Emerging Issues for In-House Counsel 2006

Presented by:

The Corporate Litigation Practice Group ofBlank Rome LLP

November 3, 2006

© 2006, Blank Rome LLP

Arbitration: Is It Arbitrary?

Presented by:

Edward N. Cahn, Blank Rome LLPHirsh N. Cogan, Blank Rome, LLP, ModeratorLeRoy Lambert, Blank Rome LLPMichael D. Young, JAMS,Inc.

33

Arbitration

Is it arbitrary?Is it arbitrary?

44

Typical ClauseTypical Clause

Any controversy or claim arising out of or relating to Any controversy or claim arising out of or relating to this contract, or the breach thereof shall be settled by this contract, or the breach thereof shall be settled by arbitration administered by the American Arbitration arbitration administered by the American Arbitration Association in accordance with its Commercial [or Association in accordance with its Commercial [or other] Arbitration Rules [including the Optional Rules other] Arbitration Rules [including the Optional Rules for Emergency Measures of Protection], and judgment for Emergency Measures of Protection], and judgment on the award rendered by the arbitration may be on the award rendered by the arbitration may be entered in any court having jurisdiction thereof.entered in any court having jurisdiction thereof.

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

55

Selection of ArbitratorsSelection of Arbitrators

Specific QualificationsSpecific Qualifications Industry SpecificIndustry Specific Number of ArbitratorsNumber of Arbitrators Party-Neutral ArbitratorsParty-Neutral Arbitrators

66

Particular ProvisionsParticular Provisions

LocaleLocale Time PeriodsTime Periods Choice of LawChoice of Law Reasoned OpinionReasoned Opinion

77

““Baseball” ArbitrationBaseball” Arbitration

When is it advisable?When is it advisable?

88

MediationMediation

Typical ClauseTypical Clause– If a dispute arises out of or relates to this contract, If a dispute arises out of or relates to this contract,

or the breach thereof, and if the dispute cannot be or the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first settled through negotiation, the parties agree first to try in good faith to settle the dispute by to try in good faith to settle the dispute by mediation administered by the American Arbitration mediation administered by the American Arbitration Association under its Commercial Mediation Association under its Commercial Mediation Procedures before resorting to arbitration, litigation, Procedures before resorting to arbitration, litigation, or some other dispute resolution procedure.or some other dispute resolution procedure.

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

99

MediationMediation

Is mediation ever too early?Is mediation ever too early?– Obtaining the necessary documents Obtaining the necessary documents

for mediation for mediation

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Arbitration – Arbitration – Pleadings and Pleadings and ProceduresProcedures Narrative, Descriptive PleadingsNarrative, Descriptive Pleadings Preliminary ConferencePreliminary Conference Scheduling OrderScheduling Order Motion PracticeMotion Practice

1111

Discovery in ArbitrationDiscovery in Arbitration

Contractual Agreement on:Contractual Agreement on:– Number of depositionsNumber of depositions– Document productionDocument production– InterrogatoriesInterrogatories

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Discovery from Out of Discovery from Out of State WitnessesState Witnesses

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

Hay Group, Inc. v. E.B.S. Hay Group, Inc. v. E.B.S. Acquisition Acquisition CorpCorp., 360 F.3d 404 (3d ., 360 F.3d 404 (3d Cir. 2004)Cir. 2004)

In re Security Life Ins. CoIn re Security Life Ins. Co., 228 ., 228 F.3d 865F.3d 865

(8th Cir. 2000)(8th Cir. 2000)

1313

The Second Circuit disagrees with the recent The Second Circuit disagrees with the recent trend that subpoenas for the production of trend that subpoenas for the production of documents do not need to comply Rule 45(b)documents do not need to comply Rule 45(b)(2)’s territorial limit. (2)’s territorial limit.

Dynegy Midstream Services LP v. Dynegy Midstream Services LP v. TrammochemTrammochem, , 2006 WL 1612722 (2d Cir. 2006 WL 1612722 (2d Cir. 2006)2006)

1414

Injunctive ReliefInjunctive Relief

Under the FAA, arbitrators can grant preliminary injunctive relief. See Advisors Inc. v. Thorley, 147 F.3d 229, 230-31 (2d Cir. 1998); Commercial Arbitration Rules and Mediation Procedures, at R-31(b).

Under Pennsylvania law, arbitrators can grant any form of equitable relief. See 1980 Uniform Arbitration Act, 42 Pa.C.S.A. §§ 7301; Dickler v. Shearson Lehman Hutton, Inc., 408 Pa. Super. 286 (Pa. Super. Ct. 1991)

N.Y. C.P.L.R. 7502(c) grants the court only the limited authority to issue an order of attachment or a preliminary injunction in connection with an arbitrable controversy and does not, despite petitioners' contentions, endow the court with broad discretionary powers to fashion other injunctive orders "in aid of arbitration." Salvano v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 85 N.Y.2d 17 (1995)

1515

Punitive DamagesPunitive Damages

Under the FAA, if contracting parties agree to include Under the FAA, if contracting parties agree to include claims for punitive damages within the issues to be claims for punitive damages within the issues to be arbitrated, the Federal Arbitration Act ensures that their arbitrated, the Federal Arbitration Act ensures that their agreement will be enforced. 9 U.S.C.S. §§ 3, 4, agreement will be enforced. 9 U.S.C.S. §§ 3, 4, Mastrobuono v. Shearson Lehman HuttonMastrobuono v. Shearson Lehman Hutton, 514 U.S. 52 , 514 U.S. 52

Under Pennsylvania law, if an agreement is silent as to Under Pennsylvania law, if an agreement is silent as to remedies, arbitrators can award punitive damages. remedies, arbitrators can award punitive damages. Phillips v. Babcock & WilcoxPhillips v. Babcock & Wilcox, 349 Pa. Super. 351 (Pa. , 349 Pa. Super. 351 (Pa. Super. Ct. 1985)Super. Ct. 1985)

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

1616

The “Manifest Disregard of The “Manifest Disregard of Law” Standard of Review for Law” Standard of Review for

Arbitration AwardsArbitration Awards

1717

Manifest Disregard of Law Manifest Disregard of Law

under the FAA?under the FAA? In order to overturn an award for “manifest In order to overturn an award for “manifest

disregard,” a court must determine that: disregard,” a court must determine that: – the law that was allegedly ignored was clear, the law that was allegedly ignored was clear,

and in fact explicitly applicable to the matter and in fact explicitly applicable to the matter before the arbitrators; before the arbitrators;

– the law was improperly applied, leading to an the law was improperly applied, leading to an erroneous outcome and erroneous outcome and

– arbitrator knew of the law’s existence and that arbitrator knew of the law’s existence and that it should have been applied to the case before it should have been applied to the case before him. him.

1818

New York and New York and PennsylvaniaPennsylvania Under CPLR 7511, “manifest disregard of the law” is not a Under CPLR 7511, “manifest disregard of the law” is not a

standard under which a court can overturn an arbitrator’s standard under which a court can overturn an arbitrator’s decision.decision.

Banc of Am. Secs. v. Knight,Banc of Am. Secs. v. Knight, 2004 NY Slip Op 24232 (N.Y. Sup. Ct. 2004)2004 NY Slip Op 24232 (N.Y. Sup. Ct. 2004)

Recently, there has been an indication that New York may Recently, there has been an indication that New York may

adopt the “manifest disregard of the law” standard.adopt the “manifest disregard of the law” standard. Wien & Malkin LLP v. Helmsley-Spear, IncWien & Malkin LLP v. Helmsley-Spear, Inc., .,

6 N.Y.3d 471 (2006)6 N.Y.3d 471 (2006)

Pennsylvania law recognizes "manifest disregard of the Pennsylvania law recognizes "manifest disregard of the law" as a ground for vacating an arbitration award.law" as a ground for vacating an arbitration award.

Republic W. Ins. Co. v. Legion Ins. CoRepublic W. Ins. Co. v. Legion Ins. Co., ., 2001 Phila. Ct. Com. Pl. LEXIS 582001 Phila. Ct. Com. Pl. LEXIS 58

1919

Arbitration ClausesArbitration Clauses

Are they always advisable?Are they always advisable? When should they be utilized?When should they be utilized?

2020

The Society of Maritime The Society of Maritime Arbitrators, Inc. (“SMA”)Arbitrators, Inc. (“SMA”)

Formed in 1963 to provide a way for Formed in 1963 to provide a way for companies in the industry to have companies in the industry to have disputes resolved by commercial peers disputes resolved by commercial peers without resort to the courts. without resort to the courts. Membership consists of approximately Membership consists of approximately 80 commercial persons (including non-80 commercial persons (including non-practicing lawyers).practicing lawyers).

2121

Awards are published. There are presently in Awards are published. There are presently in excess of 3800 awards. Awards are available excess of 3800 awards. Awards are available on Lexis, ADMRTY Library, USAWDS File. on Lexis, ADMRTY Library, USAWDS File. There are SMA Rules for Arbitration, for There are SMA Rules for Arbitration, for Mediation, and for Conciliation.Mediation, and for Conciliation.

Healy & Baillie (now Blank Rome) was Healy & Baillie (now Blank Rome) was attorney of record in more than 600 of the attorney of record in more than 600 of the published awards (more than any other firm) published awards (more than any other firm) and of course in hundreds of other disputes and of course in hundreds of other disputes subject to arbitration which were resolved subject to arbitration which were resolved prior to award.prior to award.

2222

An SMA PanelAn SMA Panel

Most forms of charter parties call for Most forms of charter parties call for disputes arising under the charter to disputes arising under the charter to be resolved by arbitration in London or be resolved by arbitration in London or New York.New York.

Typically, disputes are heard by three-Typically, disputes are heard by three-person panels. Each party appoints an person panels. Each party appoints an arbitrator and those two select a arbitrator and those two select a chairman.chairman.

2323

Proceedings in an SMA Proceedings in an SMA Arbitration Arbitration (i)(i)

Compared to court, VERY informal, and compared Compared to court, VERY informal, and compared to most other arbitral bodies, informal.to most other arbitral bodies, informal.

No administration. Essentially, an ad hoc No administration. Essentially, an ad hoc arbitration, subject, of course, to the SMA Rules.arbitration, subject, of course, to the SMA Rules.

No pleadings, but parties often exchange No pleadings, but parties often exchange statements of their respective cases or present statements of their respective cases or present their cases orally at an organizational hearing. their cases orally at an organizational hearing.

Limited discovery. Depositions are the exception, Limited discovery. Depositions are the exception, not the rule, and only if parties agree. Extent of not the rule, and only if parties agree. Extent of document production depends on the parties, document production depends on the parties, their counsel, the issues, and the panel. “Any and their counsel, the issues, and the panel. “Any and all” requests are not favored.all” requests are not favored.

2424

Proceedings in an SMA Proceedings in an SMA Arbitration Arbitration (ii)(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 Cases are typically presented in stages, at

different times, not at one sitting. This is a different times, not at one sitting. This is a consequence of not having discovery. consequence of not having discovery.

Once parties have presented their evidence, Once parties have presented their evidence, they exchange main and reply briefs.they exchange main and reply briefs.

Panel issues its award.Panel issues its award. The award is subject to review by the district The award is subject to review by the district

court in accordance with Federal Arbitration court in accordance with Federal Arbitration Act and/or applicable Conventions. It is very Act and/or applicable Conventions. It is very difficult to vacate an award.difficult to vacate an award.

2525

Arbitration with a Arbitration with a difference?difference? Consolidation of disputes between parties to Consolidation of disputes between parties to

different contracts if issue involves “common different contracts if issue involves “common questions of fact or law and/or arise in questions of fact or law and/or arise in substantial part from the same maritime substantial part from the same maritime transactions or series of related transactions, transactions or series of related transactions, provided all contracts incorporate SMA provided all contracts incorporate SMA Rules.” Section 2. Rules.” Section 2.

Section 30 authorizes an award of attorney’s Section 30 authorizes an award of attorney’s fees to the prevailing party, and SMA fees to the prevailing party, and SMA arbitrators typically award them.arbitrators typically award them.

