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Emerging Issues for In-House Counsel 2006 Presented by: The Corporate Litigation Practice Group of Blank Rome LLP November 3, 2006 © 2006, Blank Rome LLP.

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Presentation on theme: "Emerging Issues for In-House Counsel 2006 Presented by: The Corporate Litigation Practice Group of Blank Rome LLP November 3, 2006 © 2006, Blank Rome LLP."— Presentation transcript:

1 Emerging Issues for In-House Counsel 2006 Presented by: The Corporate Litigation Practice Group of Blank Rome LLP November 3, 2006 © 2006, Blank Rome LLP

2 Arbitration: Is It Arbitrary? Presented by: Edward N. Cahn, Blank Rome LLP Hirsh N. Cogan, Blank Rome, LLP, Moderator LeRoy Lambert, Blank Rome LLP Michael D. Young, JAMS,Inc.

3 3 Arbitration Is it arbitrary? Is it arbitrary?

4 4 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. 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 Source: American Arbitration Association, Drafting Dispute Resolution Clauses, A Practical Guide

5 5 Selection of Arbitrators Specific Qualifications Specific Qualifications Industry Specific Industry Specific Number of Arbitrators Number of Arbitrators Party-Neutral Arbitrators Party-Neutral Arbitrators

6 6 Particular Provisions Locale Locale Time Periods Time Periods Choice of Law Choice of Law Reasoned Opinion Reasoned Opinion

7 7 “Baseball” Arbitration When is it advisable? When is it advisable?

8 8 Mediation Typical Clause 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

9 9 Mediation Is mediation ever too early? Is mediation ever too early? –Obtaining the necessary documents for mediation

10 10 Arbitration – Pleadings and Procedures Narrative, Descriptive Pleadings Narrative, Descriptive Pleadings Preliminary Conference Preliminary Conference Scheduling Order Scheduling Order Motion Practice Motion Practice

11 11 Discovery in Arbitration Contractual Agreement on: Contractual Agreement on: –Number of depositions –Document production –Interrogatories

12 12 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. 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 865 (8th Cir. 2000) Generally subpoenas calling for the production of documents do not need to comply with FRCP 45(b)(2)’s territorial limit. 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 865 (8th Cir. 2000)

13 13 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. Dynegy Midstream Services LP v. Trammochem, 2006 WL (2d Cir. 2006) 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. Dynegy Midstream Services LP v. Trammochem, 2006 WL (2d Cir. 2006)

14 14 Injunctive Relief Under the FAA, arbitrators can grant preliminary injunctive relief. See Advisors Inc. v. Thorley, 147 F.3d 229, (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)

15 15 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 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 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) Under New York law, an arbitrator cannot award punitive damages. Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354 (1976)

16 16 The “Manifest Disregard of Law” Standard of Review for Arbitration Awards

17 17 Manifest Disregard of Law under the FAA? In order to overturn an award for “manifest disregard,” a court must determine that: 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 –arbitrator knew of the law’s existence and that it should have been applied to the case before him.

18 18 New York and Pennsylvania Under CPLR 7511, “manifest disregard of the law” is not a standard under which a court can overturn an arbitrator’s decision. Under CPLR 7511, “manifest disregard of the law” is not a standard under which a court can overturn an arbitrator’s decision. Banc of Am. Secs. v. Knight, 2004 NY Slip Op (N.Y. Sup. Ct. 2004) Recently, there has been an indication that New York may adopt the “manifest disregard of the law” standard. 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. 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

19 19 Arbitration Clauses Are they always advisable? Are they always advisable? When should they be utilized? When should they be utilized?

20 20 The Society of Maritime Arbitrators, Inc. (“SMA”) Formed in 1963 to provide a way for companies in the industry to have disputes resolved by commercial peers without resort to the courts. Membership consists of approximately 80 commercial persons (including non-practicing lawyers). Formed in 1963 to provide a way for companies in the industry to have disputes resolved by commercial peers without resort to the courts. Membership consists of approximately 80 commercial persons (including non-practicing lawyers).

21 21 Awards are published. There are presently in excess of 3800 awards. Awards are available on Lexis, ADMRTY Library, USAWDS File. There are SMA Rules for Arbitration, for Mediation, and for Conciliation. Awards are published. There are presently in excess of 3800 awards. Awards are available on Lexis, ADMRTY Library, USAWDS File. There are SMA Rules for Arbitration, for Mediation, and for Conciliation. Healy & Baillie (now Blank Rome) was attorney of record in more than 600 of the published awards (more than any other firm) and of course in hundreds of other disputes subject to arbitration which were resolved prior to award. Healy & Baillie (now Blank Rome) was attorney of record in more than 600 of the published awards (more than any other firm) and of course in hundreds of other disputes subject to arbitration which were resolved prior to award.

22 22 An SMA Panel Most forms of charter parties call for disputes arising under the charter to be resolved by arbitration in London or New York. Most forms of charter parties call for disputes arising under the charter to be resolved by arbitration in London or New York. Typically, disputes are heard by three- person panels. Each party appoints an arbitrator and those two select a chairman. Typically, disputes are heard by three- person panels. Each party appoints an arbitrator and those two select a chairman.

23 23 Proceedings in an SMA Arbitration (i) Compared to court, VERY informal, and compared to most other arbitral bodies, informal. Compared to court, VERY informal, and compared to most other arbitral bodies, informal. No administration. Essentially, an ad hoc arbitration, subject, of course, to the SMA Rules. No administration. Essentially, an ad hoc arbitration, subject, of course, to the SMA Rules. No pleadings, but parties often exchange statements of their respective cases or present their cases orally at an organizational hearing. No pleadings, but parties often exchange statements of their respective cases or present their cases orally at an organizational hearing. Limited discovery. Depositions are the exception, not the rule, and only if parties agree. Extent of document production depends on the parties, their counsel, the issues, and the panel. “Any and all” requests are not favored. Limited discovery. Depositions are the exception, not the rule, and only if parties agree. Extent of document production depends on the parties, their counsel, the issues, and the panel. “Any and all” requests are not favored.

