g), cmt. 12, which required waiver of privilege as prerequisite for finding full cooperation. Proposed F.R.E. 502: would preserve privilege and work product protections where information is disclosed to a federal, state, or local government agency during an investigation by that agency, and is limited to persons involved in the investigation. 39 III. Waiver of the Privilege Through Disclosures to Insurers and Auditors Insurers
Insurance policy cooperation clauses may require the insured to share privileged information with the insurer. Disclosure of privileged or work product information to an insurer may waive the privilege as to other parties. The issue of waiver will often turn on whether the insured and insurer share a common interest in the underlying suit. 40 Location, Location, Location: Know What States Laws May Apply
A majority of insurance disputes are litigated in federal court based on diversity jurisdiction. State law is not uniform regarding attorney-client privilege in the insurance context. As a result, disclosure to an insurer may result in a waiver in one jurisdiction, but not in another. 41 The Common Interest Doctrine
Insurer providing a defense: The common interest doctrine is most likely to preserve the privilege where the insurer has retained counsel to defend the insured. Reservation of rights: The doctrine is less likely to apply if the insurer has reserved its rights or the scope of any identity of interest is uncertain. See e.g., Metropolitan Life Ins. Co. v. Aetna Cas. & Surety Co., 730 A.2d 51, 65 (Conn. 1999); Lectrolarm Custom Sys., Inc. v. Pelco Sales, Inc., 212 F.R.D. 567,571 (E.D. Cal. 2002).
See e.g., North River Ins. Co. v. Philadelphia Reinsurance Corp., 797 F.Supp. 363 (D.N.J. 1992); Lectrolarm, supra. Separate counsel: Most courts will not find a common interest if the insurer declines coverage or the insured has its own counsel and acts independently of the insurer. See e.g., Lectrolarm, supra; Metropolitan Life, supra at 65 n. 33. 42 Common Interest: Sword and Shield In a coverage dispute, insurers may use
the common interest doctrine to seek access to the insureds privileged materials from the underlying case. The unity of interest eliminates any expectation of confidentiality for communications relating to the defense of the underlying case. Privilege may still attach to communications related to coverage because the interests of the insurer and its insured are adverse. See, e.g., Nationwide Mut. Fire Ins. Co. v. Bourlon, 617 S.E.2d 40, 47 (N.C. Ct. App. 2005). 43 Little Clarity From the Courts Several courts have found that a common interest eliminates a claim of privilege
between the insured and insurer. See, e.g., Waste Mgmt., Inc. v. Intl Surplus Lines Ins. Co., 579 N.E.2d 322, 328 (Ill. 1991); Dendema v. Denbur, Inc., 2002 U.S. Dist. LEXIS 3804 (N.D. Ill. Mar. 8, 2002); Metro Wastewater Reclamation Dist. v. U.S. Fire Ins. Co., 142 F.R.D. 471 (D. Col. 1992) Other courts have rejected this approach. See, e.g., N. River Ins. Co. v. Columbia Cas. Co., 1995 WL 5792 (S.D.N.Y. Jan. 5, 1995); Intl Ins. Co. v. Newmount Mining Corp., 800 F. Supp. 1195 (S.D.N.Y. 1992); OwensCorning Fiberglass Corp. v. Allstate Ins. Co., 660 N.E.2d 755 (Ohio Ct. Com. Pl. 1993). 44
Privilege and Insurance Policy Cooperation Clauses Insurers have argued, and some courts have agreed, that the insureds contractual duty to cooperate waives the privilege with respect to materials in the underlying case. See, e.g., Waste Mgmt., Inc. v. Intl Surplus Lines Ins. Co., 579 N.E.2d 322, 328 (Ill. 1991). Most courts have rejected the cooperation clause waiver argument. See, e.g., Bituminous Cas. Corp. v. Tonka Corp., 140 F.R.D. 381, 386 (D. Minn. 1992); Metropolitan Life, supra at 63-64.
45 Disclosures to Accountants & Auditors Auditors In general, the attorney-client privilege does not apply to communications that are intended to be disclosed to third parties, or that are in fact so disclosed. See, e.g., U.S. v. Rockwell Intern., 897 F.2d 1255 (3d Cir.) 1990). [N]o accountant-client privilege exists under federal law, and no state-created privilege has
been recognized in federal cases. United States v. Arthur Young & Co., 465 U.S. 805, 817 (1984). 46 State Law All Over the Map on Accountant-Client Privilege At least 31 states have codified some form of accountant-client privilege, but the statutes and the protection afforded thereunder vary considerably. Only about 12 states provide a meaningful privilege. Many others have merely codified
accountants existing ethical obligations. The Accountant-Client Privilege: A Prescription for Confidentiality or Just a Placebo?, New Eng. L. Rev. 697, 735 (2000). Statutory accountant-client privilege is often strictly construed. 47 An Exception to Every Rule: Accountants as Translators Accountant may be deemed privileged agent where the accountant serves as a translator to facilitate communications between counsel and client for the purpose of obtaining legal advice. See, e.g., United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).
This exception does not apply where the accountant is providing accounting services or information that is not necessary to counsels provision of legal advice to the client. See, e.g., United States v. Ackert, 169 F.3d 136, 139 (2d Cir. 1999); In re G-I Holdings, Inc., 218 F.R.D. 428, 436-37 (D.N.J. 2003); United States v. Chevron Texaco Corp., 241 F. Supp. 2d 1065, 1072 (N.D. Cal. 2002). 48 Disclosures to Auditors Generally, disclosure of privileged information to auditors
will waive the privilege. S.E.C. v. Brady, 2006 WL 2880444 (N.D. Tex. Oct. 6, 2006) (disclosure of confidential information to auditors for purposes other than seeking legal advice destroys the right to claim the privilege). First Fed. Savs. Bank v. United States, 55 Fed. Cl. 263, 269-70 (Fed. Cl. 2003) (disclosure of unredacted board minutes during annual audits waived the privilege, because the disclosure did not have a legal purpose). United States v. El Paso Co., 682 F.2d 530, 540 (5th Cir. 1982) (disclosure of tax pool analysis and underlying documentation to outside accountants for tax purposes waived the privilege). Where counsel retains an auditor to assist in providing legal advice, the auditor acts as a privileged agent.
See U.S. ex rel. Robinson v. Northrop Grumman Corp., 2002 WL 31478259 (N.D. Ill. Nov. 5, 2002). 49 Privilege v. Work Product: An Important Distinction Waiver of the attorney-client privilege is not necessarily a waiver of the work product protection for the same documents. See S.E.C. v. Brady, supra at *10. Most courts find work product waived only when it is disclosed to an adversary or potential adversary. See, e.g., Lawrence E. Jaffe Pension Plan v. Household Intl,
Inc., 237 F.R.D. 176, 183 (N.D. Ill. July 6, 2006); United States v. Stewart, 287 F. Supp.2d 461 (S.D.N.Y. 2003). Generally, waiver of opinion work product will not result in a broad subject matter waiver. See, e.g., S.E.C. v. Brady, supra at *14; Chambers v. Allstate Ins. Co., 206 F.R.D. 579, 589 (S.D. W. Va. 2002). 50 Is An Auditor an Adversary? The fact that an auditor must remain independent does not establish that it is adversarial to the company it audits. See, e.g., Lawrence Jaffe Pension Plan, supra at 183.