SMA arbitrators may award punitive damages SMA arbitrators may award punitive damages in maritime cases, but rarely do so.in maritime cases, but rarely do so.

Emerging Issues in Delaware Law

Presented by:

Alisa E. Moen, Blank Rome LLPCraig A. Damast, Blank Rome LLP Thomas P. Preston, Blank Rome LLP, Moderator

2727

Once Upon a Disney -The Evolution of the Fiduciary Duty of Good Faith

Trenwick America Litigation Trust v. Ernst & Young, L.L.P.

2006 WL 2434228 (Del. Ch. Aug. 10, 2006) - Fiduciary duties to creditors of a subsidiary

2828

Once Upon a Disney – Once Upon a Disney – The Evolution of the Duty The Evolution of the Duty of Good Faithof Good Faith

Common law origin – the TriadCommon law origin – the Triad

Duty of CareDuty of Care Duty of LoyaltyDuty of Loyalty Duty of Good Faith - maybeDuty of Good Faith - maybe

Cede & Co v. Technicolor, Cede & Co v. Technicolor,

634 A.2d 345, 381 (Del. 1993)634 A.2d 345, 381 (Del. 1993)

2929

What Is Good Faith?What Is Good Faith? good faithgood faith, , n.n. A state of mind consisting A state of mind consisting

in (1) honesty in belief or purpose, in (1) honesty in belief or purpose, (2) faithfulness to one’s duty or (2) faithfulness to one’s duty or obligation, obligation, (3) observance of reasonable commercial (3) observance of reasonable commercial standards of fair dealing in a given trade standards of fair dealing in a given trade or business, or (4) absence of intent to or business, or (4) absence of intent to defraud or to seek unconscionable defraud or to seek unconscionable advantage…advantage…

Black’s Law Dictionary (2004)Black’s Law Dictionary (2004)

3030

bad faithbad faith, , nn. The opposite of “good faith,” . The opposite of “good faith,” generally implying or involving actual or generally implying or involving actual or constructive fraud, or design to mislead or constructive fraud, or design to mislead or deceive another, or a neglect or refusal to deceive another, or a neglect or refusal to fulfill some duty or some contractual fulfill some duty or some contractual obligation, not prompted by an honest obligation, not prompted by an honest mistake as to one’s rights or duties, but by mistake as to one’s rights or duties, but by some interested or sinister motive. some interested or sinister motive.

Black’s Law Dictionary (2004)Black’s Law Dictionary (2004)

3131

scienterscienter. . n.n. Lat. Knowingly. The term is Lat. Knowingly. The term is used in pleadings to signify an used in pleadings to signify an allegation … setting out the defendant’s allegation … setting out the defendant’s previous knowledge of the cause which previous knowledge of the cause which led to the injury complained of, or rather led to the injury complained of, or rather his previous knowledge of a state of his previous knowledge of a state of facts which it was his duty to guard facts which it was his duty to guard against, and his omission to do which against, and his omission to do which has led to the injury complained of.has led to the injury complained of.

Black’s Law Dictionary (2004)Black’s Law Dictionary (2004)

3232

The Duty of Good FaithThe Duty of Good Faith

Is it a free-standing duty? Is it a free-standing duty? ((DisneyDisney Ft. n. 112) 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?

3333

Is It a Gap Filler?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

3434

Is It a Standard of Is It a Standard of Conduct?Conduct?

Duty of LoyaltySelf-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

3535

According to Disney….According to Disney….

““To act in good faith, a director must To act in good faith, a director must act at all times with an honesty of act at all times with an honesty of purpose and in the best interests and purpose and in the best interests and welfare of the corporation … a true welfare of the corporation … a true faithfulness and devotion to the faithfulness and devotion to the interests of the corporation and its interests of the corporation and its shareholders…”shareholders…”

In re the Walt Disney CompanyIn re the Walt Disney Company, ,

2005 WL 2056651 (Del. Ch. 2005)2005 WL 2056651 (Del. Ch. 2005)

3636

Bad FaithBad Faith

An “intentional dereliction of duty, a An “intentional dereliction of duty, a conscious disregard for one’s conscious disregard for one’s responsibilities … deliberate responsibilities … deliberate indifference and inaction in the face of indifference and inaction in the face of a duty to act … conduct that is clearly a duty to act … conduct that is clearly disloyal to the corporation. It is the disloyal to the corporation. It is the epitome of faithless conduct.”epitome of faithless conduct.”

In re the Walt Disney CompanyIn re the Walt Disney Company, , 2005 WL 2056651 (Del. Ch. 2005)2005 WL 2056651 (Del. Ch. 2005)

3737

How is “Good Faith” How is “Good Faith” different from Loyalty?different from Loyalty?

No allegation of breach of duty of No allegation of breach of duty of loyalty in loyalty in Disney – Disney – just bad faithjust bad faith

The only way to rebut the business The only way to rebut the business judgment rule presumption is to judgment rule presumption is to demonstrate that the conduct was in demonstrate that the conduct was in bad faithbad faith

3838

Breach of Duty of CareBreach of Duty of Care– Directors are protected by the BJR, unless Directors are protected by the BJR, unless

Plaintiffs can demonstrate grossPlaintiffs can demonstrate grossnegligence or bad faith.negligence or bad faith.

No Indemnification No Exculpation No Indemnification No Exculpation §§145145

§§102(b)(7)102(b)(7)

3939

Breach of Duty of LoyaltyBreach of Duty of Loyalty– may be authorized and ratified by the may be authorized and ratified by the

majority of disinterested directors;majority of disinterested directors;– may survive the entire fairness testmay survive the entire fairness test– no protection of the BJR, no no protection of the BJR, no

indemnification, no exculpation, probably indemnification, no exculpation, probably no D&Ono D&O

(See (See §§145(g) permits purchase of D&O regardless of 145(g) permits purchase of D&O regardless of whether the conduct can be indemnified, but not willful, whether the conduct can be indemnified, but not willful, deliberate, or criminal conduct)deliberate, or criminal conduct)

4040

Statutory FrameworkStatutory FrameworkDelaware General Corporation Delaware General Corporation LawLaw good faith is not definedgood faith is not defined no liability imposedno liability imposed finding of bad faith negates finding of bad faith negates

statutory exculpation and statutory exculpation and indemnificationindemnification

4141

8 8 Del.Del. CC. . § 101 et seq.§ 101 et seq.The term “good faith” appears The term “good faith” appears nine timesnine times

- 102(b)(7) – exculpation clause102(b)(7) – exculpation clause- 103(i) – filling error (“good faith effort”)103(i) – filling error (“good faith effort”)- 125 – conferring academic or honorary degrees125 – conferring academic or honorary degrees- 141(e) reliance on corporate records and third party 141(e) reliance on corporate records and third party

reportsreports- 144 – ratification of conflict transactions by 144 – ratification of conflict transactions by

shareholdersshareholders- 145 – indemnification145 – indemnification- 162(c) – transfer of stock162(c) – transfer of stock- 172 – reliance on corporate records and third party 172 – reliance on corporate records and third party

reportsreports- 203 – business with interested stockholders203 – business with interested stockholders

4242

Fiduciary Duties in Fiduciary Duties in Alternative EntitiesAlternative Entities

The policy of alternative entities is to The policy of alternative entities is to “give maximum effect to the principle “give maximum effect to the principle of freedom of contract and to the of freedom of contract and to the enforceability of [alternative entity’s] enforceability of [alternative entity’s] agreements.”agreements.”

§§ 17-1101(c); 17-1101(c); §§ 18-1101(b) 18-1101(b)

4343

Contractual AbrogationContractual Abrogation

““To the extent that, at law or in equity, a To the extent that, at law or in equity, a member or manager or other person has duties member or manager or other person has duties (including fiduciary duties) to a limited liability (including fiduciary duties) to a limited liability company or to another member or manager or company or to another member or manager or to another person that is party to or is to another person that is party to or is otherwise bound by a limited liability company otherwise bound by a limited liability company agreement, the member’s or manager’s or agreement, the member’s or manager’s or other person’s duties may be expanded or other person’s duties may be expanded or restricted or eliminated by provisions in the restricted or eliminated by provisions in the limited liability company agreement; provided, limited liability company agreement; provided, that the limited liability company agreement that the limited liability company agreement may not eliminate the implied contractual may not eliminate the implied contractual covenant of good faith and fair dealing.”covenant of good faith and fair dealing.”

6 6 Del.Del. C.C. § § 18-1101(c) 18-1101(c)

4444

Why Do We Care?Why Do We Care?

§ § 102(b)(7)102(b)(7)““a provision eliminating or limiting the personal liability a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty … shall monetary damages for breach of fiduciary duty … shall not eliminate or limit the liability … for acts or not eliminate or limit the liability … for acts or omissions not in good faith…”omissions not in good faith…”

§§ 145 145““a corporation shall have power to indemnify any a corporation shall have power to indemnify any person … by reason of the fact that the person is or person … by reason of the fact that the person is or was a director, officer, employee or agent of the was a director, officer, employee or agent of the corporation … if the person acted in good faith…”corporation … if the person acted in good faith…”

4545

Business Judgment Business Judgment RuleRule a presumption that in making a a presumption that in making a

business decision, directors of a business decision, directors of a corporation act on an informed basis, corporation act on an informed basis, in good faith, and in an honest belief in good faith, and in an honest belief that the action taken was in the best that the action taken was in the best interest of the company.interest of the company.

4646

Application of the BJRApplication of the BJR ““[b]usiness judgment rule protects the [b]usiness judgment rule protects the

directors of solvent, barely solvent, directors of solvent, barely solvent, and insolvent corporations, and … the and insolvent corporations, and … the creditors of an insolvent firm have no creditors of an insolvent firm have no greater rights to challenge a greater rights to challenge a disinterested, good faith business disinterested, good faith business decision than the stockholders of a decision than the stockholders of a solvent firm.”solvent firm.”

Trenwick Am. Litig. TrustTrenwick Am. Litig. Trust,,2006 WL 2333201, at *22 n. 75, 2006 WL 2333201, at *22 n. 75, see also see also North Am. Catholic Education programming North Am. Catholic Education programming Foundation, Inc. v. Ghewalla, et alFoundation, Inc. v. Ghewalla, et al. 2006 WL . 2006 WL 2588971, at *11 (Del. Ch. Sept. 1, 2006).2588971, at *11 (Del. Ch. Sept. 1, 2006).

4747

TrenwickTrenwick

The complaint set forth eight counts, all The complaint set forth eight counts, all centered on one idea – Trenwick’s expansion centered on one idea – Trenwick’s expansion and acquisition of Chartwell and LaSalle was and acquisition of Chartwell and LaSalle was “irrational” and resulted from “gross “irrational” and resulted from “gross negligence”. Such expansion and subsidiary negligence”. Such expansion and subsidiary reorganization resulted in the creation of a reorganization resulted in the creation of a large insurance holding company with large insurance holding company with inadequate reserves and assets to cover the inadequate reserves and assets to cover the claims that were ultimately made against it claims that were ultimately made against it rendering it insolvent and leaving it with too rendering it insolvent and leaving it with too few assets to satisfy its creditors.few assets to satisfy its creditors.

4848

Defendants Defendants

Trenwick Group Inc.’s directors Trenwick Group Inc.’s directors (parent corporation)(parent corporation)

Trenwick America Corp’s directors Trenwick America Corp’s directors (wholly-owned subsidiary - Debtor)(wholly-owned subsidiary - Debtor)

Former third-party advisors – Ernst Former third-party advisors – Ernst & Young, PWC, Baker & McKenzie & Young, PWC, Baker & McKenzie and Milliman, Inc.and Milliman, Inc.

4949

Plaintiff Plaintiff Litigation TrustLitigation Trust

- created by the Litigation - created by the Litigation Trust Agreement Trust Agreement

pursuant to pursuant to Trenwick Trenwick America’s chapter 11 plan of America’s chapter 11 plan of reorganization.reorganization.