24 24 Proceedings in an SMA Arbitration (ii) Claimant presents its case in chief. Claimant presents its case in chief. Respondent presents its defense. Respondent presents its defense. Cases are typically presented in stages, at different times, not at one sitting. This is a consequence of not having discovery. Cases are typically presented in stages, at different times, not at one sitting. This is a consequence of not having discovery. Once parties have presented their evidence, they exchange main and reply briefs. Once parties have presented their evidence, they exchange main and reply briefs. Panel issues its award. Panel issues its award. The award is subject to review by the district court in accordance with Federal Arbitration Act and/or applicable Conventions. It is very difficult to vacate an award. The award is subject to review by the district court in accordance with Federal Arbitration Act and/or applicable Conventions. It is very difficult to vacate an award.

25 25 Arbitration with a difference? Consolidation of disputes between parties to different contracts if issue involves “common questions of fact or law and/or arise in substantial part from the same maritime transactions or series of related transactions, provided all contracts incorporate SMA Rules.” Section 2. Consolidation of disputes between parties to different contracts if issue involves “common questions of fact or law and/or arise in substantial part from the same maritime transactions or series of related transactions, provided all contracts incorporate SMA Rules.” Section 2. Section 30 authorizes an award of attorney’s fees to the prevailing party, and SMA arbitrators typically award them. Section 30 authorizes an award of attorney’s fees to the prevailing party, and SMA arbitrators typically award them. SMA arbitrators may award punitive damages in maritime cases, but rarely do so. SMA arbitrators may award punitive damages in maritime cases, but rarely do so.

26 Emerging Issues in Delaware Law Presented by: Alisa E. Moen, Blank Rome LLP Craig A. Damast, Blank Rome LLP Thomas P. Preston, Blank Rome LLP, Moderator

27 27 Once Upon a Disney - The Evolution of the Fiduciary Duty of Good Faith Trenwick America Litigation Trust v. Ernst & Young, L.L.P WL (Del. Ch. Aug. 10, 2006) - Fiduciary duties to creditors of a subsidiary

28 28 Once Upon a Disney – The Evolution of the Duty of Good Faith Common law origin – the Triad Duty of Care Duty of Care Duty of Loyalty Duty of Loyalty Duty of Good Faith - maybe Duty of Good Faith - maybe Cede & Co v. Technicolor, 634 A.2d 345, 381 (Del. 1993)

29 29 What Is Good Faith? good faith, n. A state of mind consisting in (1) honesty in belief or purpose, (2) faithfulness to one’s 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… good faith, n. A state of mind consisting in (1) honesty in belief or purpose, (2) faithfulness to one’s 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… Black’s Law Dictionary (2004)

30 30 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 one’s rights or duties, but by some interested or sinister motive. 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 one’s rights or duties, but by some interested or sinister motive. Black’s Law Dictionary (2004)

31 31 scienter. n. Lat. Knowingly. The term is used in pleadings to signify an allegation … setting out the defendant’s 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. scienter. n. Lat. Knowingly. The term is used in pleadings to signify an allegation … setting out the defendant’s 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. Black’s Law Dictionary (2004)

32 32 The Duty of Good Faith Is it a free-standing duty? Is it a free-standing duty? (Disney Ft. n. 112) (Disney Ft. n. 112) Is it a state of mind? Is it a state of mind? Is it a standard of conduct? Is it a standard of conduct? Is it a catch-all? Is it a catch-all? Is it a gap-filler? Is it a gap-filler?

33 33 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. Allis- Chalmers Mfg. Co., 188 A.2d 185, 130 (Del. 1963) 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 Good Faith

34 34 Is It a Standard of Conduct? 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) Good Faith Duty of Care Duty of Loyalty

35 35 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…” “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 (Del. Ch. 2005)

36 36 Bad Faith An “intentional dereliction of duty, a conscious disregard for one’s 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.” An “intentional dereliction of duty, a conscious disregard for one’s 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 (Del. Ch. 2005)

37 37 How is “Good Faith” different from Loyalty? No allegation of breach of duty of loyalty in Disney – just bad faith 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 The only way to rebut the business judgment rule presumption is to demonstrate that the conduct was in bad faith

38 38 Breach of Duty of Care Breach of Duty of Care –Directors are protected by the BJR, unless Plaintiffs can demonstrate gross negligence or bad faith. No Indemnification No Exculpation §145 §102(b)(7)

39 39 Breach of Duty of Loyalty 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)

40 40 Statutory Framework Delaware General Corporation Law good faith is not defined good faith is not defined no liability imposed no liability imposed finding of bad faith negates statutory exculpation and indemnification finding of bad faith negates statutory exculpation and indemnification

41 41 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”) – conferring academic or honorary degrees - 141(e) reliance on corporate records and third party reports – ratification of conflict transactions by shareholders – indemnification - 162(c) – transfer of stock – reliance on corporate records and third party reports – business with interested stockholders

42 42 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 entity’s] agreements.” The policy of alternative entities is to “give maximum effect to the principle of freedom of contract and to the enforceability of [alternative entity’s] agreements.” § (c); § (b)

43 43 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 member’s or manager’s or other person’s 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.” “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 member’s or manager’s or other person’s 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. § (c)

44 44 Why Do We Care? § 102(b)(7) § 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 § 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…”

45 45 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. 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.

46 46 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.” “[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 , at *22 n. 75, see also North Am. Catholic Education programming Foundation, Inc. v. Ghewalla, et al WL , at *11 (Del. Ch. Sept. 1, 2006).

47 47 Trenwick The complaint set forth eight counts, all centered on one idea – Trenwick’s 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. The complaint set forth eight counts, all centered on one idea – Trenwick’s 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.

48 48 Defendants Trenwick Group Inc.’s directors (parent corporation) Trenwick Group Inc.’s directors (parent corporation) Trenwick America Corp’s directors (wholly-owned subsidiary - Debtor) Trenwick America Corp’s directors (wholly-owned subsidiary - Debtor) Former third-party advisors – Ernst & Young, PWC, Baker & McKenzie and Milliman, Inc. Former third-party advisors – Ernst & Young, PWC, Baker & McKenzie and Milliman, Inc.