Some courts have suggested that auditors and the companies they audit share a common interest in the information shared by the company. See Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 229 F.R.D. 441 (S.D.N.Y. 2004). But see Medinol Ltd. V. Boston Scientific Corp., 214 F.R.D. 113 (S.D.N.Y. 2002) (in view of recent accounting scandals, it is crystal clear that in order for auditors to properly do their job, they must not share common interests with the company they audit) (emphasis added). 51 Privilege Threat Increased in Post-Enron Environment
The enactment of the Sarbanes-Oxley Act of 2002 in the wake of Enron and other corporate scandals has broadened the scope of information requested by auditors and increased potential threats to the privilege. Areas of inquiry include liabilities and contingency/litigation reserves, results of internal investigations, and legal advice regarding regulatory and transactional matters. In response, the ABA recently adopted a resolution urging the SEC and other governmental and professional organizations to adopt standards, policies, practices and procedures to ensure that the privilege and work product protections are preserved throughout the audit process See ABA Aug. 7-8, 2006 Resolution and Report of ABA Task
Force on the Attorney-Client Privilege, available at http://www/abanet.org/buslaw/attorneyclient/home.shtml. 52 Trouble with Boilerplate How Standard Clauses Stand Up In Court Presented by: Faith Greenfield, Campbell Soup Company Ann Laupheimer, Blank Rome LLP, Moderator Richard McElroy, Blank Rome LLP David Simon, Jefferson Health System Agreements to Negotiate in Good Faith The parties agree to negotiate in good faith to resolve expeditiously any controversies, claims or disputes between the parties that may arise
from time to time under this Agreement or otherwise relating to the Joint Venture. . . . This letter agreement is not intended to be binding upon the parties unless and until the parties sign a final written agreement. The parties agree to negotiate in good faith to enter into a final agreement by 90 days from today. 54 Why Include These Terms? Preliminary Duty to Negotiate In Good Faith? nave belief in positive thinking aversion to litigation (belief in the power of business solutions) inability to decide on firm outcome, time limits
or critical deal terms weak alternative to a carefully tailored mediation and arbitration clause Effective leverage between business persons to get to a final agreement 55 Problem: How do I know when I have negotiated in good faith? Consider one litigants unsuccessful argument to the federal court in New York that the court imply a duty to: Disclose information material to partys ability to
formulate offer Make offers and counteroffers Continue negotiations for a sufficient minimum period of time before signing with other suitor to permit party a fair opportunity to compete with alternative offer Candid Productions, Inc. v. International (S.D.N.Y. 1982). 56 Skating Union, 530 F. Supp. 1330 Will a Court Enforce a Good Faith Negotiation Duty and if So, How? New York law: probably not.
See, e.g., JillcyFilm Enterprises, Inc. v. Home Box Office, Inc., 593 Supp. 515 (S.D.N.Y. 1984); Candid Productions, Inc. v. International Skating Union, 530 F. Supp. 1330 (S.D.N.Y. 1982) Pennsylvania law: probably if sufficiently definite. See e.g., Channel Home Centers v. Grossman, 795 F.2d 291, 299 (3d Cir. 1986). Illinois law: maybe yes Minnesota: maybe no
New Hampshire: probably yes, and reserves for another day the appropriate remedy (maybe none). See Howtek, Inc. v. Relisys, 958 F. Supp. 46, cases). 57 48 (D.N.H. 1996) (collecting No Jury Please With respect to any judicial proceeding commenced by either party to this Agreement relating to a disputes, controversies, or issues arising under or relating to this Agreement, matter, both parties agree to waive their rights, if any, to a jury trial. 58
To Waive or Not to Waive Reasons to waive Belief that juries are not as intelligent as a judge Belief that subject matter lends itself to emotional bias and you are on the wrong side Belief that Judge has better judgment or ability to understand and study complex issues Reasons not to waive Avoid jury of one Avoid judicial lottery Believe your client has the equities 59
Elements of a Successful Jury Waiver Think Big Scope: Some cases have made subtle distinctions in the language of the waiver and Supreme Court requires that jury waivers be construed narrowly. Aetna Ins. Co. v. Kennedy, 302 U.S. 389, 393 (1937). Think Big Government: most federal courts enforce a clear waiver. Think Big Apple: New York case law is good and plentiful. A broad jury waiver applies to torts and
contracts, may be enforced even in the face of fraud in the inducement claim. Fraudulent Inducement: Most jurisdictions have embraced Telum, Inc. v. E.F. Hutton, 859 F.2d 835, 83738 (10th Cir. 1988), requiring proof that jury waiver clause induced by fraud. See Gurfein v. Sovereign Group, 826 F. Supp. 890, 92160(E.D. Pa. 1993). Dont Look At Me!: Limiting Your Liability Neither party will be liable to the other for consequential, indirect or punitive damages for any cause of action, whether in contract, tort or otherwise, except for any grossly negligent, willful or fraudulent act or omission. Consequential damages include, but are not limited to, lost profits, lost revenues and lost business opportunities, whether or not the other party was or should have been aware of
61 the possibility of these damages. Protect Your Client With Broad Limitation Language Tort and Contract make sure you include tort and contract claims, as economic loss doctrine is unreliable. Lost Profits - Think about consequential in terms of direct or indirect lost profits.
Punitive Damages are they available for willful breach of contract trap for the unwary. No Exceptions -- Think twice before including the gross negligence, willful or fraudulent conduct carve-out. Damage Cap - Consider a monetary damages cap -- ordinarily enforceable between sophisticated parties. 62 Can The Parties Eliminate the Recovery of Lost Profits and What Are Consequential Damages? Most courts will permit a clear waiver of
lost profits Does elimination of consequential damages avoid all claims for lost profits Ordinary benefit of the bargain damages for breach of contract look a lot like lost profits. Most Courts distinguish between direct and indirect lost profits. 63 Punitive Damages for Intentional Breach of Contract
Conventional wisdom: punitive damages are available only for torts New York: punitive damages available for willful or egregious breach of contract claims that include element of public wrong. Rocanova v. Equitable Life Assur. Socy, 83 N.Y.2d 603, 613 (N.Y. 1994) Minority of jurisdictions: punitive damages available for intentional breach of contract under specific circumstances Caution: exclude punitive damages, at the very least for contract claims. Fraud: hornbook law that a party may not, consistent with public policy, insulate itself from any claim of fraud, but you can likely limit the damage. 64 Restatement (Second) of Contracts 195 (1981)
Contractually Shortened Limitations Periods Parties frequently provide for expiration of warranties in a shorter timeframe than statute of limitations or other mechanism to shorten limitations period. New York: Ok Pennsylvania: Ok Illinois: Ok
Missouri: against public policy by statute Kentucky: Ok California: Ok 65 Drafting an Integration Clause That Sticks This Agreement, including Appendices attached to this Agreement and the Recitals set forth herein, constitutes the entire agreement between the parties pertaining to the subject matter hereof, and all prior representations, discussions and negotiations between the parties and/or members or Groups pertaining to the subject matter of this Agreement are superseded. 66
Preventing Claims of Fraud Based On Pre-Contractual Negotiations Boilerplate Integration Clauses Often Fail to prevent claims of reliance on pre-contractual information exchange New York: a general merger or integration clause does not bar a claim for fraud or fraud in the inducement. Gizzi v. Hall, 754 N.Y.S.2d 373, 376 (N.Y. App. Div. 2002). Delaware: simple integration clause traditionally not enough to bar fraud in the inducement. Norton v. Poplos, 443 A2d 1 (Del. 1982). Pennsylvania: We, too, have attempted to find consistency in Pennsylvania parol evidence cases where fraud is alleged. Our examination of the pertinent cases has led us reluctantly to conclude that no intellectually
sound analysis of the cases can yield a perfectly consistent set of principles. 1721 Cherry St. Partnership v. Bell Atlantic Properties, 439 Pa. Super. 141 (1995) (Beck, J.). 67 Favorable Trend in Sophisticated Business Transactions Delaware Chancery Court: ABRY Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032, 1057 (Del. Ch. 2006): a party cannot promise, in a clear integration clause of a negotiated agreement, that it will not rely on promises and representations outside of the agreement and then shirk its own bargain in favor of a but we did rely on those other representations fraudulent inducement claim.