The Court dismissed claims of Debtor’s The Court dismissed claims of Debtor’s creditors to the extent those claims could not creditors to the extent those claims could not have been assigned to the Litigation Trust and have been assigned to the Litigation Trust and did not represent claims of the Debtor.did not represent claims of the Debtor.

5050

Consequences of Consequences of Trenwick….if any…Trenwick….if any…

Does it raise the bar on pleading Does it raise the bar on pleading insolvency?insolvency?

Does it change the application of Does it change the application of 102(b)(7) to protect directors of 102(b)(7) to protect directors of insolvent corporations?insolvent corporations?

Does the BJR rule change when the Does the BJR rule change when the company is insolvent?company is insolvent?

5151

Delaware law vs. New Delaware law vs. New York lawYork law Unlike other jurisdictions, including Unlike other jurisdictions, including

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

5252

Delaware vs. New York Delaware vs. New York

Fiduciary DutiesFiduciary Duties DE – duty of care, loyalty and good faithDE – duty of care, loyalty and good faith

NY – duty of care, loyalty and obedience NY – duty of care, loyalty and obedience (“the obligation of directors and officers (“the obligation of directors and officers to act within the organization’s to act within the organization’s purposes and ensure that the purposes and ensure that the corporation’s mission is pursued” corporation’s mission is pursued” State State v. Grassov. Grasso))

5353

““This entire case rises and falls on This entire case rises and falls on the issue of whether the NYSE the issue of whether the NYSE acted ultra vires in awarding Mr. acted ultra vires in awarding Mr. Grasso excessive compensation Grasso excessive compensation and benefits.” and benefits.”

State v. GrassoState v. Grasso:   New :   New Trend or New York Non-Trend or New York Non-Profit Outlier?Profit Outlier?

5454

Who is responsible for Who is responsible for excessive compensation?excessive compensation?

Have directors hijacked the NYSE and Have directors hijacked the NYSE and siphoned off the NYSE’s funds to pay siphoned off the NYSE’s funds to pay Grasso?Grasso?

Who is responsible for the ultra vires Who is responsible for the ultra vires actions? – directors? CEO? – Who is pay?actions? – directors? CEO? – Who is pay?

Trouble with Boilerplate

How Standard Clauses Stand Up In Court

Presented by:

Ann B. Laupheimer, Blank Rome LLP, Moderator Faith Greenfield, Campbell Soup CompanyRichard P. McElroy, Blank Rome LLPRobert J. Stillman, Aetna Inc.

5656

Agreements to Negotiate Agreements to Negotiate in Good Faithin Good Faith

The parties agree to The parties agree to negotiate in good faithnegotiate in good faith to to resolve expeditiously any controversies, claims resolve expeditiously any controversies, claims or disputes between the parties that may arise or disputes between the parties that may arise from time to time under this Agreement or from time to time under this Agreement or otherwise relating to the Joint Venture. . . . otherwise relating to the Joint Venture. . . .

This letter agreement is not intended to be This letter agreement is not intended to be binding upon the parties unless and until the binding upon the parties unless and until the parties sign a final written agreement. The parties sign a final written agreement. The parties agree to parties agree to negotiate in good faithnegotiate in good faith to enter to enter into a final agreement by 90 days from today.into a final agreement by 90 days from today.

5757

Why Include These Why Include These Terms?Terms? Preliminary Duty to Negotiate In Good Preliminary Duty to Negotiate In Good

Faith?Faith?– naïve belief in positive thinkingnaïve belief in positive thinking– aversion to litigation (belief in the power of aversion to litigation (belief in the power of

“business solutions”)“business solutions”)– inability to decide on firm outcome, time inability to decide on firm outcome, time

limits or critical deal termslimits or critical deal terms– weak alternative to a carefully tailored weak alternative to a carefully tailored

mediation and arbitration clausemediation and arbitration clause Effective leverage between business Effective leverage between business

persons to get to a final agreement persons to get to a final agreement

5858

Problem: How do I know Problem: How do I know when I have negotiated in when I have negotiated in good faith?good faith? Consider one litigant’s unsuccessful argument Consider one litigant’s unsuccessful argument

to the federal court in New York that the court to the federal court in New York that the court imply a duty to:imply a duty to:– Disclose information material to party’s ability to Disclose information material to party’s ability to

formulate offerformulate offer– Make offers and counteroffersMake offers and counteroffers– Continue negotiations for a sufficient minimum period Continue negotiations for a sufficient minimum period

of time before signing with other suitor to permit party of time before signing with other suitor to permit party a fair opportunity to compete with alternative offera fair opportunity to compete with alternative offer

Candid Productions, Inc. v. Candid Productions, Inc. v. InternationalInternational Skating UnionSkating Union, , 530 F. Supp. 1330 (S.D.N.Y. 530 F. Supp. 1330 (S.D.N.Y. 1982).1982).

5959

Will a Court Enforce a “Good Will a Court Enforce a “Good Faith Negotiation” Duty and if So, Faith Negotiation” Duty and if So, How?How? New York law: probably not. New York law: probably not.

SeeSee, , e.g.e.g., , JillcyFilm Enterprises, JillcyFilm Enterprises, Inc. v. Home Inc. v. Home Box Office, Box Office, Inc.Inc., 593 Supp. 515 (S.D.N.Y. , 593 Supp. 515 (S.D.N.Y. 1984); 1984); Candid Productions, Inc. v.Candid Productions, Inc. v.

International Skating UnionInternational Skating Union, 530 , 530 F. Supp. 1330 (S.D.N.Y. 1982)F. Supp. 1330 (S.D.N.Y. 1982)

Pennsylvania law: probably Pennsylvania law: probably ifif sufficiently definite. sufficiently definite. SeeSee e.g.,e.g., Channel Home Centers v. Channel Home Centers v.

GrossmanGrossman, , 795 F.2d 291, 299 (3d Cir. 795 F.2d 291, 299 (3d Cir. 1986).1986).

Illinois law: maybe yesIllinois law: maybe yes Minnesota: maybe noMinnesota: maybe no New Hampshire: probably yes, and reserves for another New Hampshire: probably yes, and reserves for another

day the appropriate remedy (maybe none).day the appropriate remedy (maybe none).

SeeSee Howtek, Inc. v. RelisysHowtek, Inc. v. Relisys, 958 F. , 958 F. Supp. 46, Supp. 46, 48 (D.N.H. 1996) (collecting 48 (D.N.H. 1996) (collecting cases). cases).

6060

No Jury PleaseNo Jury Please

With respect to any judicial proceeding With respect to any judicial proceeding commenced by either party to this commenced by either party to this Agreement relating to a disputes, Agreement relating to a disputes, controversies, or issues arising under or controversies, or issues arising under or relating to this Agreement, matter, relating to this Agreement, matter, both both parties agree to waive their rights, if parties agree to waive their rights, if any, to a jury trialany, to a jury trial..

6161

To Waive or Not to To Waive or Not to WaiveWaive

Reasons to waiveReasons to waive– Belief that juries are not as intelligent as a Belief that juries are not as intelligent as a

judgejudge– Belief that subject matter lends itself to Belief that subject matter lends itself to

emotional bias and you are on the wrong sideemotional bias and you are on the wrong side– Belief that Judge has better judgment or ability Belief that Judge has better judgment or ability

to understand and study complex issuesto understand and study complex issues Reasons not to waiveReasons not to waive

– Avoid “jury of one”Avoid “jury of one”– Avoid judicial lottery Avoid judicial lottery – Believe your client has the equitiesBelieve your client has the equities

6262

Elements of a Successful Elements of a Successful Jury WaiverJury Waiver Think Big ScopeThink Big Scope:: Some cases have made subtle Some cases have made subtle

distinctions in the language of the waiver and Supreme distinctions in the language of the waiver and Supreme Court requires that jury waivers be construed narrowly. Court requires that jury waivers be construed narrowly. Aetna Ins. Co. v. KennedyAetna Ins. Co. v. Kennedy, 302 U.S. 389, 393 (1937)., 302 U.S. 389, 393 (1937).

Think Big GovernmentThink Big Government:: most federal courts enforce a most federal courts enforce a clear waiver. clear waiver.

Think Big AppleThink Big Apple:: New York case law is good and New York case law is good and plentiful. A broad jury waiver applies to torts and plentiful. A broad jury waiver applies to torts and contracts, may be enforced even in the face of fraud in contracts, may be enforced even in the face of fraud in the inducement claim.the inducement claim.

Fraudulent InducementFraudulent Inducement:: Most jurisdictions have Most jurisdictions have embraced embraced Telum, Inc. v. E.F. HuttonTelum, Inc. v. E.F. Hutton, 859 F.2d 835, 837-, 859 F.2d 835, 837-38 (1038 (10thth Cir. 1988), requiring proof that jury waiver Cir. 1988), requiring proof that jury waiver clause induced by fraud. clause induced by fraud. SeeSee Gurfein v. Sovereign Gurfein v. Sovereign GroupGroup, 826 F. Supp. 890, 921 (E.D. Pa. 1993)., 826 F. Supp. 890, 921 (E.D. Pa. 1993).

6363

““Don’t Look At Me!”: Don’t Look At Me!”: Limiting Your LiabilityLimiting Your LiabilityNeither party will be liable to the other for Neither party will be liable to the other for consequential, indirect or punitive damagesconsequential, indirect or punitive damages for any cause of action, whether in contract, for any cause of action, whether in contract, tort or otherwise, except for any grossly tort or otherwise, except for any grossly negligent, willful or fraudulent act or negligent, willful or fraudulent act or omission. omission.

Consequential damages include, but are not Consequential damages include, but are not limited to, limited to, lost profits, lost revenues and lost lost profits, lost revenues and lost business opportunitiesbusiness opportunities, whether or not the , whether or not the other party was or should have been aware of other party was or should have been aware of the possibility of these damages. the possibility of these damages.

6464

Protect Your Client With Protect Your Client With Broad Limitation Broad Limitation LanguageLanguage Tort and ContractTort and Contract – make sure you include – make sure you include

tort and contract claims, as economic loss tort and contract claims, as economic loss doctrine is unreliable.doctrine is unreliable.

Lost ProfitsLost Profits - - Think about “consequential” in Think about “consequential” in terms of direct or indirect lost profits.terms of direct or indirect lost profits.

Punitive DamagesPunitive Damages – are they available for – are they available for willful breach of contract – trap for the willful breach of contract – trap for the unwary.unwary.

No Exceptions No Exceptions -- -- Think twice before Think twice before including the “gross negligence, willful or including the “gross negligence, willful or fraudulent conduct” carve-out.fraudulent conduct” carve-out.

Damage CapDamage Cap - - Consider a monetary Consider a monetary damages cap -- ordinarily enforceable damages cap -- ordinarily enforceable between sophisticated parties. between sophisticated parties.

6565

Can The Parties Eliminate the Can The Parties Eliminate the Recovery of Lost Profits and Recovery of Lost Profits and What Are “Consequential What Are “Consequential Damages”?Damages”? Most courts will permit a clear waiver of Most courts will permit a clear waiver of

lost profitslost profits Does elimination of “consequential Does elimination of “consequential

damages” avoid all claims for lost damages” avoid all claims for lost profitsprofits– Ordinary benefit of the bargain damages for Ordinary benefit of the bargain damages for

breach of contract look a lot like “lost breach of contract look a lot like “lost profits.”profits.”

– Most Courts distinguish between “direct” Most Courts distinguish between “direct” and “indirect” lost profits.and “indirect” lost profits.

6666

Punitive Damages for Punitive Damages for “Intentional” Breach of “Intentional” Breach of ContractContract Conventional wisdom:Conventional wisdom: punitive damages are punitive damages are

available only for tortsavailable only for torts New York:New York: punitive damages available for willful or punitive damages available for willful or

egregious breach of contract claims that include egregious breach of contract claims that include element of public wrong. element of public wrong. Rocanova v. Equitable Life Rocanova v. Equitable Life Assur. Soc’yAssur. Soc’y, 83 N.Y.2d 603, 613 (N.Y. 1994) , 83 N.Y.2d 603, 613 (N.Y. 1994)

Minority of jurisdictions:Minority of jurisdictions: punitive damages punitive damages available for “intentional breach of contract” under available for “intentional breach of contract” under specific circumstancesspecific circumstances

Caution:Caution: exclude punitive damages, at the very least exclude punitive damages, at the very least for contract claims.for contract claims.