49 49 Plaintiff Litigation Trust Litigation Trust - created by the Litigation Trust Agreement pursuant to Trenwick America’s chapter 11 plan of reorganization. The Court dismissed claims of Debtor’s creditors to the extent those claims could not have been assigned to the Litigation Trust and did not represent claims of the Debtor. The Court dismissed claims of Debtor’s creditors to the extent those claims could not have been assigned to the Litigation Trust and did not represent claims of the Debtor.

50 50 Consequences of Trenwick….if any… Does it raise the bar on pleading insolvency? Does it raise the bar on pleading insolvency? Does it change the application of 102(b)(7) to protect directors of insolvent corporations? 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? Does the BJR rule change when the company is insolvent?

51 51 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. Unlike other jurisdictions, including New York, 102(b)(7) under Delaware law exculpates directors for actions that take place when the company is insolvent.

52 52 Delaware vs. New York Fiduciary Duties DE – duty of care, loyalty and good faith 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 organization’s purposes and ensure that the corporation’s mission is pursued” State v. Grasso) NY – duty of care, loyalty and obedience (“the obligation of directors and officers to act within the organization’s purposes and ensure that the corporation’s mission is pursued” State v. Grasso)

53 53 “This entire case rises and falls on the issue of whether the NYSE acted ultra vires in awarding Mr. Grasso excessive compensation and benefits.” State v. Grasso: New Trend or New York Non-Profit Outlier?

54 54 Who is responsible for excessive compensation? Have directors hijacked the NYSE and siphoned off the NYSE’s funds to pay Grasso? Have directors hijacked the NYSE and siphoned off the NYSE’s funds to pay Grasso? Who is responsible for the ultra vires actions? – directors? CEO? – Who is pay? Who is responsible for the ultra vires actions? – directors? CEO? – Who is pay?

55 Trouble with Boilerplate How Standard Clauses Stand Up In Court Presented by: Ann B. Laupheimer, Blank Rome LLP, Moderator Faith Greenfield, Campbell Soup Company Richard P. McElroy, Blank Rome LLP Robert J. Stillman, Aetna Inc.

56 56 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.

57 57 Why Include These Terms? Preliminary Duty to Negotiate In Good Faith? Preliminary Duty to Negotiate In Good Faith? – naïve 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 Effective leverage between business persons to get to a final agreement

58 58 Problem: How do I know when I have negotiated in good faith? Consider one litigant’s unsuccessful argument to the federal court in New York that the court imply a duty to: Consider one litigant’s unsuccessful argument to the federal court in New York that the court imply a duty to: –Disclose information material to party’s 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 Skating Union, 530 F. Supp (S.D.N.Y. 1982).

59 59 Will a Court Enforce a “Good Faith Negotiation” Duty and if So, How? New York law: probably not. 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 (S.D.N.Y. 1982) Pennsylvania law: probably if sufficiently definite. 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 Illinois law: maybe yes Minnesota: maybe no Minnesota: maybe no New Hampshire: probably yes, and reserves for another day the appropriate remedy (maybe none). New Hampshire: probably yes, and reserves for another day the appropriate remedy (maybe none). See Howtek, Inc. v. Relisys, 958 F. Supp. 46, 48 (D.N.H. 1996) (collecting cases).

60 60 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.

61 61 To Waive or Not to Waive Reasons 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 Reasons not to waive –Avoid “jury of one” –Avoid judicial lottery –Believe your client has the equities

62 62 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 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 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. 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, (10 th Cir. 1988), requiring proof that jury waiver clause induced by fraud. See Gurfein v. Sovereign Group, 826 F. Supp. 890, 921 (E.D. Pa. 1993). Fraudulent Inducement: Most jurisdictions have embraced Telum, Inc. v. E.F. Hutton, 859 F.2d 835, (10 th Cir. 1988), requiring proof that jury waiver clause induced by fraud. See Gurfein v. Sovereign Group, 826 F. Supp. 890, 921 (E.D. Pa. 1993).

63 63 “Don’t 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 the possibility of these damages.

64 64 Protect Your Client With Broad Limitation Language Tort and Contract – make sure you include tort and contract claims, as economic loss doctrine is unreliable. 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. 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. 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. 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. Damage Cap - Consider a monetary damages cap -- ordinarily enforceable between sophisticated parties.

65 65 Can The Parties Eliminate the Recovery of Lost Profits and What Are “Consequential Damages”? Most courts will permit a clear waiver of lost profits Most courts will permit a clear waiver of lost profits Does elimination of “consequential damages” avoid all claims for 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.

66 66 Punitive Damages for “Intentional” Breach of Contract Conventional wisdom: punitive damages are available only for torts 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. Soc’y, 83 N.Y.2d 603, 613 (N.Y. 1994) New York: punitive damages available for willful or egregious breach of contract claims that include element of public wrong. Rocanova v. Equitable Life Assur. Soc’y, 83 N.Y.2d 603, 613 (N.Y. 1994) Minority of jurisdictions: punitive damages available for “intentional breach of contract” under specific circumstances 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. 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. Restatement (Second) of Contracts § 195 (1981) 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. Restatement (Second) of Contracts § 195 (1981)

67 67 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. 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

68 68 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.

69 69 Preventing Claims of Fraud Based On Pre-Contractual Negotiations Boilerplate Integration Clauses Often Fail to prevent claims of reliance on pre-contractual information exchange 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.).

70 70 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): 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): 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

71 71 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 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. 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. Waive any right to allege fraud in the inducement based on anything not included in the final written agreement.

72 72 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 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? 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.). 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.).

73 73 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 arising out of or relating to (i) such Group’s Transferred Assets, or (ii) such Group’s business which are the subject of this Agreement.

74 74 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. 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, (2d Cir. 2002). 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, (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). 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 indemnifying officers and directors so long as they acted in good faith.

75 75 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. 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

76 76 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 (E.D. Pa. 2000) (Fullam, Sr. J.) (insurer may contract to avoid indemnity obligation for non-monetary 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). 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 (E.D. Pa. 2000) (Fullam, Sr. J.) (insurer may contract to avoid indemnity obligation for non-monetary 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).