Southern District New York: DynCorp v. GTE Corp., 215 F. Supp. 2d 308 (S.D.N.Y. 2002): A party to a contract cannot allege that it reasonably relied on a parol representation when, in the same contract, it "specifically disclaims reliance upon [that] particular representation." See also MBIA Insurance Corp. v. Royal Indemnity Co., 426 F.3d 204, 218 (3d Cir. 2005) (Alito, J.)1 68 Draft Detailed Integration/Anti-Reliance Provision
Be Specific: Describe the representations or information upon which the parties may not and did not rely, such as sales information or forecasts, reserves, omission of proprietary information, projected income, budgets Be detailed: disclaim accuracy of all data exchanged, have parties specifically agree that they did not rely on particular types of information. Waive any right to allege fraud in the inducement based on anything not included in the final written agreement. 69 What About Parole Evidence?
Will a court look outside the four corners of contract for meaning and intent of the parties where a term is found ambiguous? Will the integration clause prevent this? Pennsylvania: Parol evidence of representations concerning a subject dealt with in an integrated written agreement and made prior to or contemporaneous with the execution of the agreement is admissible to modify or avoid the terms of that agreement only where it is alleged that the parties agreed that those representations would be included in the written
agreement but were omitted by fraud, accident, or mistake. This is commonly referred to as fraud in the execution. . . . 1721 Cherry St. Partnership v. Bell Atlantic Properties, 439 Pa. Super. 141 (1995) (Beck, J.). 70 Indemnify This! Each Indemnifying Group shall be responsible for and shall indemnify the other Group against any and all Losses arising in connection, directly or indirectly, with any material breach of any material representation or warranty
made by an Indemnifying Group in this Agreement or in any document contemplated by this Agreement; any material breach of any material covenant made by an Indemnifying Group in this Agreement or in any document contemplated by this Agreement; Products made and sold by or on behalf of such Indemnifying Group or its predecessors prior to the Effective Date; Breaches of contract, negligent acts or omissions, or breaches of law, perpetrated or caused by such Indemnifying Group or its predecessors prior to the Effective Date; Employee claims (including, without limitation, due to dismissal by reason of redundancy, conduct or otherwise) made by employees of such Indemnifying Group or its predecessors prior to the Effective Date; and Any acts or omissions occurring prior to the Effective Date 71 arising out of or relating to (i) such Groups Transferred Assets, or (ii) such Groups business which are the subject of
this Agreement. Indemnification for Claims of Intentional Wrongful Conduct Prohibited in most jurisdictions where there is a finding of intentional wrongful conduct, with jurisdictions less clear on whether a finding of is required. New York: permits (with clear language) contractual indemnification so long as no finding of intentional wrongful conduct. See Gibbs-Alfano v. Burton, 281 F.3d 12, 19-22 (2d Cir. 2002). Delaware: scant law but general observations critical
of indemnity contracts which indemnify one against the consequences of his own negligence or where party found liable for conduct more egregious than negligence. See e.g., Alten v. Ellin & Tucker, 854 F. Supp. 283, 288 289 (D. Del. 1994), citing Howard, Needles, Tammen & B v. Steers, Perini & P, 312 A.2d 621, 624 (Del. 1973). BUT: see Delaware has highly developed law of 72 indemnifying officers and directors so long as they acted in good faith. Indemnification for Punitive Damages? Punitive damages: usually awarded only in cases of malicious, fraudulent,
intentional or willful misconduct, but in some jurisdictions available for reckless conduct. insurance coverage cases permit indemnification for vicariously imposed punitive damages Include special choice of law, modeled after insurance policies or a promise by the parties not to invoke public policy or challenge enforceability 73 Indemnification for Cost to Comply With Non-Monetary Relief Non-monetary loss: if contract includes specific language and method of calculating
value, freedom of contract should permit indemnification. See National Casualty Co. v. Newtown Township, 2000 U.S. Dist. LEXIS 10747 (E.D. Pa. 2000) (Fullam, Sr. J.) (insurer may contract to avoid indemnity obligation for nonmonetary loss, implying that contract would govern this question) Outboard Marine Corp. v. Liberty Mutual Ins. Co., 607 N.E.2d 1204 (Ill. 1993) (costs to comply with equitable relief qualify as damages subject to indemnification). 74 Indemnification for Partys Own Negligence Illinois and New Jersey: prohibited by statute in construction contracts: With respect to contracts or agreements, either public
or private, for the construction, alteration, repair or maintenance of a building, structure, highway bridge, viaducts or other work dealing with construction, or for any moving, demolition or excavation connected therewith, every covenant, promise or agreement to indemnify or hold harmless another person from that person's own negligence is void as against public policy and wholly unenforceable. 740 ILCS 35/1. See N.J. Stat. 2A:40A-1 (same). Pennsylvania: while such contracts are disfavored, party may be indemnified against its own negligence if it uses clear and unambiguous language with burden on party seeking indemnity and ambiguities resolved against. See Amquip Corp. v. Delaware Valley Erectors , 75 Pa. 1999), affd, 265 1999 U.S. Dist. LEXIS 18276 (E.D.
F.3d 1054 (3d Cir. 2001). Special Rule in Securities Fraud Cases Most jurisdictions find indemnification (implied or contractual) for securities violations unavailable based on public policy concerns, regardless of degree of fault. Eichenholtz v. Brennan, 52 F.3d 478 (3d Cir. 1995). Globus v. Law Research Service, Inc., 418 F.2d 1276 (2d Cir. 1969). In re Olympia Brewing Co. Sec. Lit., 674 F.