Fraud:Fraud: hornbook law that a party may not, consistent hornbook law that a party may not, consistent with public policy, insulate itself from any claim of with public policy, insulate itself from any claim of fraud, but you can likely limit the damage. fraud, but you can likely limit the damage. Restatement (Second) of Contracts Restatement (Second) of Contracts § 195 (1981)§ 195 (1981)

6767

Contractually Shortened Contractually Shortened Limitations PeriodsLimitations Periods Parties frequently provide for expiration Parties frequently provide for expiration

of warranties in a shorter timeframe of warranties in a shorter timeframe than statute of limitations or other than statute of limitations or other mechanism to shorten limitations mechanism to shorten limitations period.period.– New York: OkNew York: Ok– Pennsylvania: OkPennsylvania: Ok– Illinois: OkIllinois: Ok– Missouri: against public policy by statuteMissouri: against public policy by statute– Kentucky: OkKentucky: Ok– California: OkCalifornia: Ok

6868

Drafting an Integration Drafting an Integration Clause That SticksClause That Sticks

This Agreement, including Appendices This Agreement, including Appendices attached to this Agreement and the attached to this Agreement and the Recitals set forth herein, constitutes the Recitals set forth herein, constitutes the entire agreement between the parties entire agreement between the parties pertaining to the subject matter hereof, pertaining to the subject matter hereof, and all prior representations, and all prior representations, discussions and negotiations between discussions and negotiations between the parties and/or members or Groups the parties and/or members or Groups pertaining to the subject matter of this pertaining to the subject matter of this Agreement are superseded. Agreement are superseded.

6969

Preventing Claims of Fraud Preventing Claims of Fraud Based On Pre-Contractual Based On Pre-Contractual NegotiationsNegotiations Boilerplate Integration Clauses Often Fail to Boilerplate Integration Clauses Often Fail to

prevent claims of reliance on pre-contractual prevent claims of reliance on pre-contractual information exchangeinformation exchange– New York:New York: a general merger or integration clause a general merger or integration clause

does not bar a claim for fraud or fraud in the does not bar a claim for fraud or fraud in the inducement. inducement. Gizzi v. HallGizzi v. Hall, 754 N.Y.S.2d 373, 376 (N.Y. , 754 N.Y.S.2d 373, 376 (N.Y. App. Div. 2002).App. Div. 2002).

– Delaware:Delaware: simple integration clause traditionally not simple integration clause traditionally not enough to bar fraud in the inducement. enough to bar fraud in the inducement. Norton v. Norton v. PoplosPoplos, 443 A2d 1 (Del. 1982). , 443 A2d 1 (Del. 1982).

– Pennsylvania:Pennsylvania: “We, too, have attempted to find “We, too, have attempted to find consistency in Pennsylvania parol evidence cases consistency in Pennsylvania parol evidence cases where fraud is alleged. Our examination of the where fraud is alleged. Our examination of the pertinent cases has led us reluctantly to conclude that pertinent cases has led us reluctantly to conclude that no intellectually sound analysis of the cases can yield a no intellectually sound analysis of the cases can yield a perfectly consistent set of principles.” perfectly consistent set of principles.” 1721 Cherry St. 1721 Cherry St. Partnership v. Bell Atlantic PropertiesPartnership v. Bell Atlantic Properties, 439 Pa. Super. , 439 Pa. Super. 141 (1995) (Beck, J.). 141 (1995) (Beck, J.).

7070

Favorable Trend in Favorable Trend in Sophisticated Business Sophisticated Business TransactionsTransactions Delaware Chancery Court:Delaware Chancery Court: ABRY Partners V, L.P. v. ABRY Partners V, L.P. v.

F&W Acquisition LLCF&W Acquisition LLC, 891 A.2d 1032, 1057 (Del. Ch. , 891 A.2d 1032, 1057 (Del. Ch. 2006):2006):

““a party cannot promise, in a clear integration clause of a a party cannot promise, in a clear integration clause of a negotiated agreement, that it will not rely on promises negotiated agreement, that it will not rely on promises and representations outside of the agreement and then and representations outside of the agreement and then shirk its own bargain in favor of a ‘but we did rely on shirk its own bargain in favor of a ‘but we did rely on those other representations’ fraudulent inducement those other representations’ fraudulent inducement claim.”claim.”

Southern District New York:Southern District New York: DynCorp v. GTE Corp.DynCorp v. GTE Corp., , 215 F. Supp. 2d 308 (S.D.N.Y. 2002):215 F. Supp. 2d 308 (S.D.N.Y. 2002):

““A party to a contract cannot allege that it reasonably A party to a contract cannot allege that it reasonably relied on a parol representation when, in the same relied on a parol representation when, in the same contract, it "specifically disclaims reliance upon [that] contract, it "specifically disclaims reliance upon [that] particular representation." particular representation." See See also also MBIA Insurance Corp. MBIA Insurance Corp. v. Royal Indemnity Co.v. Royal Indemnity Co., 426 F.3d 204, 218 (3d Cir. 2005) , 426 F.3d 204, 218 (3d Cir. 2005) (Alito, J.)1(Alito, J.)1

7171

Draft Detailed Draft Detailed Integration/Anti-Reliance Integration/Anti-Reliance ProvisionProvision Be Specific:Be Specific: Describe the representations or Describe the representations or

information upon which the parties information upon which the parties may notmay not and did not rely, such as sales information or and did not rely, such as sales information or forecasts, reserves, omission of proprietary forecasts, reserves, omission of proprietary information, projected income, budgetsinformation, projected income, budgets

Be detailed:Be detailed: disclaim accuracy of all data disclaim accuracy of all data exchanged, have parties specifically agree exchanged, have parties specifically agree that they did not rely on particular types of that they did not rely on particular types of information.information.

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

7272

What About Parole What About Parole Evidence?Evidence? Will a court look outside the four corners of contract for Will a court look outside the four corners of contract for

“meaning” and “intent of the parties” where a term is “meaning” and “intent of the parties” where a term is found ambiguous?found ambiguous?

Will the integration clause prevent this?Will the integration clause prevent this?

Pennsylvania: “Parol evidence of representations Pennsylvania: “Parol evidence of representations concerning a subject dealt with in an integrated written concerning a subject dealt with in an integrated written agreement and made prior to or contemporaneous with agreement and made prior to or contemporaneous with the execution of the agreement is admissible to modify the execution of the agreement is admissible to modify or avoid the terms of that agreement only where it is or avoid the terms of that agreement only where it is alleged that the parties agreed that those alleged that the parties agreed that those representations would be included in the written representations would be included in the written agreement but were omitted by fraud, accident, or agreement but were omitted by fraud, accident, or mistake. This is commonly referred to as ‘fraud in the mistake. This is commonly referred to as ‘fraud in the execution’. . . .” execution’. . . .” 1721 Cherry St. Partnership v. Bell 1721 Cherry St. Partnership v. Bell Atlantic PropertiesAtlantic Properties, 439 Pa. Super. 141 (1995) (Beck, J.). , 439 Pa. Super. 141 (1995) (Beck, J.).

7373

Indemnify This!Indemnify This!Each Indemnifying Group shall be responsible for and shall Each Indemnifying Group shall be responsible for and shall indemnify the other Group against any and all Losses indemnify the other Group against any and all Losses arising in connection, directly or indirectly, witharising in connection, directly or indirectly, with

– any material breach of any material representation or warrantyany material breach of any material representation or warranty made by an Indemnifying Group in this Agreement or in any made by an Indemnifying Group in this Agreement or in any document contemplated by this Agreement;document contemplated by this Agreement;

– any material breach of any material covenantany material breach of any material covenant made by an made by an Indemnifying Group in this Agreement or in any document Indemnifying Group in this Agreement or in any document contemplated by this Agreement;contemplated by this Agreement;

– Products made and soldProducts made and sold by or on behalf of such Indemnifying by or on behalf of such Indemnifying Group or its predecessors Group or its predecessors prior to the Effective Dateprior to the Effective Date;;

– Breaches of contract, negligent acts or omissions, or breaches Breaches of contract, negligent acts or omissions, or breaches of lawof law, perpetrated or caused by such Indemnifying Group or , perpetrated or caused by such Indemnifying Group or its predecessors prior to the Effective Date;its predecessors prior to the Effective Date;

– Employee claimsEmployee claims (including, without limitation, due to (including, without limitation, due to dismissal by reason of redundancy, conduct or otherwise) dismissal by reason of redundancy, conduct or otherwise) made by employees of such Indemnifying Group or its made by employees of such Indemnifying Group or its predecessors prior to the Effective Date; andpredecessors prior to the Effective Date; and

– Any acts or omissions occurring prior to the Effective DateAny acts or omissions occurring prior to the Effective Date arising out of or relating to (i) such Group’s Transferred arising out of or relating to (i) such Group’s Transferred Assets, or (ii) such Group’s business which are the subject of Assets, or (ii) such Group’s business which are the subject of this Agreement.this Agreement.

7474

Indemnification for Claims Indemnification for Claims of Intentional Wrongful of Intentional Wrongful ConductConduct ProhibitedProhibited in most jurisdictions where there is a finding in most jurisdictions where there is a finding

of intentional wrongful conduct, with jurisdictions less of intentional wrongful conduct, with jurisdictions less clear on whether a “finding” of is required.clear on whether a “finding” of is required.

New York:New York: permits (with clear language) contractual permits (with clear language) contractual indemnification so long as no finding of intentional indemnification so long as no finding of intentional wrongful conduct. wrongful conduct. SeeSee Gibbs-Alfano v. BurtonGibbs-Alfano v. Burton, 281 , 281 F.3d 12, 19-22 (2d Cir. 2002).F.3d 12, 19-22 (2d Cir. 2002).

Delaware:Delaware: scant law but general observations critical scant law but general observations critical of indemnity contracts “which indemnify one against of indemnity contracts “which indemnify one against the consequences of his own negligence” or where the consequences of his own negligence” or where party found liable for conduct more egregious than party found liable for conduct more egregious than negligence. negligence. SeeSee e.g.e.g., , Alten v. Ellin & TuckerAlten v. Ellin & Tucker, 854 F. , 854 F. Supp. 283, 288 – 289 (D. Del. 1994), citing Supp. 283, 288 – 289 (D. Del. 1994), citing Howard, Howard, Needles, Tammen & B v. Steers, Perini & PNeedles, Tammen & B v. Steers, Perini & P, 312 A.2d , 312 A.2d 621, 624 (Del. 1973).621, 624 (Del. 1973).

– BUT: see Delaware has highly developed law of BUT: see Delaware has highly developed law of indemnifying officers and directors so long as they indemnifying officers and directors so long as they acted in good faith. acted in good faith.

7575

Indemnification for Indemnification for Punitive Damages?Punitive Damages? Punitive damages:Punitive damages: usually awarded usually awarded

only in cases of malicious, fraudulent, only in cases of malicious, fraudulent, intentional or willful misconduct, but in intentional or willful misconduct, but in some jurisdictions available for “reckless” some jurisdictions available for “reckless” conduct.conduct.– insurance coverage cases permit insurance coverage cases permit

indemnification for indemnification for vicariouslyvicariously imposed imposed punitive damages punitive damages

– Include special choice of law, modeled after Include special choice of law, modeled after insurance policies or a promise by the parties insurance policies or a promise by the parties not to invoke public policy or challenge not to invoke public policy or challenge enforceabilityenforceability

7676

Indemnification for Cost to Indemnification for Cost to Comply With Non-Monetary Comply With Non-Monetary ReliefRelief Non-monetary loss:Non-monetary loss: if contract includes if contract includes

specific language and method of calculating specific language and method of calculating value, freedom of contract should permit value, freedom of contract should permit indemnification. indemnification. SeeSee National Casualty Co. v. National Casualty Co. v. Newtown TownshipNewtown Township, 2000 U.S. Dist. LEXIS , 2000 U.S. Dist. LEXIS 10747 (E.D. Pa. 2000) (Fullam, Sr. J.) (insurer 10747 (E.D. Pa. 2000) (Fullam, Sr. J.) (insurer may contract to avoid indemnity obligation for may contract to avoid indemnity obligation for non-monetary loss, implying that contract non-monetary loss, implying that contract would govern this question) would govern this question) Outboard Marine Outboard Marine Corp. v. Liberty Mutual Ins. Co.Corp. v. Liberty Mutual Ins. Co., 607 N.E.2d , 607 N.E.2d 1204 (Ill. 1993) (costs to comply with equitable 1204 (Ill. 1993) (costs to comply with equitable relief qualify as “damages” subject to relief qualify as “damages” subject to indemnification).indemnification).