77 77 Indemnification for Party’s Own Negligence Illinois and New Jersey: prohibited by statute in construction contracts: 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, 1999 U.S. Dist. LEXIS (E.D. Pa. 1999), aff’d, 265 F.3d 1054 (3d Cir. 2001). 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, 1999 U.S. Dist. LEXIS (E.D. Pa. 1999), aff’d, 265 F.3d 1054 (3d Cir. 2001).

78 78 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. 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)

79 Developments in Database Security Law Presented by: Kit Applegate, Blank Rome LLP Jordana Cooper, Blank Rome LLP, Moderator

80 80 Developments In Database Security Law: Outline Federal privacy law directed to financial institutions: Gramm-Leach-Bliley 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 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 Enforcement –State Attorney General activity –Private litigation and class actions –Federal agencies: FTC

81 81 Gramm-Leach-Bliley and State Statutes: Introduction G-L-B: 15 U.S.C. § 6801 et seq.: 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 [1] respect the privacy of its customers and [2] to protect the security and confidentiality of those customers’ nonpublic personal information.” 15 U.S.C. § –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.

82 82 Gramm-Leach-Bliley and State Statutes: Introduction State Statutes 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 Notification of security breach Use of Social Security numbers Use of Social Security numbers Destruction of records that contain “personal information” Destruction of records that contain “personal information”

83 83 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 U.S.C. § 6809(3)(A). 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 U.S.C. § 6809(3)(A). “Financial activities” include, inter alia: “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).

84 84 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 (FTC). But FTC Rule contains a “significantly engaged” modifier. Id. Generally, “financial institution” is defined “very broadly under G-L-B and includes several entities not traditionally recognized as financial institutions.” 65 Fed.Reg (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 Overlap between financial institutions covered by G-L-B and entities covered by HIPAA. 65 Fed.Reg Colleges and universities are not exempted – may be double-regulated by FERPA; compliance with FERPA adequate to FTC. 65 Fed.Reg Colleges and universities are not exempted – may be double-regulated by FERPA; compliance with FERPA adequate to FTC. 65 Fed.Reg

85 85 State Statutes: Who Is Covered? Apply to both businesses and individuals who: 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 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 “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

86 86 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 “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

87 87 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 “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

88 88 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 “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

89 89 State Statutes: What Information Is Covered? Computerized data that include “personal information” Computerized data that include “personal information” “Personal information” “Personal information” –Individual’s name –Linked to any of the following: Social Security number; Social Security number; Driver’s license number or state identification card number; or Driver’s 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 individual’s financial account Account, credit, or debit card number in combination with any security code, access code, or password that would permit access to the individual’s financial account

90 90 G-L-B: Privacy Policies G-L-B: Among other things, a financial institution’s privacy policy contains a description in general terms of who is authorized to have access to the information and states whether the institution has security practices and procedures in place to ensure the confidentiality of the information in accordance with the policy. 65 Fed.Reg G-L-B: Among other things, a financial institution’s privacy policy contains a description in general terms of who is authorized to have access to the information and states whether the institution has security practices and procedures in place to ensure the confidentiality of the information in accordance with the policy. 65 Fed.Reg

91 91 G-L-B: Standards For Safeguarding Customer Information G-L-B: Regulators confer on institutions the discretion to determine the levels of protection necessary for different categories of information. 66 Fed.Reg G-L-B: Regulators confer on institutions the discretion to determine the levels of protection necessary for different categories of information. 66 Fed.Reg 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 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

92 92 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 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

93 93 State Law: Standards For Safeguarding Customer Information The state statutes generally do not require the formulation of information security protocols 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 Destruction of records –“ –“A business... shall destroy, or arrange for the destruction of, a customer’s 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: f

94 94 State Law: Standards For Safeguarding Customer Information Limitations on use of Social Security numbers Limitations on use of Social Security numbers –Shall NOT: Publicly post or display any four or more consecutive numbers of an individual’s Social Security number Publicly post or display any four or more consecutive numbers of an individual’s Social Security number Print an individual’s Social Security number on any materials mailed to the individual Print an individual’s Social Security number on any materials mailed to the individual Print an individual’s Social Security number on any card required for the individual to access products or services provided by the entity Print an individual’s Social Security number on any card required for the individual to access products or services provided by the entity

95 95 State Law: Standards For Safeguarding Customer Information Limitations on use of Social Security numbers Limitations on use of Social Security numbers –Shall NOT: Intentionally communicate or otherwise make available to the general public an individual’s Social Security number Intentionally communicate or otherwise make available to the general public an individual’s 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 Require an individual to transmit his Social Security number over the internet, unless the connection is secure or the Social Security number is encrypted

96 96 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 G-L-B: An incident involving unauthorized access to or use of “sensitive customer information.” 70 Fed.Reg “Sensitive customer information”: a customer’s name, address, or telephone number in conjunction with social security, driver’s license, account, credit or debit card number, or a personal identification number or password that would permit access to the customer’s account. Also any combination of components that would allow someone to log onto or access the customer’s account, such as user name and password. 70 Fed.Reg “Sensitive customer information”: a customer’s name, address, or telephone number in conjunction with social security, driver’s license, account, credit or debit card number, or a personal identification number or password that would permit access to the customer’s account. Also any combination of components that would allow someone to log onto or access the customer’s account, such as user name and password. 70 Fed.Reg

97 97 State Law: What Is A Breach Triggering Statutory Notification? State statutes are not uniform in their definition of “breach of security” State statutes are not uniform in their definition of “breach of security” Access Access –Unauthorized access of unencrypted computerized data that compromises the security, confidentiality, or integrity of personal information maintained by the business Acquisition Acquisition –Unauthorized acquisition of unencrypted computerized data that compromises the security, confidentiality, or integrity of personal information maintained by the business Access and Acquisition Access and Acquisition

98 98 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. 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.