Supp. 597, 611 (N.D. Ill. 1987) (collecting cases concerning implied right to indemnification) 76 Developments in Database Security Law Presented by: Kit Applegate, Blank Rome LLP Jordana Cooper, Blank Rome LLP, Moderator Lesli Esposito, Blank Rome LLP Developments In Database Security Law: Outline
Federal privacy law directed to financial institutions: Gramm-Leach-Bliley New state privacy statutes broadly directed to businesses that conduct business within the state and/or own or license personal information of residents of the state Enforcement State Attorney General activity Private litigation and class actions Federal agencies: FTC 78 Gramm-Leach-Bliley and
State Statutes: Introduction G-L-B: 15 U.S.C. 6801 et seq.: It is the policy of Congress that each financial institution has an affirmative and continuing obligation to  respect the privacy of its customers and  to protect the security and confidentiality of those customers nonpublic personal information. 15 U.S.C. 6801. Regulatory authority to reside with the federal banking agencies, National Credit Union Administration, Secretary of the Treasury, SEC, and FTC, which regulate the financial institutions subject to their jurisdiction, and enforce G-L-B. 79
Gramm-Leach-Bliley and State Statutes: Introduction State Statutes At least 30 states presently have security breach notification laws Statutes are similar, but far from uniform Cover a variety of topics Notification of security breach
Use of Social Security numbers Destruction of records that contain personal information 80 G-L-B: Who Is Covered? G-L-B: Any institution the business of which is engaging in financial activities as defined by Section 4(k) of the Bank Holding Co. Act of 1956. 15 U.S.C. 6809(3)(A). Financial activities include, inter alia: Lending, investing for others, or safeguarding money or
securities; Insuring or issuance of annuities or acting as an agent or broker for such activities; Providing financial, investment, or economic advisory services; Underwriting or making a market in securities. 12 U.S.C. 1843(k)(4)(C). 81 G-L-B: Who Is Covered? Generally, financial institution is defined very broadly under G-L-B and includes several entities not traditionally recognized as financial
institutions. 65 Fed.Reg. 33646 (FTC). But FTC Rule contains a significantly engaged modifier. Id. Overlap between financial institutions covered by G-L-B and entities covered by HIPAA. 65 Fed.Reg. 33646. Colleges and universities are not exempted may be double-regulated by FERPA; compliance with FERPA adequate to FTC. 65 Fed.Reg. 33646. 82 State Statutes: Who Is Covered? Apply to both businesses and individuals who: conduct business in that state; and/or own or license personal information of a resident of that state
Also apply to third-party vendors that compile or maintain personal information on behalf of other businesses Financial institutions covered under G-L-B are also subject to the state statutes Exceptions exist for those that maintain procedures for a breach of security system pursuant to federal or state regulations 83 G-L-B: What Information Is Covered?
Nonpublic personal information. With certain exceptions, a financial institution may not, directly or through any affiliate, disclose to a nonaffiliated third party and nonpublic personal information, unless such financial institution provides or has provided to the consumer a notice that complies with the statute and that gives the consumer a reasonable opportunity to opt out of the disclosure before it occurs. 15 U.S.C. 6802; 65 Fed.Reg. 35162. 84 G-L-B: What Information Is Covered?
Nonpublic personal information: In addition to lists or groupings of consumers, this means personally identifiable financial information, excluding publicly available information (information the financial institution has a reasonable basis to believe is lawfully made available to the general public from certain specified sources). 65 Fed.Reg. 33646. 85 G-L-B: What Information Is Covered? Personally available financial information broadly includes information a consumer provides
to you on an application, not just account balance information, payment history, and credit/debit purchase information. The FTC believes that any information should be considered financial information if it is requested by a financial institution for the purpose of providing a financial product or service. (Addresses, phone numbers.) It also includes the fact that the individual has been one of your customers. 65 Fed.Reg. 33646. 86 State Statutes: What Information Is Covered? Computerized data that include personal
information Personal information Individuals name Linked to any of the following: Social Security number; Drivers license number or state identification card number; or Account, credit, or debit card number in combination with any security code, access code, or password that would permit access to the individuals financial account 87 G-L-B: Privacy Policies
G-L-B: Regulators confer on institutions the discretion to determine the levels of protection necessary for different categories of information. 66 Fed.Reg. 8616. Each institution must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. 66 Fed.Reg. 8616. 89 G-L-B: Standards For Safeguarding Customer Information
The information security program should be designed to ensure the security and confidentiality of customer information, protect against any anticipated threats to the security of such information, and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. 66 Fed.Reg. 8616. 90 State Law: Standards For Safeguarding Customer Information The state statutes generally do not require the formulation of information security protocols
California is a notable exception. Companies that own or license unencrypted personal information about California residents are required to implement and maintain reasonable security procedures and practices for that data Destruction of records A business . . . shall destroy, or arrange for the destruction of, a customers records [paper or electronic] within its custody or control containing personal information, which is no longer to be retained by the business . . . by shredding, erasing, or otherwise modifying the personal information in those records to make it unreadable, undecipherable or nonreconstructable through generally available means. N.J.S.A. 56:8-162. 91 State Law:
Standards For Safeguarding Customer Information Limitations on use of Social Security numbers Shall NOT: Publicly post or display any four or more consecutive numbers of an individuals Social Security number Print an individuals Social Security number on any materials mailed to the individual Print an individuals Social Security number on
any card required for the individual to access products or services provided by the entity 92 State Law: Standards For Safeguarding Customer Information Limitations on use of Social Security numbers Shall NOT: Intentionally communicate or otherwise make available to the general public an individuals Social Security number
Require an individual to transmit his Social Security number over the internet, unless the connection is secure or the Social Security number is encrypted 93 G-L-B: What Is A Breach Triggering Statutory Notification? G-L-B: An incident involving unauthorized access to or use of sensitive customer information. 70 Fed.Reg. 15736. Sensitive customer information: a customers name, address, or telephone number in
conjunction with social security, drivers license, account, credit or debit card number, or a personal identification number or password that would permit access to the customers account. Also any combination of components that would allow someone to log onto or access the customers account, such as user name and password. 70 Fed.Reg. 15736. 94 State Law: What Is A Breach Triggering Statutory Notification? State statutes are not uniform in their definition of breach of security
Access Unauthorized access of unencrypted computerized data that compromises the security, confidentiality, or integrity of personal information maintained by the business Acquisition Unauthorized acquisition of unencrypted computerized data that compromises the security, confidentiality, or integrity of personal information maintained by the business Access and Acquisition 95 G-L-B:
When Must You Notify Customers? G-L-B: When a financial institution becomes aware of an incident of unauthorized access to sensitive customer information, it must investigate reasonably. If the institution determines that misuse of its information about a customer has occurred or is reasonably possible, notification is triggered. 12 C.F.R. Pt. 30, App. B. 96 State Law: When Must You Notify Customers?
Generally, duty to notify arises when a business: Becomes aware, discovers, or receives notification of a breach of security; and Ascertains that a customers personal information was, or is reasonably believed to have been acquired/accessed by an unauthorized person 97 G-L-B: Which Customers Must Be Notified? G-L-B: Notice to affected customers. If a financial institution, based upon its investigation, can determine from its logs or other data precisely which customers information has been improperly accessed, it may limit notification to those
customers with regard to whom the institution determines that misuse of their information has occurred or is reasonably possible. However, there may be situations where the institution determines that a group of files has been accessed improperly, but is unable to identify which specific customers information has been accessed. If the circumstances of the unauthorized access lead the institution to determine that misuse of the information is reasonably possible, it should notify all customers in the group. 12 C.F.R. Pt. 30, App. B. 98 State Law: Which Customers Must Be Notified?