7777

Indemnification for Indemnification for Party’s Own NegligenceParty’s Own Negligence Illinois and New Jersey:Illinois and New Jersey: prohibited by statute in prohibited by statute in

construction contracts:construction contracts:““With respect to With respect to contractscontracts or agreements, either public or agreements, either public or private, for the construction, alteration, repair or or private, for the construction, alteration, repair or maintenance of a building, structure, highway bridge, maintenance of a building, structure, highway bridge, viaducts or other work dealing with construction, or for viaducts or other work dealing with construction, or for any moving, demolition or excavation connected any moving, demolition or excavation connected therewith, every covenant, promise or agreement to therewith, every covenant, promise or agreement to indemnifyindemnify or hold harmless another person from that or hold harmless another person from that person's own person's own negligencenegligence is void as against is void as against public public policypolicy and wholly unenforceable.” 740 ILCS 35/1. and wholly unenforceable.” 740 ILCS 35/1. SeeSee N.J. Stat. N.J. Stat. § 2A:40A-1 (same).§ 2A:40A-1 (same).

Pennsylvania:Pennsylvania: while such contracts are disfavored, while such contracts are disfavored, party may be indemnified against its own negligence if it party may be indemnified against its own negligence if it uses “clear and unambiguous language” with burden on uses “clear and unambiguous language” with burden on party seeking indemnity and ambiguities resolved party seeking indemnity and ambiguities resolved against. against. SeeSee Amquip Corp. v. Delaware Valley ErectorsAmquip Corp. v. Delaware Valley Erectors, , 1999 U.S. Dist. LEXIS 18276 (E.D. Pa. 1999), 1999 U.S. Dist. LEXIS 18276 (E.D. Pa. 1999), aff’daff’d, 265 , 265 F.3d 1054 (3d Cir. 2001).F.3d 1054 (3d Cir. 2001).

7878

Special Rule in Securities Special Rule in Securities Fraud CasesFraud Cases Most jurisdictions find indemnification Most jurisdictions find indemnification

(implied or contractual) for securities (implied or contractual) for securities violations unavailable based on public violations unavailable based on public policy concerns, regardless of degree of policy concerns, regardless of degree of fault. fault.

– Eichenholtz v. BrennanEichenholtz v. Brennan, 52 F.3d 478 (3d Cir. , 52 F.3d 478 (3d Cir.

1995).1995).– Globus v. Law Research Service, Inc.Globus v. Law Research Service, Inc., 418 , 418

F.2d 1276 (2d Cir. 1969).F.2d 1276 (2d Cir. 1969).– In re Olympia Brewing Co. Sec. Lit.In re Olympia Brewing Co. Sec. Lit., 674 F. , 674 F.

Supp. 597, 611 (N.D. Ill. 1987) (collecting Supp. 597, 611 (N.D. Ill. 1987) (collecting cases concerning implied right to cases concerning implied right to indemnification)indemnification)

Developments in Database Security Law

Presented by:

Kit Applegate, Blank Rome LLPJordana Cooper, Blank Rome LLP, Moderator

8080

Developments In Developments In Database Security Law: Database Security Law: OutlineOutline Federal privacy law directed to financial Federal privacy law directed to financial

institutions: Gramm-Leach-Blileyinstitutions: Gramm-Leach-Bliley New state privacy statutes broadly directed New state privacy statutes broadly directed

to businesses that conduct business within to businesses that conduct business within the state and/or own or license personal the state and/or own or license personal information of residents of the stateinformation of residents of the state

EnforcementEnforcement– State Attorney General activityState Attorney General activity– Private litigation and class actionsPrivate litigation and class actions– Federal agencies: FTCFederal agencies: FTC

8181

Gramm-Leach-Bliley and Gramm-Leach-Bliley and State Statutes: State Statutes: IntroductionIntroduction G-L-B:G-L-B: 15 U.S.C. 15 U.S.C. § 6801 § 6801 et seq.et seq.::

– ““It is the policy of Congress that each financial It is the policy of Congress that each financial institution has an affirmative and continuing institution has an affirmative and continuing obligation to [1] respect the privacy of its obligation to [1] respect the privacy of its customers and [2] to protect the security and customers and [2] to protect the security and confidentiality of those customers’ nonpublic confidentiality of those customers’ nonpublic personal information.” 15 U.S.C. § 6801.personal information.” 15 U.S.C. § 6801.

– Regulatory authority to reside with the federal Regulatory authority to reside with the federal banking agencies, National Credit Union banking agencies, National Credit Union Administration, Secretary of the Treasury, SEC, Administration, Secretary of the Treasury, SEC, and FTC, which regulate the financial institutions and FTC, which regulate the financial institutions subject to their jurisdiction, and enforce G-L-B.subject to their jurisdiction, and enforce G-L-B.

8282

Gramm-Leach-Bliley and Gramm-Leach-Bliley and State Statutes: State Statutes: IntroductionIntroduction State StatutesState Statutes

– At least 30 states presently have security At least 30 states presently have security breach notification lawsbreach notification laws

– Statutes are similar, but far from uniformStatutes are similar, but far from uniform– Cover a variety of topicsCover a variety of topics

Notification of security breachNotification of security breach Use of Social Security numbersUse of Social Security numbers Destruction of records that contain “personal Destruction of records that contain “personal

information”information”

8383

G-L-B: Who Is G-L-B: Who Is Covered?Covered? G-L-B:G-L-B: Any institution the business of which is Any institution the business of which is

engaging in “financial activities” as defined by engaging in “financial activities” as defined by Section 4(k) of the Bank Holding Co. Act of 1956. Section 4(k) of the Bank Holding Co. Act of 1956. 15 U.S.C. 15 U.S.C. § 6809(3)(A).§ 6809(3)(A).

““Financial activities” include, Financial activities” include, inter aliainter alia::– Lending, investing for others, or safeguarding money or Lending, investing for others, or safeguarding money or

securities;securities;– Insuring or issuance of annuities or acting as an agent Insuring or issuance of annuities or acting as an agent

or broker for such activities;or broker for such activities;– Providing financial, investment, or economic advisory Providing financial, investment, or economic advisory

services;services;– Underwriting or making a market in securities. 12 Underwriting or making a market in securities. 12

U.S.C. § 1843(k)(4)(C).U.S.C. § 1843(k)(4)(C).

8484

G-L-B: Who Is Covered? G-L-B: Who Is Covered? Generally, “financial institution” is defined “very Generally, “financial institution” is defined “very

broadly under G-L-B and includes several entities broadly under G-L-B and includes several entities not traditionally recognized as financial not traditionally recognized as financial institutions.” 65 Fed.Reg. 33646 (FTC). But FTC institutions.” 65 Fed.Reg. 33646 (FTC). But FTC Rule contains a “significantly engaged” modifier. Rule contains a “significantly engaged” modifier. Id.Id.

Overlap between financial institutions covered Overlap between financial institutions covered by G-L-B and entities covered by HIPAA. 65 by G-L-B and entities covered by HIPAA. 65 Fed.Reg. 33646.Fed.Reg. 33646.

Colleges and universities are not exempted – Colleges and universities are not exempted – may be double-regulated by FERPA; compliance may be double-regulated by FERPA; compliance with FERPA adequate to FTC. 65 Fed.Reg. with FERPA adequate to FTC. 65 Fed.Reg. 33646.33646.

8585

State Statutes: State Statutes: Who Is Covered?Who Is Covered?

Apply to both businesses Apply to both businesses andand individuals who: individuals who:– conduct business in that state; and/orconduct business in that state; and/or– own or license personal information of a resident of own or license personal information of a resident of

that statethat state Also apply to third-party vendors that compile Also apply to third-party vendors that compile

or maintain personal information on behalf of or maintain personal information on behalf of other businessesother businesses

““Financial institutions” covered under G-L-B Financial institutions” covered under G-L-B are also subject to the state statutesare also subject to the state statutes– Exceptions exist for those that maintain procedures Exceptions exist for those that maintain procedures

for a breach of security system pursuant to federal or for a breach of security system pursuant to federal or state regulationsstate regulations

8686

G-L-B: G-L-B: What Information Is What Information Is Covered?Covered? ““Nonpublic personal information.” With Nonpublic personal information.” With

certain exceptions, “a financial institution certain exceptions, “a financial institution may not, directly or through any affiliate, may not, directly or through any affiliate, disclose to a nonaffiliated third party and disclose to a nonaffiliated third party and nonpublic personal information, unless such nonpublic personal information, unless such financial institution provides or has provided financial institution provides or has provided to the consumer a notice” that complies with to the consumer a notice” that complies with the statute and that gives the consumer a the statute and that gives the consumer a reasonable opportunity to “opt out” of the reasonable opportunity to “opt out” of the disclosure before it occurs. 15 U.S.C. disclosure before it occurs. 15 U.S.C. § 6802; § 6802; 65 Fed.Reg. 35162. 65 Fed.Reg. 35162.

8787

G-L-B: G-L-B: What Information Is What Information Is Covered?Covered? ““Nonpublic personal information”: In Nonpublic personal information”: In

addition to lists or groupings of consumers, addition to lists or groupings of consumers, this means “personally identifiable financial this means “personally identifiable financial information,” excluding “publicly available information,” excluding “publicly available information” (information the financial information” (information the financial institution has a reasonable basis to believe institution has a reasonable basis to believe is lawfully made available to the general is lawfully made available to the general public from certain specified sources). 65 public from certain specified sources). 65 Fed.Reg. 33646.Fed.Reg. 33646.

8888

G-L-B: G-L-B: What Information Is What Information Is Covered?Covered?

““Personally available financial information” Personally available financial information” broadly includes information a consumer broadly includes information a consumer provides to you on an application, not just provides to you on an application, not just account balance information, payment history, account balance information, payment history, and credit/debit purchase information. The FTC and credit/debit purchase information. The FTC believes that “any information should be believes that “any information should be considered financial information if it is requested considered financial information if it is requested by a financial institution for the purpose of by a financial institution for the purpose of providing a financial product or service.” providing a financial product or service.” (Addresses, phone numbers.) It also includes the (Addresses, phone numbers.) It also includes the fact that the individual has been one of your fact that the individual has been one of your customers. 65 Fed.Reg. 33646.customers. 65 Fed.Reg. 33646.

8989

State Statutes: State Statutes: What Information Is What Information Is Covered?Covered? Computerized data that include “personal Computerized data that include “personal

information”information” ““Personal information”Personal information”

– Individual’s nameIndividual’s name– Linked to any of the following:Linked to any of the following:

Social Security number;Social Security number; Driver’s license number or state identification card Driver’s license number or state identification card

number; ornumber; or Account, credit, or debit card number in Account, credit, or debit card number in

combination with any security code, access code, combination with any security code, access code, or password that would permit access to the or password that would permit access to the individual’s financial accountindividual’s financial account

9090

G-L-B: Privacy PoliciesG-L-B: Privacy Policies

G-L-B:G-L-B: Among other things, a financial Among other things, a financial institution’s privacy policy contains a institution’s privacy policy contains a description in general terms of who is description in general terms of who is authorized to have access to the authorized to have access to the information and states whether the information and states whether the institution has security practices and institution has security practices and procedures in place to ensure the procedures in place to ensure the confidentiality of the information in confidentiality of the information in accordance with the policy. 65 Fed.Reg. accordance with the policy. 65 Fed.Reg. 33646.33646.