99 99 State Law: When Must You Notify Customers? Generally, duty to notify arises when a business: Generally, duty to notify arises when a business: –Becomes “aware,” “discovers,” or receives “notification” of a breach of security; and –Ascertains that a customer’s personal information “was, or is reasonably believed” to have been acquired/accessed by an unauthorized person

100 100 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.” 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. “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.

101 101 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 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 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

102 102 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. “[A]s soon as possible.” 12 C.F.R. Pt. 30, App. B., Supp. A, III.A.

103 103 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 ” 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: Notification may be delayed: –to determine the scope of the breach and restore the integrity of the data system –if requested by law enforcement

104 104 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. 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.

105 105 State Law: Notification To Law Enforcement Delaware, New York, and Pennsylvania do not require that law enforcement be notified first 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 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 As a practical matter, law enforcement should be notified

106 106 G-L-B And State Law: Details Of Customer Notice G-L-B: Detailed requirements for notice, including: 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 months and to promptly report incidents of suspected identity theft.

107 107 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 recommendation that the customer review account statements and immediately report any suspicious activity A description of fraud alters A description of fraud alters A recommendation that the customer periodically obtain credit reports A recommendation that the customer periodically obtain credit reports How the customer may obtain a credit report free of charge How the customer may obtain a credit report free of charge Information about the ftc’s online guidance. 12 C.F.R. 30, App. B, Supp. A, iii.B.1 Information about the ftc’s online guidance. 12 C.F.R. 30, App. B, Supp. A, iii.B.1

108 108 State Law: Details Of Customer Notice Delaware, New Jersey, and Pennsylvania do not specify the contents of the notice Delaware, New Jersey, and Pennsylvania do not specify the contents of the notice New York 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 Means of providing notice –Written notice –Electronic notice

109 109 State Law: Details Of Customer Notice Means of providing 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: 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: – ; –Posting the notice on business’s web site; and –Notifying major statewide media

110 110 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 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

111 111 State Law: Regulator Notice? New York New York –New York Attorney General –New York Consumer Protection Board –New York Office of Cyber Security and Critical Infrastructure Coordination

112 112 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. 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.

113 113 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 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

114 114 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 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 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 Under existing authority, agencies may impose fines. e.g., OCC: 12 U.S.C. § 1818 Most active regulator enforcement: FTC! Most active regulator enforcement: FTC!

115 115 State Law: Consequences -- Regulator Action State AGs vested with authority to prosecute violations State AGs vested with authority to prosecute violations

116 116 G-L-B And State Law: Consequences! -- AG Actions State AGs have been active in consumer privacy before the new state statutes and before G-L-B based on their authority under state consumer fraud and other statutes. State AGs have been active in consumer privacy before the new state statutes and before G-L-B based on their authority under state consumer fraud and other statutes. 1999: Minnesota AG action against a large financial institution: Sale of customer information to a third-party marketer in violation of its privacy policy. Settlement over $3 million. 1999: Minnesota AG action against a large financial institution: Sale of customer information to a third-party marketer in violation of its privacy policy. Settlement over $3 million. Led to charges by 38 other state AGs. Led to class action lawsuit funded by several million dollars in settlement, plus attorney’s fees.

117 117 G-L-B And State Law: Consequences! -- AG Actions [1] Inadvertent disclosures of [2] nonsensitive information prosecuted. [1] Inadvertent disclosures of [2] 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. 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.

118 118 G-L-B And State Law: Consequences! -- AG Actions Lesson: You must follow your privacy policies. Lesson: You must follow your privacy policies. Elliot Spitzer on privacy policies (March, 2006): 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.”

119 119 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. Suits under G-L-B: Most courts have determined no private right of action. –e.g., Menton v. Experian Corp., 2003 WL (S.D.N.Y. July 21, 2003); Menton v. Experian Corp., 2003 WL (S.D.N.Y. July 21, 2003); Dunn v. First Nat’l Bank, 111 P.3d 1076 (Kan. App. 2005); Dunn v. First Nat’l Bank, 111 P.3d 1076 (Kan. App. 2005); Borninski v. Williamson, 2004 WL (N.D. Tex. March 1, 2004); Borninski v. Williamson, 2004 WL (N.D. Tex. March 1, 2004); Briggs v. Emporia State Bank and Trust, 2005 WL (D. Kan. Aug. 23, 2005); Briggs v. Emporia State Bank and Trust, 2005 WL (D. Kan. Aug. 23, 2005); American Family Mutual Ins. Co. v. Roth, 2005 WL (N.D. Ill. Aug. 5, 2005). American Family Mutual Ins. Co. v. Roth, 2005 WL (N.D. Ill. Aug. 5, 2005).

120 120 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: “Back door”: Negligence claims, esp. negligence per se, based on G-L-B standards: –Dunmire v. Morgan Stanley, 2005 WL (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-holder’s soon-to-be-ex wife, premised on violation of G-L-B and implementing regulations. –Guin v. Brazos Higher Ed. Service Corp., 2006 WL (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.

121 121 G-L-B And State Law: Consequences! -- Private And Class Actions Negligence claims: Best-case scenario: lost data. Negligence claims: Best-case scenario: lost data. –Giordano v. Wachovia Securities, 2006 WL (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.

122 122 G-L-B And State Law: Consequences! -- Private And Class Actions Negligence claims: More risk: Burglary of equipment without known interest in data. Negligence claims: More risk: Burglary of equipment without known interest in data. Stollenwerk v. Tri-West Healthcare Alliance, 2005 WL (D. Ariz. Sept. 6, 2005). Class action. Stollenwerk v. Tri-West Healthcare Alliance, 2005 WL (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.”

123 123 G-L-B And State Law: Consequences! -- Private And Class Actions Negligence: Worst-case scenario: Save money; poor security protocols; data theft. Negligence: Worst-case scenario: Save money; poor security protocols; data theft. Richardson v. DSW, Inc., 2006 WL (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. Richardson v. DSW, Inc., 2006 WL (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.