Notification must be provided to those customers whose personal information was, or is reasonably believed to have been acquired/accessed Risk of harm exception in some statutes Disclosure not required if business establishes that misuse of information not reasonably possible Determination must be documented in writing and retained for five years 99 G-L-B: How Soon Do Affected Customers Have To Be Notified?
[A]s soon as possible. 12 C.F.R. Pt. 30, App. B., Supp. A, III.A. 100 State Law: How Soon Do Affected Customers Have To Be Notified? Generally, notice must be made in the most expedient time possible and without unreasonable delay Florida mandates notice within 45 days
Notification may be delayed: to determine the scope of the breach and restore the integrity of the data system if requested by law enforcement 101 G-L-B: Notification To Law Enforcement G-L-B: Response program should contain procedures for notifying appropriate law enforcement authorities. Customer notice may be delayed if an appropriate law enforcement agency determines that notification will interfere with a criminal investigation and provides written request for a delay. 12
C.F.R. 30, App. B, Supp. A. 102 State Law: Notification To Law Enforcement Delaware, New York, and Pennsylvania do not require that law enforcement be notified first New Jersey does require that law enforcement be notified before disclosure is made to the customer
As a practical matter, law enforcement should be notified 103 G-L-B And State Law: Details Of Customer Notice G-L-B: Detailed requirements for notice, including: Description of the incident in general terms and the type of customer information involved Description generally of what the institution has done to protect from further unauthorized access Telephone number for further information. Remind customers to remain vigilant over 12-24 months and to promptly report incidents of
suspected identity theft. 104 G-L-B And State Law: Details Of Customer Notice When appropriate: A recommendation that the customer review account statements and immediately report any suspicious activity A description of fraud alters
A recommendation that the customer periodically obtain credit reports How the customer may obtain a credit report free of charge Information about the ftcs online guidance. 12 C.F.R. 30, App. B, Supp. A, iii.B.1 105 State Law: Details Of Customer Notice
Delaware, New Jersey, and Pennsylvania do not specify the contents of the notice New York Contact information for the business making the notification The personal information that was or believed to have been acquired Means of providing notice Written notice Electronic notice 106
State Law: Details Of Customer Notice Means of providing notice Telephonic notice Substitute notice If the business can demonstrate that (1) the cost of providing notice will exceeds a certain dollar amount, or (2) that the affected class of customers exceeds a certain number, or (3) that the business does not have sufficient contact information to provide notice, substitute notice may be made by:
E-mail; Posting the notice on businesss web site; and Notifying major statewide media 107 G-L-B: Regulator Notice? G-L-B: Response program should contain procedures for notifying primary federal regulator as soon as possible. 12 C.F.R. 30, App. B, Supp. A, II.A.1 108 State Law: Regulator Notice?
New York New York Attorney General New York Consumer Protection Board New York Office of Cyber Security and Critical Infrastructure Coordination 109 G-L-B: Notice To Credit Reporting Agencies? G-L-B: Institutions are encouraged
to notify nationwide consumer reporting agencies prior to sending notices to a large number of customers that include contact information for the reporting agencies. 12 C.F.R. 30, App. B, Supp. A, III.B.2. 110 State Law: Notice To Credit Reporting Agencies? Generally, where a large number of customers are affected, a business must notify, without reasonable delay, all consumer reporting agencies that compile or maintain files on consumers
on a nationwide basis of the timing, distribution, and content of the notices New Jersey: 1,000 New York: 5,000 Pennsylvania: 1,000 111 G-L-B: Consequences -Regulator Action G-L-B: Enforcement by OCC, Federal Reserve, FDIC, OTS, National Credit Union Administration, SEC, state insurance regulators, FTC as to
persons within their respective jurisdictions. Penalties not enumerated. 15 U.S.C. 6805 Agencies clarify (OCC) that existing authority is preserved. 12 C.F.R. Pt. 30, App. B Under existing authority, agencies may impose fines. e.g., OCC: 12 U.S.C. 1818 Most active regulator enforcement: FTC! 112 State Law: Consequences -Regulator Action State AGs vested with authority to prosecute violations 113 G-L-B And State Law:
G-L-B And State Law: Consequences! -- AG Actions  Inadvertent disclosures of  nonsensitive information prosecuted. Alta Vista: NY AG action. $70,000 settlement (2001). Involved names and addresses only input by consumers into Alta Vista Yellow Pages directory to narrow searches to businesses nearby and promised privacy; programming error led to inadvertent disclosure to a third party company. No one profited and third-party company did not use the information. 115
G-L-B And State Law: Consequences! -- AG Actions Lesson: You must follow your privacy policies. Elliot Spitzer on privacy policies (March, 2006): Personal information secured through a promise of confidentiality must always remain confidential. Companies must adhere to known privacy policies and promises. Failing to do so constitutes a clear consumer fraud.
116 G-L-B And State Law: Consequences! -- Private And Class Actions Suits under G-L-B: Most courts have determined no private right of action. e.g.,
Menton v. Experian Corp., 2003 WL 21692820 (S.D.N.Y. July 21, 2003); Dunn v. First Natl Bank, 111 P.3d 1076 (Kan. App. 2005); Borninski v. Williamson, 2004 WL 433746 (N.D. Tex. March 1, 2004); Briggs v. Emporia State Bank and Trust, 2005 WL 2035038 (D. Kan. Aug. 23, 2005); American Family Mutual Ins. Co. v. Roth, 2005 WL 3700232 (N.D. Ill. Aug. 5, 2005). 117 G-L-B And State Law: Consequences! -- Private And Class Actions Back door: Negligence claims, esp. negligence per se,
based on G-L-B standards: Dunmire v. Morgan Stanley, 2005 WL 1005993 (W.D. Mo. April 7, 2005): Refuses to dismiss complaint asserting a claim for negligence per se based on allegations that Morgan Stanley delivered account information to account-holders soon-to-be-ex wife, premised on violation of G-L-B and implementing regulations. Guin v. Brazos Higher Ed. Service Corp., 2006 WL 288483 (D. Minn. Feb. 7, 2006): Employee maintained unencrypted personal customer information on a laptop kept at home; burglary; defendant not able to tell which customer information was active on laptop and sent 550,000 customer notices. No identity fraud appeared to have occurred. Negligence claim analyzed on sj under G-L-B standards; defendant prevailed. 118 G-L-B And State Law:
Consequences! -- Private And Class Actions Negligence claims: Best-case scenario: lost data. Giordano v. Wachovia Securities, 2006 WL 2177036 (D.N.J. July 31, 2006). UPS package containing personal financial data was lost in transit. Mere fear of misuse in future fear of injury insufficient to create Article III standing. 119 G-L-B And State Law: Consequences! -- Private And Class Actions
Negligence claims: More risk: Burglary of equipment without known interest in data. Stollenwerk v. Tri-West Healthcare Alliance, 2005 WL 2465906 (D. Ariz. Sept. 6, 2005). Class action. Burglary of computer hard-drives. Summary judgment granted on negligence claims. Absent evidence that the data was actually targeted or accessed, there is no basis for a reasonable jury to determine that sensitive personal information was significantly exposed. 120 G-L-B And State Law: Consequences! -- Private And
Class Actions Negligence: Worst-case scenario: Save money; poor security protocols; data theft. Richardson v. DSW, Inc., 2006 WL 163167 (N.D. Ill. Jan. 18, 2006): Suit under state consumer fraud statute alleging retailer, on notice by credit card company of its contractual obligations regarding the proper handling and disposal of credit card information, failed to follow the specified procedures. Complaint states a claim where alleges protocols ignored to save money, and hacking ensured. 121
Common law claims for common law duty of bank confidentiality. Usual defense: Banks not liable for acts of third party wrongdoers or criminal acts of insiders as beyond scope of employment. e.g., Roth v. First Natl State Bank of NJ, 169 N.J. Super. 280 (App. Div. 1979). Perhaps can augment defense with good GL-B protocols. Also, preemption??? On the other hand, may lose this legal defense as GL-B contemplates insider abuse and institution responsible for limiting opportunities for abuse and developing means to detect and contain it. 123 G-L-B And State Law: Consequences! -- Private And Class Actions Private consumer fraud suits typically class actions.