9191

G-L-B: G-L-B: Standards For Safeguarding Standards For Safeguarding Customer InformationCustomer Information G-L-B:G-L-B: Regulators confer on institutions the Regulators confer on institutions the

discretion to determine the levels of discretion to determine the levels of protection necessary for different categories protection necessary for different categories of information. 66 Fed.Reg. 8616.of information. 66 Fed.Reg. 8616.

Each institution must implement a Each institution must implement a comprehensive written information security comprehensive written information security program that includes administrative, program that includes administrative, technical, and physical safeguards technical, and physical safeguards appropriate to the size and complexity of the appropriate to the size and complexity of the institution and the nature and scope of its institution and the nature and scope of its activities. 66 Fed.Reg. 8616.activities. 66 Fed.Reg. 8616.

9292

G-L-B: G-L-B: Standards For Safeguarding Standards For Safeguarding Customer InformationCustomer Information

The information security program should be The information security program should be designed to ensure the security and designed to ensure the security and confidentiality of customer information, confidentiality of customer information, protect against any anticipated threats to the protect against any anticipated threats to the security of such information, and protect security of such information, and protect against unauthorized access to or use of such against unauthorized access to or use of such information that could result in substantial information that could result in substantial harm or inconvenience to any customer. 66 harm or inconvenience to any customer. 66 Fed.Reg. 8616.Fed.Reg. 8616.

9393

State Law: State Law: Standards For Safeguarding Standards For Safeguarding Customer InformationCustomer Information

The state statutes generally do not require the The state statutes generally do not require the formulation of information security protocolsformulation 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 recordsDestruction 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. 56:8-162.

9494

State Law: State Law: Standards For Safeguarding Standards For Safeguarding Customer InformationCustomer Information Limitations on use of Social Security Limitations on use of Social Security

numbersnumbers– Shall NOT:Shall NOT:

Publicly post or display any four or more Publicly post or display any four or more consecutive numbers of an individual’s Social consecutive numbers of an individual’s Social Security numberSecurity number

Print an individual’s Social Security number on Print an individual’s Social Security number on any materials mailed to the individualany materials mailed to the individual

Print an individual’s Social Security number on Print an individual’s Social Security number on any card required for the individual to access any card required for the individual to access products or services provided by the entityproducts or services provided by the entity

9595

State Law: State Law: Standards For Safeguarding Standards For Safeguarding Customer InformationCustomer Information

Limitations on use of Social Security Limitations on use of Social Security numbersnumbers– Shall NOT:Shall NOT:

Intentionally communicate or otherwise make Intentionally communicate or otherwise make available to the general public an individual’s available to the general public an individual’s Social Security numberSocial Security number

Require an individual to transmit his Social Require an individual to transmit his Social Security number over the internet, unless the Security number over the internet, unless the connection is secure or the Social Security connection is secure or the Social Security number is encryptednumber is encrypted

9696

G-L-B: What Is A Breach G-L-B: What Is A Breach Triggering Statutory Triggering Statutory Notification?Notification? G-L-B:G-L-B: An incident involving unauthorized An incident involving unauthorized

access to or use of “sensitive customer access to or use of “sensitive customer information.” 70 Fed.Reg. 15736.information.” 70 Fed.Reg. 15736.

““Sensitive customer information”: a customer’s Sensitive customer information”: a customer’s name, address, or telephone number in name, address, or telephone number in conjunction with social security, driver’s license, conjunction with social security, driver’s license, account, credit or debit card number, or a account, credit or debit card number, or a personal identification number or password that personal identification number or password that would permit access to the customer’s account. would permit access to the customer’s account. Also any combination of components that would Also any combination of components that would allow someone to log onto or access the allow someone to log onto or access the customer’s account, such as user name and customer’s account, such as user name and password. 70 Fed.Reg. 15736.password. 70 Fed.Reg. 15736.

9797

State Law: What Is A Breach State Law: What Is A Breach Triggering Statutory Triggering Statutory Notification?Notification? State statutes are not uniform in their definition of State statutes are not uniform in their definition of

“breach of security”“breach of security” AccessAccess

– Unauthorized Unauthorized accessaccess of unencrypted computerized data of unencrypted computerized data that compromises the security, confidentiality, or that compromises the security, confidentiality, or integrity of personal information maintained by the integrity of personal information maintained by the businessbusiness

AcquisitionAcquisition– Unauthorized Unauthorized acquisitionacquisition of unencrypted computerized of unencrypted computerized

data that compromises the security, confidentiality, or data that compromises the security, confidentiality, or integrity of personal information maintained by the integrity of personal information maintained by the businessbusiness

Access Access andand Acquisition Acquisition

9898

G-L-B: G-L-B: When Must You Notify When Must You Notify Customers?Customers?

G-L-B:G-L-B: When a financial institution When a financial institution becomes aware of an incident of becomes aware of an incident of unauthorized access to sensitive unauthorized access to sensitive customer information, it must customer information, it must investigate reasonably. If the institution investigate reasonably. If the institution determines that “misuse of its determines that “misuse of its information about a customer has information about a customer has occurred or is reasonably possible,” occurred or is reasonably possible,” notification is triggered. 12 C.F.R. Pt. notification is triggered. 12 C.F.R. Pt. 30, App. B.30, App. B.

9999

State Law: When Must State Law: When Must You Notify Customers?You Notify Customers?

Generally, duty to notify arises when a Generally, duty to notify arises when a business:business:

– Becomes “aware,” “discovers,” or receives Becomes “aware,” “discovers,” or receives “notification” of a breach of security; and “notification” of a breach of security; and

– Ascertains that a customer’s personal Ascertains that a customer’s personal information “was, or is reasonably information “was, or is reasonably believed” to have been acquired/accessed believed” to have been acquired/accessed by an unauthorized personby an unauthorized person

100100

G-L-B: Which Customers G-L-B: Which Customers Must Be Notified?Must Be Notified? G-L-B:G-L-B: Notice to “affected customers.” “If a financial Notice to “affected customers.” “If a financial

institution, based upon its investigation, can determine from institution, based upon its investigation, can determine from its logs or other data precisely which customers’ information its logs or other data precisely which customers’ information has been improperly accessed, it may limit notification to has been improperly accessed, it may limit notification to those customers with regard to whom the institution those customers with regard to whom the institution determines that misuse of their information has occurred or is determines that misuse of their information has occurred or is reasonably possible.”reasonably possible.”

““However, there may be situations where the institution However, there may be situations where the institution determines that a group of files has been accessed determines that a group of files has been accessed improperly, but is unable to identify which specific customers’ improperly, but is unable to identify which specific customers’ information has been accessed. If the circumstances of the information has been accessed. If the circumstances of the unauthorized access lead the institution to determine that unauthorized access lead the institution to determine that misuse of the information is reasonably possible, it should misuse of the information is reasonably possible, it should notify all customers in the group.” 12 C.F.R. Pt. 30, App. B.notify all customers in the group.” 12 C.F.R. Pt. 30, App. B.

101101

State Law: Which State Law: Which Customers Must Be Customers Must Be Notified?Notified? Notification must be provided to those Notification must be provided to those

customers whose “personal information” customers whose “personal information” “was, or is reasonably believed” to have “was, or is reasonably believed” to have been acquired/accessedbeen acquired/accessed

Risk of harm exception in some statutesRisk of harm exception in some statutes– Disclosure not required if business Disclosure not required if business

establishes that “misuse” of information not establishes that “misuse” of information not reasonably possiblereasonably possible

– Determination must be documented in Determination must be documented in writing and retained for five yearswriting and retained for five years

102102

G-L-B: How Soon Do Affected G-L-B: How Soon Do Affected Customers Have To Be Customers Have To Be Notified?Notified? ““[A]s soon as possible.” 12 C.F.R. Pt. [A]s soon as possible.” 12 C.F.R. Pt.

30, App. B., Supp. A, III.A.30, App. B., Supp. A, III.A.

103103

State Law: How Soon Do State Law: How Soon Do Affected Customers Have To Affected Customers Have To Be Notified?Be Notified?

Generally, notice must be made “in Generally, notice must be made “in the most expedient time possible and the most expedient time possible and without unreasonable delaywithout unreasonable delay””– Florida mandates notice within 45 daysFlorida mandates notice within 45 days

Notification may be delayed:Notification may be delayed:– to determine the scope of the breach and to determine the scope of the breach and

restore the integrity of the data systemrestore the integrity of the data system– if requested by law enforcementif requested by law enforcement

104104

G-L-B: G-L-B: Notification To Law Notification To Law EnforcementEnforcement

G-L-B:G-L-B: Response program should Response program should contain procedures for notifying contain procedures for notifying appropriate law enforcement appropriate law enforcement authorities. Customer notice may be authorities. Customer notice may be delayed if an appropriate law delayed if an appropriate law enforcement agency determines that enforcement agency determines that notification will interfere with a criminal notification will interfere with a criminal investigation and provides written investigation and provides written request for a delay. 12 C.F.R. 30, App. request for a delay. 12 C.F.R. 30, App. B, Supp. A.B, Supp. A.

105105

State Law: State Law: Notification To Law Notification To Law EnforcementEnforcement Delaware, New York, and Delaware, New York, and

Pennsylvania do not require that Pennsylvania do not require that law enforcement be notified firstlaw enforcement be notified first

New Jersey does require that law New Jersey does require that law enforcement be notified before enforcement be notified before disclosure is made to the disclosure is made to the customercustomer

As a practical matter, law As a practical matter, law enforcement should be notifiedenforcement should be notified

106106

G-L-B And State Law: G-L-B And State Law: Details Of Customer Details Of Customer NoticeNotice G-L-B:G-L-B: Detailed requirements for notice, Detailed requirements for notice,

including:including:– Description of the incident in general terms Description of the incident in general terms

and the type of customer information involvedand the type of customer information involved

– Description generally of what the institution Description generally of what the institution has done to protect from further unauthorized has done to protect from further unauthorized accessaccess

– Telephone number for further information.Telephone number for further information.

– Remind customers to remain vigilant over 12-Remind customers to remain vigilant over 12-24 months and to promptly report incidents of 24 months and to promptly report incidents of suspected identity theft.suspected identity theft.

107107

G-L-B And State Law: G-L-B And State Law: Details Of Customer Details Of Customer NoticeNotice

– When appropriate:When appropriate: A recommendation that the customer review A recommendation that the customer review

account statements and immediately report any account statements and immediately report any suspicious activitysuspicious activity

A description of fraud altersA description of fraud alters A recommendation that the customer A recommendation that the customer

periodically obtain credit reportsperiodically obtain credit reports How the customer may obtain a credit report How the customer may obtain a credit report

free of chargefree of charge Information about the ftc’s online guidance. 12 Information about the ftc’s online guidance. 12

C.F.R. 30, App. B, Supp. A, iii.B.1C.F.R. 30, App. B, Supp. A, iii.B.1

108108

State Law: State Law: Details Of Customer NoticeDetails Of Customer Notice Delaware, New Jersey, and Delaware, New Jersey, and

Pennsylvania do not specify the Pennsylvania do not specify the contents of the noticecontents of the notice

New YorkNew York– Contact information for the business Contact information for the business

making the notificationmaking the notification– The personal information that was or The personal information that was or

believed to have been acquiredbelieved to have been acquired Means of providing noticeMeans of providing notice

– Written noticeWritten notice– Electronic noticeElectronic notice

109109

State Law: State Law: Details Of Customer NoticeDetails Of Customer Notice Means of providing noticeMeans of providing notice

– Telephonic noticeTelephonic notice– Substitute noticeSubstitute notice

If the business can demonstrate that (1) the cost If the business can demonstrate that (1) the cost of providing notice will exceeds a certain dollar of providing notice will exceeds a certain dollar amount, or (2) that the affected class of customers amount, or (2) that the affected class of customers exceeds a certain number, or (3) that the business exceeds a certain number, or (3) that the business does not have sufficient contact information to does not have sufficient contact information to provide notice, substitute notice may be made by:provide notice, substitute notice may be made by:

– E-mail;E-mail;– Posting the notice on business’s web site; andPosting the notice on business’s web site; and– Notifying major statewide mediaNotifying major statewide media

110110

G-L-B: Regulator G-L-B: Regulator Notice?Notice?