124 124 G-L-B And State Law: Consequences! -- Private And Class Actions Second “back door”: Suit for breach of contract based – privacy policy as contract. Second “back door”: Suit for breach of contract based – privacy policy as contract. Best defense: Contract claims require damages. Loss of privacy held not to satisfy requirement of economic losses flowing directly from the breach. See In re Jetblue Airways Corp. Privacy Lit., 379 F.Supp.2d 299 (E.D.N.Y. 2005); In re Northwest Airlines Privacy Lit., 2004 WL (D. Minn. 2004). Best defense: Contract claims require damages. Loss of privacy held not to satisfy requirement of economic losses flowing directly from the breach. See In re Jetblue Airways Corp. Privacy Lit., 379 F.Supp.2d 299 (E.D.N.Y. 2005); In re Northwest Airlines Privacy Lit., 2004 WL (D. Minn. 2004). –Note: This defense has application in negligence context as well. Forbes v. Wells Fargo Bank, N.A., 420 F.Supp.2d 1018 (D. Minn. 2006) (theft of computers containing unencrypted customer information; negligence for failing to adequately secure data; no damages – the “threat of future harm, not yet realized, will not satisfy the damage requirement.”) Additional defense: Privacy policy a “unilateral” undertaking but not a unilateral contract – no offer and acceptance. In re Northwest Airlines. Additional defense: Privacy policy a “unilateral” undertaking but not a unilateral contract – no offer and acceptance. In re Northwest Airlines. Untested defense: Preemption by G-L-B. Untested defense: Preemption by G-L-B.

125 125 G-L-B And State Law: Consequences! -- Private And Class Actions Common law claims for common law duty of bank confidentiality. 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 Nat’l State Bank of NJ, 169 N.J. Super. 280 (App. Div. 1979). Perhaps can augment defense with good G-L-B protocols. Also, preemption??? 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 Nat’l State Bank of NJ, 169 N.J. Super. 280 (App. Div. 1979). Perhaps can augment defense with good G-L-B protocols. Also, preemption??? On the other hand, may lose this legal defense as G-L-B contemplates insider abuse and institution responsible for limiting opportunities for abuse and developing means to detect and contain it. On the other hand, may lose this legal defense as G-L-B contemplates insider abuse and institution responsible for limiting opportunities for abuse and developing means to detect and contain it.

126 126 G-L-B And State Law: Consequences! -- Private And Class Actions Private consumer fraud suits – typically 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; attorney’s fees, treble damages. N.J.S.A. 56: 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; attorney’s fees, treble damages. N.J.S.A. 56: 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??? 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???

127 127 Best Defense: Good Privacy And Security Practices Materials: Materials: –April 2006 California Dept. of Consumer Affairs “Recommended Practices on Notice of Security Breach Involving Personal Information” Covers protection and prevention as well Covers protection and prevention as well

128 128 The Federal Trade Commission’s Privacy Enforcement Initiative The FTC has the power to protect personal information pursuant to: 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

129 129 Section 5 of the FTC Act Prohibits “unfair or deceptive act” or practices in or affecting commerce. 15 U.S.C. 45(a) 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 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. 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.

130 130 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. 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. Generally applies to persons, partnerships, or corporations.

131 131 Examples of Cases Brought by the FTC: In the Matter of Nations Title Agency, Inc. (GLB) In the Matter of Nations Title Agency, Inc. (GLB) In the Matter of CardSystems Solutions, Inc. (FTC Act) In the Matter of CardSystems Solutions, Inc. (FTC Act) Federal Trade Commission v. ChoicePoint Inc. (FTC Act) Federal Trade Commission v. ChoicePoint Inc. (FTC Act)

132 Ethics/Internal Investigations Presented by: Jerry D. Bernstein, Blank Rome LLP Timothy D. Katsiff, Blank Rome LLP William H. Roberts, Blank Rome LLP, Moderator Joseph G. Poluka, Blank Rome LLP

133 133 A.Internal Investigations: A Brief Historical Perspective

134 134 B. The Purpose, Structure and Mechanics of the Internal Investigation

135 135 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

136 136 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?

137 137 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.?

138 138 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.

139 139 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. 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.

140 140 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.

141 141 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. We will discuss this issue in detail during the ethics segment of the program.

142 142 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 counsel’s ability to give legal advice in local jurisdiction?

143 143 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)

144 144 Who is the Client? –The dominant CEO syndrome? –Must Legal circumvent management and go directly to the Board? –Shareholders

145 145 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 “don’t ask, don’t tell”? –Is finding “red flags” the objective? (FCPA issues)

146 146 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

147 147 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

148 148 Insurance Issues –Duty to disclose to trigger coverage? –Impact of disclosure?

149 149 C.Ethical Considerations for Internal Investigations

150 150 Define Your Role Clearly define the scope of your engagement at each stage Clearly define the scope of your engagement at each stage Clearly identify the client or clients you are representing Clearly identify the client or clients you are representing Communicate your role with clarity to those to be interviewed 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. Be clear whether the representation extends to the individual directors, officers, employees, former employees of the corporation, as well as the corporation itself.

151 151 Can I Do It…How ? What factors should be considered in deciding on a simultaneous representation of the company and some of its officers or employees? 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 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? What disclosures and consents are required?

152 152 When may a simultaneous representation be undertaken? There is no per se bar to simultaneous representation. 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)): 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 ) 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.

153 153 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] 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” Then consider the “Disinterested Lawyer Standard”

154 154 Basic Test Conflicts Subject To Disclosure And Consent Conflicts Subject To Disclosure And Consent –If the attorney’s 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 lawyer’s judgment immaterial conflicts--remote or unlikely to affect the lawyer’s judgment non-consentable conflicts non-consentable conflicts consentable conflicts consentable conflicts

155 155 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.

156 156 Easy Cases Example: Disinterested Lawyer Test Not Satisfied: 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.

157 157 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 )

158 158 More Easy Cases… Example: Disinterested Lawyer Test Satisfied Example: Disinterested Lawyer Test Satisfied Case 2: Same investigation as Case 1 above, except maintenance employee only overheard comments regarding need to alter the corporation’s 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.

159 159 Closer Cases … Case 3: Case 3: Employee is in accounting department but not involved in the preparation of the financial statements under investigation. Case 4: 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.

160 160 Closer Cases … Case 5: 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 government’s investigation.