Breach of state statutes automatically qualifies as a consumer fraud violation in many states. e.g., NJCFA willful, knowing or reckless failure to comply with notice requirements is a NJCFA violation; attorneys fees, treble damages. N.J.S.A. 56:8-166. Lack of damages defense. Before new state statutes, we have argued ascertainable loss requirement for private CFA claims not met by a data security breach in and of itself. Will this defense survive the new statutes??? 124 Best Defense: Good
Privacy And Security Practices Materials: April 2006 California Dept. of Consumer Affairs Recommended Practices on Notice of Security Breach Involving Personal Information Covers protection and prevention as well 125 The Federal Trade Commissions Privacy Enforcement Initiative
The FTC has the power to protect personal information pursuant to: Section 5 of the Federal Trade Commission Act (FTC Act); and The Gramm-Leach-Bliley Act 126 Section 5 of the FTC Act Prohibits unfair or deceptive act or practices in
or affecting commerce. 15 U.S.C. 45(a) Unfair practices: those that cause or are likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition The FTC Act allows the FTC to initiate federal district court proceedings to enjoin violations and to secure equitable relief including, but not limited to restitution and disgorgement. 127 Section 5 of the FTC Act Although Section 5 does not grant the
FTC specific authority to protect privacy, over the last several years it has been construed to prohibit certain privacy invasions based on deception. Generally applies to persons, partnerships, or corporations. 128 Examples of Cases Brought by the FTC: In the Matter of Nations Title Agency, Inc. (GLB) In the Matter of CardSystems
Solutions, Inc. (FTC Act) Federal Trade Commission v. ChoicePoint Inc. (FTC Act) 129 Ethics/Internal Investigations Presented by: Jerry Bernstein, Blank Rome LLP Frank Dante, Blank Rome LLP Timothy Katsiff, Blank Rome LLP William Roberts, Blank Rome LLP, Moderator Mark Simon, L-3 Communications Corporation
A. Internal Investigations: A Brief Historical Perspective 131 B. The Purpose, Structure and Mechanics of the Internal Investigation 132 What is the impetus for the investigation? A request of the Board Employee complaint of alleged misconduct Commercial third party assertion
Individual whistleblower Governmental assertion Governmental enforcement agency inquiry or investigation 133 Evaluate the possible end results that may occur and tailor all aspects of the investigation accordingly Architecture should fit the objective. Is there an applicable/industry voluntary disclosure program? 134 Evaluate the possible end results that may occur and tailor all aspects of the investigation accordingly
(cont.) What are the nuances of the program? e.g., DOJ Antitrust Division amnesty program What are the requirements of the program? What are the benefits of the program, e.g., nonprosecution agreement, reduced fines, lifting of debarment from receiving U.S. Government contracts, etc.? 135 Evaluate the possible end results that may occur and tailor all aspects of the investigation accordingly (cont.) Will a waiver of privilege be required under the program? Is there something less than the waiver that
will satisfy the government? Negatives of amnesty program or other corporate cooperation? What is the impact of the waiver as it relates to other potential adversaries of the client? Fight or flight? Should you disclose at all decide as early as possible. 136 Need for Quick Completion Generally, investigations should be conducted swiftly with the objective of evaluating the scope of the impropriety and stopping any misconduct immediately while concurrently gathering all the facts
so the best possible defenses may be asserted, including voluntary disclosure. 137 Is There an Ongoing Governmental Investigation? Have the government investigators contacted employees? Give guidance to employees to attempt to protect corporation without creating obstruction of justice issues. Encourage employees to be interviewed at work with counsel present. 138
Is There an Ongoing Governmental Investigation? (cont.) Do not advise that they are prohibited from speaking with the government investigators. Attempt to contact the agency to discover focus of inquiry. Be sensitive to issues of multiple representation of company and employees. We will discuss this issue in detail during the ethics segment of the program. 139 Who Should Conduct the Investigation Inside or
Outside Counsel? Is there a need for independence? Is there a possibility that internal counsel may become a witness? Internal counsels ability to give legal advice in local jurisdiction? 140 Is There a Corporate Compliance Department/Officer? Degree of involvement? Is there a corporate compliance policy? Generally ensure that any investigation by
corporate compliance is done at the written direction of Legal in support of its objective of providing legal advice to the client. Is there an opportunity for a dual investigation? Compliance Department and Legal Department (to protect work product) 141 Who is the Client? The dominant CEO syndrome? Must Legal circumvent management and go directly to the Board? Shareholders 142 Specific Objective of the Investigation
Determination of the standard of care/due inquiry as required by the law, regulation, contract, etc. Is it a case of dont ask, dont tell? Is finding red flags the objective? (FCPA issues) 143 Other Practical Investigation Issues Interviews of employees and need for witnesses to such interviews Counseling of such employees about the confidential nature of the investigation and the duty not to disclose same 144
Other Practical Investigation Issues (cont.) Document retention/recovery processes & capabilities Litigation holds preservation obligations and sanctions Forensic information technology Duty to maintain anonymity (ethics hotlines) No retaliation against whistle blower 145 Insurance Issues Duty to disclose to trigger coverage? Impact of disclosure? 146
C. Ethical Considerations for Internal Investigations 147 Define Your Role Clearly define the scope of your engagement at each stage Clearly identify the client or clients you are representing
Communicate your role with clarity to those to be interviewed Be clear whether the representation extends to the individual directors, officers, employees, former employees of the corporation, as well as the corporation itself. 148 Can I Do ItHow ? What factors should be considered in deciding on a simultaneous representation of the company and some of its officers or employees?