G-L-B:G-L-B: Response program should Response program should contain procedures for notifying contain procedures for notifying primary federal regulator as soon as primary federal regulator as soon as possible. 12 C.F.R. 30, App. B, Supp. possible. 12 C.F.R. 30, App. B, Supp. A, II.A.1A, II.A.1

111111

State Law: State Law: Regulator Notice?Regulator Notice?

New YorkNew York– New York Attorney GeneralNew York Attorney General– New York Consumer Protection BoardNew York Consumer Protection Board– New York Office of Cyber Security and New York Office of Cyber Security and

Critical Infrastructure CoordinationCritical Infrastructure Coordination

112112

G-L-B: Notice To Credit G-L-B: Notice To Credit Reporting Agencies?Reporting Agencies?

G-L-B:G-L-B: Institutions are “encouraged” Institutions are “encouraged” to notify nationwide consumer to notify nationwide consumer reporting agencies prior to sending reporting agencies prior to sending notices to a large number of notices to a large number of customers that include contact customers that include contact information for the reporting agencies. information for the reporting agencies. 12 C.F.R. 30, App. B, Supp. A, III.B.2. 12 C.F.R. 30, App. B, Supp. A, III.B.2.

113113

State Law: Notice To State Law: Notice To Credit Reporting Credit Reporting Agencies?Agencies?

Generally, where a large number of Generally, where a large number of customers are affected, a business customers are affected, a business must notify, without reasonable delay, must notify, without reasonable delay, all consumer reporting agencies that all consumer reporting agencies that compile or maintain files on consumers compile or maintain files on consumers on a nationwide basis of the timing, on a nationwide basis of the timing, distribution, and content of the noticesdistribution, and content of the notices– New Jersey: 1,000New Jersey: 1,000– New York: 5,000New York: 5,000– Pennsylvania: 1,000Pennsylvania: 1,000

114114

G-L-B: Consequences -- G-L-B: Consequences -- Regulator ActionRegulator Action

G-L-B:G-L-B: Enforcement by OCC, Federal Reserve, Enforcement by OCC, Federal Reserve, FDIC, OTS, National Credit Union FDIC, OTS, National Credit Union Administration, SEC, state insurance Administration, SEC, state insurance regulators, FTC as to persons within their regulators, FTC as to persons within their respective jurisdictions. Penalties not respective jurisdictions. Penalties not enumerated. 15 U.S.C. enumerated. 15 U.S.C. § 6805§ 6805

Agencies clarify (OCC) that existing authority Agencies clarify (OCC) that existing authority is “preserved.” 12 C.F.R. Pt. 30, App. Bis “preserved.” 12 C.F.R. Pt. 30, App. B

Under existing authority, agencies may Under existing authority, agencies may impose fines. impose fines. e.g.e.g., OCC: 12 U.S.C. , OCC: 12 U.S.C. § 1818§ 1818

Most active regulator enforcement: FTC! Most active regulator enforcement: FTC!

115115

State Law: State Law: Consequences -- Consequences -- Regulator ActionRegulator Action State AGs vested with authority State AGs vested with authority

to prosecute violationsto prosecute violations

116116

G-L-B And State Law: G-L-B And State Law: Consequences! -- AG Consequences! -- AG ActionsActions

State AGs have been active in consumer privacy State AGs have been active in consumer privacy before the new state statutes and before G-L-B based before the new state statutes and before G-L-B based on their authority under state consumer fraud and on their authority under state consumer fraud and other statutes.other statutes.

1999: Minnesota AG action against a large financial 1999: Minnesota AG action against a large financial institution: Sale of customer information to a institution: Sale of customer information to a third-party marketer in violation of its privacy policy. third-party marketer in violation of its privacy policy. Settlement over $3 million.Settlement over $3 million.

Led to charges by 38 other state AGs.Led to charges by 38 other state AGs.

Led to class action lawsuit funded by several Led to class action lawsuit funded by several million dollars in settlement, plus attorney’s million dollars in settlement, plus attorney’s fees.fees.

117117

G-L-B And State Law: G-L-B And State Law: Consequences! -- AG Consequences! -- AG ActionsActions [1] Inadvertent disclosures of [2] nonsensitive [1] Inadvertent disclosures of [2] nonsensitive

information prosecuted.information prosecuted.

Alta Vista: NY AG action. $70,000 settlement Alta Vista: NY AG action. $70,000 settlement (2001). Involved names and addresses only – (2001). Involved names and addresses only – input by consumers into Alta Vista Yellow Pages input by consumers into Alta Vista Yellow Pages directory to narrow searches to businesses directory to narrow searches to businesses nearby and promised privacy; programming nearby and promised privacy; programming error led to inadvertent disclosure to a third error led to inadvertent disclosure to a third party company. No one profited and third-party party company. No one profited and third-party company did not use the information.company did not use the information.

118118

G-L-B And State Law: G-L-B And State Law: Consequences! -- AG Consequences! -- AG ActionsActions Lesson: You must follow your privacy Lesson: You must follow your privacy

policies.policies.

Elliot Spitzer on privacy policies (March, Elliot Spitzer on privacy policies (March, 2006):2006):– ““Personal information secured through a Personal information secured through a

promise of confidentiality must always remain promise of confidentiality must always remain confidential.”confidential.”

– ““Companies must adhere to known privacy Companies must adhere to known privacy policies and promises. Failing to do so policies and promises. Failing to do so constitutes a constitutes a clear consumer fraudclear consumer fraud.”.”

119119

G-L-B And State Law: G-L-B And State Law: Consequences! -- Private And Consequences! -- Private And Class ActionsClass Actions

Suits Suits under under G-L-B: Most courts have G-L-B: Most courts have determined no private right of action. determined no private right of action. – ee.g..g., ,

Menton v. Experian Corp.Menton v. Experian Corp., 2003 WL 21692820 , 2003 WL 21692820 (S.D.N.Y. July 21, 2003); (S.D.N.Y. July 21, 2003);

Dunn v. First Nat’l BankDunn v. First Nat’l Bank, 111 P.3d 1076 , 111 P.3d 1076 (Kan. App. 2005);(Kan. App. 2005);

Borninski v. WilliamsonBorninski v. Williamson, 2004 WL 433746 , 2004 WL 433746 (N.D. Tex. March 1, 2004); (N.D. Tex. March 1, 2004);

Briggs v. Emporia State Bank and TrustBriggs v. Emporia State Bank and Trust, 2005 WL , 2005 WL 2035038 (D. Kan. Aug. 23, 2005); 2035038 (D. Kan. Aug. 23, 2005);

American Family Mutual Ins. Co. v. RothAmerican Family Mutual Ins. Co. v. Roth, 2005 WL , 2005 WL 3700232 (N.D. Ill. Aug. 5, 2005).3700232 (N.D. Ill. Aug. 5, 2005).

120120

G-L-B And State Law: G-L-B And State Law: Consequences! -- Private And Consequences! -- Private And Class ActionsClass Actions ““Back door”: Negligence claims, esp. negligence Back door”: Negligence claims, esp. negligence per se,per se,

based on G-L-B standards:based on G-L-B standards:– Dunmire v. Morgan StanleyDunmire v. Morgan Stanley, 2005 WL 1005993 , 2005 WL 1005993

(W.D. Mo. April 7, 2005): (W.D. Mo. April 7, 2005): Refuses to dismiss complaint asserting a claim for negligence per se Refuses to dismiss complaint asserting a claim for negligence per se based on allegations that Morgan Stanley delivered account based on allegations that Morgan Stanley delivered account information to account-holder’s soon-to-be-ex wife, premised on information to account-holder’s soon-to-be-ex wife, premised on violation of G-L-B and implementing regulations.violation of G-L-B and implementing regulations.

– Guin v. Brazos Higher Ed. Service Corp.Guin v. Brazos Higher Ed. Service Corp., 2006 WL 288483 , 2006 WL 288483 (D. Minn. Feb. 7, 2006): (D. Minn. Feb. 7, 2006):

Employee maintained unencrypted personal customer information Employee maintained unencrypted personal customer information on a laptop kept at home; burglary; defendant not able to tell on a laptop kept at home; burglary; defendant not able to tell which customer information was active on laptop and sent 550,000 which customer information was active on laptop and sent 550,000 customer notices. No identity fraud appeared to have occurred. customer notices. No identity fraud appeared to have occurred. Negligence claim analyzed on sj under G-L-B standards; defendant Negligence claim analyzed on sj under G-L-B standards; defendant prevailed. prevailed.

121121

G-L-B And State Law: G-L-B And State Law: Consequences! -- Private And Consequences! -- Private And Class ActionsClass Actions Negligence claims: Best-case Negligence claims: Best-case

scenario: lost data.scenario: lost data.– Giordano v. Wachovia SecuritiesGiordano v. Wachovia Securities, 2006 , 2006

WL 2177036 (D.N.J. July 31, 2006). WL 2177036 (D.N.J. July 31, 2006). UPS package containing personal financial UPS package containing personal financial data was lost in transit. Mere fear of data was lost in transit. Mere fear of misuse in future – fear of injury – misuse in future – fear of injury – insufficient to create Article III standing.insufficient to create Article III standing.

122122

G-L-B And State Law: G-L-B And State Law: Consequences! -- Private And Consequences! -- Private And Class ActionsClass Actions Negligence claims: More risk: Burglary of Negligence claims: More risk: Burglary of

equipment without known interest in data.equipment without known interest in data.

Stollenwerk v. Tri-West Healthcare AllianceStollenwerk v. Tri-West Healthcare Alliance, , 2005 WL 2465906 (D. Ariz. Sept. 6, 2005). 2005 WL 2465906 (D. Ariz. Sept. 6, 2005). Class action.Class action.

Burglary of computer hard-drives. Summary Burglary of computer hard-drives. Summary judgment granted on negligence claims. “Absent judgment granted on negligence claims. “Absent evidence that the data was actually targeted or evidence that the data was actually targeted or accessed, there is no basis for a reasonable jury to accessed, there is no basis for a reasonable jury to determine that sensitive personal information was determine that sensitive personal information was significantly exposed.”significantly exposed.”

123123

G-L-B And State Law: G-L-B And State Law: Consequences! -- Private And Consequences! -- Private And Class ActionsClass Actions

Negligence: Worst-case scenario: Save Negligence: Worst-case scenario: Save money; poor security protocols; data theft.money; poor security protocols; data theft.

Richardson v. DSW, Inc.Richardson v. DSW, Inc., 2006 WL 163167 , 2006 WL 163167 (N.D. Ill. Jan. 18, 2006): Suit under state (N.D. Ill. Jan. 18, 2006): Suit under state consumer fraud statute alleging retailer, on consumer fraud statute alleging retailer, on notice by credit card company of its notice by credit card company of its contractual obligations regarding the proper contractual obligations regarding the proper handling and disposal of credit card handling and disposal of credit card information, failed to follow the specified information, failed to follow the specified procedures. Complaint states a claim where procedures. Complaint states a claim where alleges protocols ignored to save money, and alleges protocols ignored to save money, and hacking ensured.hacking ensured.

124124

G-L-B And State Law: G-L-B And State Law: Consequences! -- Private And Consequences! -- Private And Class ActionsClass Actions Second “back door”: Suit for breach of contract based – privacy Second “back door”: Suit for breach of contract based – privacy

policy as contract.policy as contract. Best defense: Contract claims require damages. Loss of privacy Best defense: Contract claims require damages. Loss of privacy

held not to satisfy requirement of economic losses flowing directly held not to satisfy requirement of economic losses flowing directly from the breach. from the breach. See In re Jetblue Airways Corp. Privacy Lit.See In re Jetblue Airways Corp. Privacy Lit., 379 , 379 F.Supp.2d 299 (E.D.N.Y. 2005); F.Supp.2d 299 (E.D.N.Y. 2005); In re Northwest Airlines Privacy Lit.In re Northwest Airlines Privacy Lit., , 2004 WL 1278459 (D. Minn. 2004).2004 WL 1278459 (D. Minn. 2004).– Note: This defense has application in negligence context as well. Note: This defense has application in negligence context as well. Forbes Forbes

v. Wells Fargo Bank, N.A., v. Wells Fargo Bank, N.A., 420 F.Supp.2d 1018 (D. Minn. 2006) (theft of 420 F.Supp.2d 1018 (D. Minn. 2006) (theft of computers containing unencrypted customer information; negligence for computers containing unencrypted customer information; negligence for failing to adequately secure data; no damages – the “threat of future failing to adequately secure data; no damages – the “threat of future harm, not yet realized, will not satisfy the damage requirement.”)harm, not yet realized, will not satisfy the damage requirement.”)