161 161 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? 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. The lawyer is representing only the corporation in this interview.

162 162 Getting The Facts Advise the employee/director/officer: 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].”

163 163 “Should I Get My Own Lawyer? Are You My Lawyer?” What if the employee asks whether he should consult with his own counsel? 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 lawyer’s client. –Should corporate counsel recommend getting counsel? No, that potentially acts against the interest of the corporation, the lawyer’s client.

164 164 “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? 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.

165 165 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 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 be 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.

166 166 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 lawyer’s corporate client will be disadvantaged by this restriction on the lawyer's ability to share this information. the lawyer’s 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). 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).

167 167 Full Disclosure What Disclosures Must Be Made To Render Multiple Representation Permissible? 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. 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.

168 168 Full Disclosure –What is involved in a “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. 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. 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. risks and advantages of the joint representation.

169 169 Risks….Advantages –Usual advantages –Usual advantages Avoiding expense of other counsel Avoiding expense of other counsel Broad and detailed knowledge of the relevant facts Broad and detailed knowledge of the relevant facts –Usual risks –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 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 need to obtain a prospective consent

170 170 Risks….Advantages the loss of credibility to the investigating agency 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 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 corporation’s 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 possible complications for the corporation in crippling or preventing the corporation’s 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

171 171 Structuring and Getting Consents Steps include obtaining prospective consents and consents to withdrawal: Steps include obtaining prospective consents and consents to withdrawal: –Prospective Waivers Should be accompanied by full disclosure Should be accompanied by full disclosure Should be in writing signed by the client 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 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

172 172 Structuring and Getting Consents Subjects of waivers: Subjects of waivers: –the possibility of future litigation –client’s waiver of objection to former lawyer’s 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

173 173 Agreements On Privilege And Separate Shadow Counsel –Understandings on privileged information –Understandings on privileged information whether and what kind of confidential information will be shared with the two clients whether and what kind of confidential information will be shared with the two clients who will control the privilege who will control the privilege what will happen in the event of a dispute between the clients 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 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 Adds to cost but reduces risk of potential conflicts and their resolution

174 174 1.The Thompson Memorandum

175 175 2.Selective Waiver

176 176 1.Payment of Attorney Fees for employees 2.Thompson Memorandum and DOJ’s consideration of payments of an employee’s legal fees when determining whether to indict the corporation. a.U.S. v. Stein, No. S1 05 Crim. 0888, 2006 WL (S.D.N.Y. June, 2006)

177 177 E.Enron: A Case Study

178 Whose Privilege Is It Anyway? Presented by: Lesli C. Esposito, Blank Rome LLP John D. Kimball, Blank Rome LLP Jeremy A. Rist, Blank Rome LLP, Moderator Daniel L. Stackhouse, Blank Rome LLP

179 179 The Privilege Is Under Attack! The attorney-client privilege is, more than ever, subject to increasing challenge: 1.Aggressive government investigatory techniques 2.Increasingly insistent transaction partners 3.Technology changing conditions and frequency of communication 4.Heightened auditor independence and demand for information Each of these phenomena places the exercise of the attorney-client privilege at a higher risk than ever before.

180 180 Special Topics Waiver of the privilege through transaction disclosures Waiver of the privilege through transaction disclosures Waiver of the privilege through disclosure to the government Waiver of the privilege through disclosure to the government Waiver of the privilege through disclosure to insurers and auditors Waiver of the privilege through disclosure to insurers and auditors Bonus Topic: “Opinion-Shopping”

181 181 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

182 182 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. 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. “Confidentiality Agreement” irrelevant. Privilege waived even if disclosure is required by law (e.g., “material information”). 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. Waiver of certain privileged information may waive privilege as to all communications on same subject.

183 183 Waiver of Privilege Identified Oaks Industries, Inc. v. Zenith Industries, Inc., 1998 WL (N.D. Ill. July 27, 1988): Oaks Industries, Inc. v. Zenith Industries, Inc., 1998 WL (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 attorney-client privilege. Moreover, it would do little to promote the underlying purpose of the privilege, that of encouraging open discussions between clients and their attorneys.”

184 184 Waiver of Privilege Identified Libbey Glass, Inc. v. Oneida, Ltd., 197 F.R.D. 342, (N.D. Ohio 1999) (client waived privilege as to attorney’s opinion on trade dress infringement issues by disclosing it during negotiations to representatives of an entity with whom a joint venture was eventually formed) Libbey Glass, Inc. v. Oneida, Ltd., 197 F.R.D. 342, (N.D. Ohio 1999) (client waived privilege as to attorney’s opinion on trade dress infringement issues by disclosing it during negotiations to representatives of an entity with whom a joint venture was eventually formed) Intl’l Honeycomb Corp. v. Transtech Serv. Network, 1992 WL (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) Intl’l Honeycomb Corp. v. Transtech Serv. Network, 1992 WL (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)

185 185 Waiver of Privilege Identified Cheeves v. Southern Clays, Inc., 128 F.R.D. 128, 131 (M.D. Ga. 1989) Cheeves v. Southern Clays, Inc., 128 F.R.D. 128, 131 (M.D. Ga. 1989) AMCA Int’l Corp. v. Phipard, 107 F.R.D. 39, 43 (D. Mass. 1985) (client’s disclosure of counsel’s memorandum explaining royalty payments waived privilege on that memorandum and on all other communications with any attorneys regarding such payments) AMCA Int’l Corp. v. Phipard, 107 F.R.D. 39, 43 (D. Mass. 1985) (client’s disclosure of counsel’s 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 Paul R. Rice, Attorney-Client Privilege in the United States (2d ed.) (2003) § 9:90

186 186 Privilege Deemed Preserved Hewlett-Packard Co. v. Bausch & Lomb, Inc., 115 F.R.D. 308 (N.D. Cal. 1987) (disclosure of counsel’s confidential opinion letter in negotiations over sale of subsidiary did not waive privilege). Hewlett-Packard Co. v. Bausch & Lomb, Inc., 115 F.R.D. 308 (N.D. Cal. 1987) (disclosure of counsel’s 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

187 187 Privilege Deemed Preserved Tenneco Pck’g Specialty and Consumer Prods., Inc. v. S.C. Johnson & Sons, Inc., 1999 WL (N.D. Ill. Sept. 14, 1999) (also stressed late stage of disclosure and extremely limited confidentiality agreement as to the specific information in question) Tenneco Pck’g Specialty and Consumer Prods., Inc. v. S.C. Johnson & Sons, Inc., 1999 WL (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 Ass’n, 148 F.R.D. 647 (D. Neb. 1993) Rayman v. Am. Charter Fed. Savings & Loan Ass’n, 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) 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)

188 188 Can a Common Interest Agreement Preserve Privilege? Answer generally “no” in negotiation context. 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.” 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. Transaction-related interests are usually deemed “commercial,” at least until final stages where regulatory scrutiny may be at hand.