What are the dangers of later withdrawing from one of the representations and attempting to continue the representation of the other party or parties? What disclosures and consents are required? 149 When may a simultaneous representation be undertaken? There is no per se bar to simultaneous representation. Three limitations on multiple representation (see dr 5-105; similar to PA and NJ and DEL
RPC 1.7(b)): Must be able to conclude that a disinterested lawyer (DR 5-105) would regard multiple representation as in the interest of corporate client and employee client. Must obtain consent of both clients after full disclosure. Must be alert to changes in circumstances that render continuation of multiple representation no longer permissible. 150 Basic Test Basic Test : [i]f the exercise of independent professional judgment on behalf of a client will be or is likely to be
adversely affected or if it would be likely to involve the lawyer in representing differing interests [NY] Then consider the Disinterested Lawyer Standard 151 Basic Test Conflicts Subject To Disclosure And Consent If the attorneys exercise of independent professional judgment will be or is likely to be adversely affected, then the second part of the test must be satisfied: a disinterested lawyer would conclude that the lawyer can competently represent both the corporation and the constituent.
immaterial conflicts--remote or unlikely to affect the lawyers judgment non-consentable conflicts 152 consentable conflicts Basic Test The disinterested lawyer: an objective, hypothetical lawyer whose only aim would be to give the best advice possible about whether the client should consent to the conflicted representation. 153
Easy Cases Example: Disinterested Lawyer Test Not Satisfied: Case 1: The government is investigating securities law violations in the filing of false or misleading statements and the employee has admitted wrongdoing in connection with the financial statements under investigation. Corporation would have strong interest in avoiding or limiting liability by cooperating fully with the government and providing any information sought by the government regarding preparation of the financial statements. 154 Easy Cases The individual would have to
consider a variety of factors before deciding whether it was in his interest to cooperate with the government and would need counsel able and willing to negotiate a resolution of the matter. (See New York City Bar Formal Opinion 2004-02) 155 More Easy Cases Example: Disinterested Lawyer Test Satisfied Case 2: Same investigation as Case 1 above, except maintenance employee only overheard comments regarding need to alter the corporations financial statements but would have no concern about personal liability for wrongdoing. No need for counsel
to negotiate independently with government. Therefore, lawyer could represent individual as well as the Company. 156 Closer Cases Case 3: Employee is in accounting department but not involved in the preparation of the financial statements under investigation. Case 4: Employee is in accounting department of division, whose statement is under investigation, but had limited discretion to decide how to account for the transactions giving rise to the investigation. 157 Closer Cases Case 5: Employee is in accounting division
involved in preparation of statement, but had no decision-making authority with respect to how to account for the transaction, but nonetheless participated in booking the transaction. These closer cases will depend on the specific of knowledge possessed by the employee, and the specific laws or regulations implicated by the conduct and the perceived scope of the governments investigation. 158 Getting The Facts Obtaining The Relevant Facts In determining whether the Disinterested Lawyer Test is satisfied, the lawyer will require a detailed grasp of the relevant facts. How can this be done before making the judgment to engage in a multiple
representation? Initial Interview with Employee: The Miranda Warning The lawyer is representing only the corporation in this interview. 159 Getting The Facts Advise the employee/director/officer: I represent the corporation and do not represent you. Any information you provide is privileged under the attorney-client privilege but the privilege is held by the corporation and not you.
It is up to the corporation and not you whether to waive that privilege and share that information with third parties [and the corporation may decide to do that without asking you or informing you]. 160 Should I Get My Own Lawyer? Are You My Lawyer? What if the employee asks whether he should consult with his own counsel? Suggested response: I represent the corporation and cannot advise you one way or the other on that. Should corporate counsel recommend getting counsel? No, that potentially acts against the
interest of the corporation, the lawyers client. 161 Should I Get My Own Lawyer? Are You My Lawyer? What if prior to the interview the employee asks corporate counsel to represent him/her? Corporate counsel should ordinarily decline to represent the employee at this stage. In most cases, the lawyer will not have sufficient facts at this stage to make a determination that the Disinterested Lawyer Test is satisfied and a multiple representation can be undertaken,
subject to disclosure and consent of both clients. It will be the exceptional case where this will be permissible or appropriate. 162 Later Retention The Later Request for Multiple Representation. If the government requests an interview with the employee who has already been interviewed by company counsel, and this triggers a request that corporate counsel represent the employee, then the lawyer should determine whether he/she has enough information to make the determination called for by the Disinterested Lawyer Test. If the lawyer does not, how can this information are obtained? In further interviews of the employee, the lawyer must always make it clear that the lawyer represents only the corporation, not the employee, and that any information received will be provided to the
corporation. 163 Later Retention If this is not done, then since information received from a prospective client is subject to the lawyer's duty of confidentiality, the lawyers corporate client will be disadvantaged by this restriction on the lawyer's ability to share this information. in some cases, the lawyer who fails to handle the interview in this manner may be precluded from continuing to represent the corporation. Restatement (Third) of the Law Governing Lawyers, 15 (2000). 164
Full Disclosure What Disclosures Must Be Made To Render Multiple Representation Permissible? If the lawyer determines that the Disinterested Lawyer Test has been satisfied, the lawyer must then make a full disclosure to both clients and obtain their knowing consent. 165 Full Disclosure What is involved in a full disclosure?
information reasonably sufficient, giving due regard for the sophistication of the client, to permit the client to appreciate the significance of the potential conflict. disclosure of any and all defenses and arguments that a client will not have because of the joint representation and the lawyer's fair and reasoned evaluation of those defenses and arguments, and the possible effect of failing to raise them. risks and advantages of the joint representation. 166 Risks.Advantages
Usual advantages Avoiding expense of other counsel Broad and detailed knowledge of the relevant facts Usual risks a conflict may arise in the future that will disable corporate counsel from continuing for the corporation-prejudice to the corporation from the need to switch counsel; similar risk to employee need to obtain a prospective consent
167 Risks.Advantages the loss of credibility to the investigating agency limitation on the lawyers ability to pass on to the corporation confidences and secrets that are not germane to the matter--less of a risk where the employee has been fully interviewed, but always present possible complications for the corporation in crippling or preventing the corporations full ability to cooperate with the government. The corporation may have in its possession information which its counsel obtained from the employee that would help the corporation cooperate with the government to its advantage, but be unable to
share this information because the employee does not wish to waive the attorney-client privilege 168 Structuring and Getting Consents Steps include obtaining prospective consents and consents to withdrawal: Prospective Waivers Should be accompanied by full disclosure Should be in writing signed by the client Should advise of the types of conflicts that may arise to the extent possible--who the conflicted parties would
be, and the source of the potential conflict 169 Structuring and Getting Consents Subjects of waivers: the possibility of future litigation clients waiver of objection to former lawyers right to cross examine former client potential need to revisit the scope of the waiver and the conflict that actually did arise contractual limitations of the scope of the representation, e.g. representation through investigatory stage only, to a single interview, or to a series of interviews with the government or on designated topics