189 189 When Privilege May Be Preserved Despite Disclosure Legal duty to disclose Legal duty to disclose Transaction is near closing Transaction is near closing Transaction is a merger or a stock transaction (i.e., not an asset sale) 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 Special precautions are taken to ensure the confidentiality of the privileged information in question Formal regulatory inquiry has begun or is imminent Formal regulatory inquiry has begun or is imminent

190 190 II. Waiver Through Disclosure to the Government Incentives to produce privileged information to the government in connection with an investigation Incentives to produce privileged information to the government in connection with an investigation Effects of such disclosure Effects of such disclosure Attempts to ameliorate consequences of disclosure or refusal to disclose Attempts to ameliorate consequences of disclosure or refusal to disclose

191 191 Incentives to Produce Privileged Information Intense pressure Intense pressure Required for favorable treatment Required for favorable treatment –Thompson Memorandum: “one factor a prosecutor may weigh in assessing the adequacy of a corporation’s cooperation is the completeness of its disclosure, including, if necessary, a waiver of the attorney-client and work product protections.”

192 192 The Effects of Voluntary Disclosure Effect on communications with attorneys Effect on communications with attorneys Does the disclosure to the government constitute a waiver with respect to the materials produced? 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? With respect to all materials on the same subject matter?

193 193 Waiver of the Privilege With Respect to the Materials Produced The law regarding “selective waiver” is in a “state of hopeless confusion.” The law regarding “selective waiver” is in a “state of hopeless confusion.” –See, e.g., Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F.3d 289 (6 th Cir. 2002). Most of the Courts of Appeals have held voluntary disclosure to the government to constitute a waiver with respect to the materials produced. 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., 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. 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 (8 th Cir. 1978). A party may “selectively” waive the privilege as to the government, but preserve it against outsiders. Most other courts have rejected this.

194 194 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. 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 (S.D.N.Y. Sept. 22, 1990) Confidentiality agreements are generally ineffective. Confidentiality agreements are generally ineffective. –See, e.g., Columbia/HCA

195 195 3 Basic Positions as to Selective Waiver Selective waiver never permissible Selective waiver never permissible Selective waiver permissible Selective waiver permissible Selective waiver permissible where government agrees to special confidentiality protections Selective waiver permissible where government agrees to special confidentiality protections The first position is dominant

196 196 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. 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 (4 th Cir. 1988). Probably only triggered at a certain point after a significant quantum of privileged information related to the subject has been disclosed. 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. May not apply where partial information is not put into public record. “What does fairness dictate?” “What does fairness dictate?”

197 197 Efforts to Preserve the Privilege H.R (2004) would have limited waiver of privilege to any information disclosed to the S.E.C. pursuant to a written confidentiality agreement. H.R (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.” 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.” 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.”

198 198 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. 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. 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. The issue of waiver will often turn on whether the insured and insurer share a “common interest” in the underlying suit.

199 199 Location, Location, Location: Know What States’ Laws May Apply A majority of insurance disputes are litigated in federal court based on diversity jurisdiction. 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. 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. As a result, disclosure to an insurer may result in a waiver in one jurisdiction, but not in another.

200 200 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. 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. –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). 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. 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., 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. 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.

201 201 Common Interest: Sword and Shield In a coverage dispute, insurers may use the “common interest” doctrine to seek access to the insured’s privileged materials from the underlying case. In a coverage dispute, insurers may use the “common interest” doctrine to seek access to the insured’s 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).

202 202 Little Clarity From the Courts Several courts have found that a “common interest” eliminates a claim of privilege between the insured and insurer. 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. Int’l 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. 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); Int’l Ins. Co. v. Newmount Mining Corp., 800 F. Supp (S.D.N.Y. 1992); Owens-Corning Fiberglass Corp. v. Allstate Ins. Co., 660 N.E.2d 755 (Ohio Ct. Com. Pl. 1993).

203 203 Privilege and Insurance Policy Cooperation Clauses Insurers have argued, and some courts have agreed, that the insured’s contractual duty to cooperate waives the privilege with respect to materials in the underlying case. Insurers have argued, and some courts have agreed, that the insured’s contractual duty to cooperate waives the privilege with respect to materials in the underlying case. –See, e.g., Waste Mgmt., Inc. v. Int’l Surplus Lines Ins. Co., 579 N.E.2d 322, 328 (Ill. 1991). Most courts have rejected the cooperation clause waiver argument. 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

204 204 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. 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.” “[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).

205 205 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. 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. 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. Statutory accountant-client privilege is often strictly construed.

206 206 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. 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 counsel’s provision of legal advice to the client. This exception does not apply where the accountant is providing accounting services or information that is not necessary to counsel’s 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, (D.N.J. 2003); United States v. Chevron Texaco Corp., 241 F. Supp. 2d 1065, 1072 (N.D. Cal. 2002).

207 207 Disclosures to Auditors Generally, disclosure of privileged information to auditors will waive the privilege. Generally, disclosure of privileged information to auditors will waive the privilege. –S.E.C. v. Brady, 2006 WL (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, (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 (5 th 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. 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 (N.D. Ill. Nov. 5, 2002).

208 208 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. 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”. 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 Int’l, 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. 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).

209 209 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. 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. 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).

210 210 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. 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. 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 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


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