170 Agreements On Privilege And Separate Shadow Counsel Understandings on privileged information whether and what kind of confidential information will be shared with the two clients who will control the privilege what will happen in the event of a dispute between the clients Shadow Counsel and Co-counsel
Middle ground representation for attorney who is involved to take over in the event of withdrawal and to provide independent advice at times where conflict arises Adds to cost but reduces risk of potential conflicts and their resolution 171 1. The Thompson Memorandum 172 2. Selective Waiver 173
1. Payment of Attorney Fees for employees 2. Thompson Memorandum and DOJs consideration of payments of an employees legal fees when determining whether to indict the corporation. a. U.S. v. Stein, No. S1 05 Crim. 0888, 2006 WL 1735260 (S.D.N.Y. June, 2006) 174 E. Enron: A Case Study 175 Emerging Issues in Delaware Law Presented by: Alisa Moen, Blank Rome LLP
Thomas Preston, Blank Rome LLP Jeffrey Sonnenfeld, Yale School of Management Elizabeth Wilburn, Blank Rome LLP Once Upon a Disney The Evolution of the Fiduciary Duty of Good Faith Trenwick America Litigation Trust v. Ernst & Young, L.L.P. 2006 WL 2434228 (Del. Ch. Aug. 10, 2006) - Fiduciary duties to creditors of a subsidiary 177 Once Upon a Disney The Evolution of the Duty of Good Faith Common law origin the Triad
Duty of Care Duty of Loyalty Duty of Good Faith - maybe Cede & Co v. Technicolor, 634 A.2d 345, 381 (Del. 1993) 178 What Is Good Faith? good faith, n. A state of mind consisting in (1) honesty in belief or purpose, (2) faithfulness to ones duty or obligation, (3) observance of reasonable commercial standards of fair dealing in a given trade or business, or (4) absence of intent to defraud
or to seek unconscionable advantage Blacks Law Dictionary (2004) 179 bad faith, n. The opposite of good faith, generally implying or involving actual or constructive fraud, or design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to ones rights or duties, but by some interested or sinister motive. Blacks Law Dictionary (2004) 180
scienter. n. Lat. Knowingly. The term is used in pleadings to signify an allegation setting out the defendants previous knowledge of the cause which led to the injury complained of, or rather his previous knowledge of a state of facts which it was his duty to guard against, and his omission to do which has led to the injury complained of. Blacks Law Dictionary (2004) 181 The Duty of Good Faith
Is it a free-standing duty? (Disney Ft. n. 112) Is it a state of mind? Is it a standard of conduct? Is it a catch-all? Is it a gap-filler? 182 Is It a Gap Filler? Duty of Care perform management functions with the care that an ordinary prudent
person would reasonably be expected to exercise in a like position and under similar circumstances. Graham v. AllisChalmers Mfg. Co., 188 A.2d 185, 130 (Del. 1963) Duty of Loyalty Duty of Good Faith 183
Self-dealing or conflict of interest where best interests of corporation and shareholders take precedence over interests of director, officer or controlling shareholder. Guth v. Loft, 5 A.2d 503 (Del. 1939) Is It a Standard of Conduct? Good Faith
Duty of Loyalty Self-dealing or conflict of interest where best interests of corporation and shareholders take precedence over interests of director, officer or controlling shareholder. Guth v. Loft, 5 A.2d 503 (Del. 1939) Duty of Loyalty Duty of Care
184 According to Disney. To act in good faith, a director must act at all times with an honesty of purpose and in the best interests and welfare of the corporation a true faithfulness and devotion to the interests of the corporation and its shareholders In re the Walt Disney Company, 2005 WL 2056651 (Del. Ch. 2005) 185 Bad Faith
An intentional dereliction of duty, a conscious disregard for ones responsibilities deliberate indifference and inaction in the face of a duty to act conduct that is clearly disloyal to the corporation. It is the epitome of faithless conduct. In re the Walt Disney Company, 2005 WL 2056651 (Del. Ch. 2005) 186 How is Good Faith different from Loyalty? No allegation of breach of duty of
loyalty in Disney just bad faith The only way to rebut the business judgment rule presumption is to demonstrate that the conduct was in bad faith 187 Breach of Duty of Care Directors are protected by the BJR, unless Plaintiffs can demonstrate gross negligence or bad faith. No Indemnification
145 No Exculpation 102(b)(7) 188 Breach of Duty of Loyalty may be authorized and ratified by the majority of disinterested directors; may survive the entire fairness test no protection of the BJR, no indemnification, no exculpation, probably no D&O (See 145(g) permits purchase of D&O regardless of whether the conduct can be indemnified, but not willful, deliberate, or criminal conduct) 189
Statutory Framework Delaware General Corporation Law good faith is not defined no liability imposed finding of bad faith negates statutory exculpation and indemnification 190 8 Del. C. 101 et seq. The term good faith appears
nine times - 102(b)(7) exculpation clause 103(i) filling error (good faith effort) 125 conferring academic or honorary degrees 141(e) reliance on corporate records and third party reports 144 ratification of conflict transactions by shareholders 145 indemnification 162(c) transfer of stock 172 reliance on corporate records and third party reports 203 business with interested stockholders 191 Fiduciary Duties in Alternative Entities
The policy of alternative entities is to give maximum effect to the principle of freedom of contract and to the enforceability of [alternative entitys] agreements. 17-1101(c); 18-1101(b) 192 Contractual Abrogation To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is party to or is otherwise
bound by a limited liability company agreement, the members or managers or other persons duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing. 6 Del. C. 18-1101(c) 193 Why Do We Care? 102(b)(7) a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty shall not eliminate or limit the liability for acts or omissions not in good faith 145 a corporation shall have power to indemnify any person by reason of the fact that the person is or was a director, officer, employee or agent of the corporation if the person acted in good faith 194 Business Judgment Rule a presumption that in making a business decision, directors of a
corporation act on an informed basis, in good faith, and in an honest belief that the action taken was in the best interest of the company. 195 Application of the BJR [b]usiness judgment rule protects the directors of solvent, barely solvent, and insolvent corporations, and the creditors of an insolvent firm have no greater rights to challenge a disinterested, good faith business decision than the stockholders of a solvent firm.
Trenwick Am. Litig. Trust, 2006 WL 2333201, at *22 n. 75, see also North Am. Catholic Education programming Foundation, Inc. v. Ghewalla, et al. 2006 WL 2588971, at *11 (Del. Ch. Sept. 1, 2006). 196 Trenwick The complaint set forth eight counts, all centered on one idea Trenwicks expansion and acquisition of Chartwell and LaSalle was irrational and resulted from gross negligence. Such expansion and subsidiary reorganization resulted in the creation of a large insurance holding company with inadequate reserves and assets to cover the claims that were ultimately made against it
rendering it insolvent and leaving it with too few assets to satisfy its creditors. 197 Defendants Trenwick Group Inc.s directors (parent corporation) Trenwick America Corps directors (wholly-owned subsidiary - Debtor) Former third-party advisors Ernst & Young, PWC, Baker & McKenzie and Milliman, Inc. 198
Plaintiff Litigation Trust - created by the Litigation Trust Agreement pursuant to Trenwick Americas chapter 11 plan of reorganization. The Court dismissed claims of Debtors creditors to the extent those claims could not have been assigned to the Litigation Trust and did not represent claims of the Debtor. 199
Consequences of Trenwick.if any Does it raise the bar on pleading insolvency? Does it change the application of 102(b)(7) to protect directors of insolvent corporations? Does the BJR rule change when the company is insolvent? 200 Delaware law vs. New
York law Unlike other jurisdictions, including New York, 102(b)(7) under Delaware law exculpates directors for actions that take place when the company is insolvent. 201 Delaware vs. New York Fiduciary Duties DE duty of care, loyalty and good faith
NY duty of care, loyalty and obedience (the obligation of directors and officers to act within the organizations purposes and ensure that the corporations mission is pursued State v. Grasso) 202 State v. Grasso: New Trend or New York NonProfit Outlier? This entire case rises and falls on the issue of whether the NYSE acted ultra vires in awarding Mr. Grasso excessive compensation and benefits. 203
Who is responsible for excessive compensation? Have directors hijacked the NYSE and siphoned off the NYSEs funds to pay Grasso? Who is responsible for the ultra vires actions? directors? CEO? Who is pay? 204