Additional defense: Privacy policy a “unilateral” undertaking but not Additional defense: Privacy policy a “unilateral” undertaking but not a unilateral contract – no offer and acceptance. a unilateral contract – no offer and acceptance. In re Northwest In re Northwest AirlinesAirlines. .

Untested defense: Preemption by G-L-B.Untested defense: Preemption by G-L-B.

125125

G-L-B And State Law: G-L-B And State Law: Consequences! -- Private And Consequences! -- Private And Class ActionsClass Actions

Common law claims for common law duty of bank Common law claims for common law duty of bank confidentiality.confidentiality.

Usual defense: Banks not liable for acts of third Usual defense: Banks not liable for acts of third party wrongdoers or criminal acts of insiders as party wrongdoers or criminal acts of insiders as beyond scope of employment. beyond scope of employment. e.g.e.g., , Roth v. First Roth v. First Nat’l State Bank of NJNat’l State Bank of NJ, 169 N.J. Super. 280 (App. , 169 N.J. Super. 280 (App. Div. 1979). Perhaps can augment defense with Div. 1979). Perhaps can augment defense with good G-L-B protocols. Also, preemption???good G-L-B protocols. Also, preemption???

On the other hand, may lose this legal defense as On the other hand, may lose this legal defense as G-L-B contemplates insider abuse and institution G-L-B contemplates insider abuse and institution responsible for limiting opportunities for abuse and responsible for limiting opportunities for abuse and developing means to detect and contain it.developing means to detect and contain it.

126126

G-L-B And State Law: G-L-B And State Law: Consequences! -- Private And Consequences! -- Private And Class ActionsClass Actions

Private consumer fraud suits – typically class actions.Private consumer fraud suits – typically class actions. Breach of state statutes automatically qualifies as a Breach of state statutes automatically qualifies as a

consumer fraud violation in many states. consumer fraud violation in many states. e.g.e.g., NJCFA , NJCFA – willful, knowing or reckless failure to comply with – willful, knowing or reckless failure to comply with notice requirements is a NJCFA violation; attorney’s notice requirements is a NJCFA violation; attorney’s fees, treble damages. N.J.S.A. 56:8-166.fees, treble damages. N.J.S.A. 56:8-166.

Lack of damages defense. Before new state statutes, Lack of damages defense. Before new state statutes, we have argued “ascertainable loss” requirement for we have argued “ascertainable loss” requirement for private CFA claims not met by a data security breach private CFA claims not met by a data security breach in and of itself. Will this defense survive the new in and of itself. Will this defense survive the new statutes???statutes???

127127

Best Defense: Good Best Defense: Good Privacy And Security Privacy And Security PracticesPractices Materials: Materials:

– April 2006 California Dept. of April 2006 California Dept. of Consumer Affairs “Recommended Consumer Affairs “Recommended Practices on Notice of Security Practices on Notice of Security Breach Involving Personal Breach Involving Personal Information” Information” Covers protection and prevention as Covers protection and prevention as

wellwell

128128

The Federal Trade The Federal Trade Commission’s Privacy Commission’s Privacy Enforcement InitiativeEnforcement Initiative

The FTC has the power to protect The FTC has the power to protect personal information pursuant to:personal information pursuant to:– Section 5 of the Federal Trade Commission Section 5 of the Federal Trade Commission

Act (“FTC Act”); andAct (“FTC Act”); and

– The Gramm-Leach-Bliley ActThe Gramm-Leach-Bliley Act

129129

Section 5 of the FTC Section 5 of the FTC ActAct Prohibits “unfair or deceptive act” or practices in Prohibits “unfair or deceptive act” or practices in

or affecting commerce. 15 U.S.C. 45(a)or affecting commerce. 15 U.S.C. 45(a) Unfair practicesUnfair practices: those that cause or are likely to : those that cause or are likely to

cause substantial injury to consumers which is notcause substantial injury to consumers which is not reasonably avoidable by consumers themselves reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to and not outweighed by countervailing benefits to consumers or to competitionconsumers or to competition

The FTC Act allows the FTC to initiate federal The FTC Act allows the FTC to initiate federal district court proceedings to enjoin violations and district court proceedings to enjoin violations and to secure equitable relief including, but not to secure equitable relief including, but not limited to restitution and disgorgement.limited to restitution and disgorgement.

130130

Section 5 of the FTC Section 5 of the FTC ActAct Although Section 5 does not grant the Although Section 5 does not grant the

FTC specific authority to protect FTC specific authority to protect privacy, over the last several years it privacy, over the last several years it has been construed to prohibit certain has been construed to prohibit certain privacy invasions based on deception. privacy invasions based on deception.

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

131131

Examples of Cases Examples of Cases Brought by the FTC:Brought by the FTC:

In the Matter of Nations Title Agency, In the Matter of Nations Title Agency, Inc.Inc. (GLB) (GLB)

In the Matter of CardSystems In the Matter of CardSystems Solutions, Inc.Solutions, Inc. (FTC Act) (FTC Act)

Federal Trade Commission v. Federal Trade Commission v. ChoicePoint Inc.ChoicePoint Inc. (FTC Act) (FTC Act)

Ethics/Internal InvestigationsEthics/Internal Investigations

Presented by:Jerry D. Bernstein, Blank Rome LLPTimothy D. Katsiff, Blank Rome LLPWilliam H. Roberts, Blank Rome LLP, ModeratorJoseph G. Poluka, Blank Rome LLP

133133

A.A. Internal Investigations: Internal Investigations: A Brief Historical A Brief Historical PerspectivePerspective

134134

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

135135

What is the impetus for What is the impetus for the investigation?the investigation?

– A request of the BoardA request of the Board– Employee complaint of alleged Employee complaint of alleged

misconductmisconduct– Commercial third party assertionCommercial third party assertion– Individual whistleblowerIndividual whistleblower– Governmental assertionGovernmental assertion– Governmental enforcement agency Governmental enforcement agency

inquiry or investigationinquiry or investigation

136136

Evaluate the possible end results Evaluate the possible end results that may occur and tailor all that may occur and tailor all aspects of the investigation aspects of the investigation accordinglyaccordingly

– Architecture should fit the objective.Architecture should fit the objective.– Is there an applicable/industry Is there an applicable/industry

voluntary disclosure program?voluntary disclosure program?

137137

Evaluate the possible end results Evaluate the possible end results that may occur and tailor all aspects that may occur and tailor all aspects of the investigation accordingly of the investigation accordingly (cont.)(cont.)

– What are the nuances of the program? What are the nuances of the program? e.g.e.g., DOJ Antitrust Division amnesty , DOJ Antitrust Division amnesty program program

– What are the requirements of the What are the requirements of the program?program?

– What are the benefits of the program, What are the benefits of the program, e.g.e.g., nonprosecution agreement, , nonprosecution agreement, reduced fines, lifting of debarment from reduced fines, lifting of debarment from receiving U.S. Government contracts, receiving U.S. Government contracts, etc.?etc.?

138138

Evaluate the possible end results Evaluate the possible end results that may occur and tailor all aspects that may occur and tailor all aspects of the investigation accordingly of the investigation accordingly (cont.)(cont.)

– Will a waiver of privilege be required under Will a waiver of privilege be required under the program?the program?

– Is there something less than the waiver that Is there something less than the waiver that will satisfy the government?will satisfy the government?

– Negatives of amnesty program or other Negatives of amnesty program or other corporate cooperation?corporate cooperation?

– What is the impact of the waiver as it relates What is the impact of the waiver as it relates to other potential adversaries of the client?to other potential adversaries of the client?

– Fight or flight? Should you disclose at all – Fight or flight? Should you disclose at all – decide as early as possible.decide as early as possible.

139139

Need for Quick Need for Quick CompletionCompletion

Generally, investigations should be Generally, investigations should be conducted swiftly with the objective conducted swiftly with the objective of evaluating the scope of the of evaluating the scope of the impropriety and stopping any impropriety and stopping any misconduct immediately while misconduct immediately while concurrently gathering all the facts concurrently gathering all the facts so the best possible defenses may so the best possible defenses may be asserted, including voluntary be asserted, including voluntary disclosure.disclosure.

140140

Is There an Ongoing Is There an Ongoing Governmental Governmental Investigation?Investigation?

– Have the government investigators Have the government investigators contacted employees?contacted employees?

– Give guidance to employees to Give guidance to employees to attempt to protect corporation attempt to protect corporation without creating obstruction of without creating obstruction of justice issues.justice issues.

– Encourage employees to be Encourage employees to be interviewed at work with counsel interviewed at work with counsel present.present.

141141

Is There an Ongoing Is There an Ongoing Governmental Investigation? Governmental Investigation? (cont.)(cont.)

– Do not advise that they are prohibited Do not advise that they are prohibited from speaking with the government from speaking with the government investigators.investigators.

– Attempt to contact the agency to Attempt to contact the agency to discover focus of inquiry.discover focus of inquiry.

– Be sensitive to issues of multiple Be sensitive to issues of multiple representation of company and representation of company and employees.employees. We will discuss this issue in detail during the We will discuss this issue in detail during the

ethics segment of the program.ethics segment of the program.

142142

Who Should Conduct the Who Should Conduct the Investigation – Inside or Investigation – Inside or Outside Counsel?Outside Counsel?

– Is there a need for independence?Is there a need for independence?– Is there a possibility that internal Is there a possibility that internal

counsel may become a witness?counsel may become a witness?– Internal counsel’s ability to give Internal counsel’s ability to give

legal advice in local jurisdiction?legal advice in local jurisdiction?

143143

Is There a Corporate Is There a Corporate Compliance Compliance Department/Officer?Department/Officer?

– Degree of involvement?Degree of involvement?– Is there a corporate compliance policy?Is there a corporate compliance policy?– Generally ensure that any investigation by Generally ensure that any investigation by

corporate compliance is done at the written corporate compliance is done at the written direction of Legal in support of its objective direction of Legal in support of its objective of providing legal advice to the client.of providing legal advice to the client.

– Is there an opportunity for a dual Is there an opportunity for a dual investigation? Compliance Department and investigation? Compliance Department and Legal Department (to protect work product)Legal Department (to protect work product)

144144

Who is the Client?Who is the Client?

– The dominant CEO syndrome?The dominant CEO syndrome?– Must Legal circumvent management Must Legal circumvent management

and go directly to the Board?and go directly to the Board?– ShareholdersShareholders

145145

Specific Objective of the Specific Objective of the InvestigationInvestigation

– Determination of the standard of Determination of the standard of care/due inquiry as required by the care/due inquiry as required by the law, regulation, contract, etc.law, regulation, contract, etc.

– Is it a case of “don’t ask, don’t tell”?Is it a case of “don’t ask, don’t tell”?– Is finding “red flags” the objective? Is finding “red flags” the objective?

(FCPA issues)(FCPA issues)

146146

Other Practical Other Practical Investigation IssuesInvestigation Issues

– Interviews of employees and need Interviews of employees and need for witnesses to such interviewsfor witnesses to such interviews

– Counseling of such employees about Counseling of such employees about the confidential nature of the the confidential nature of the investigation and the duty not to investigation and the duty not to disclose samedisclose same

147147

Other Practical Other Practical Investigation Issues (cont.)Investigation Issues (cont.)

– Document retention/recovery – Document retention/recovery – processes & capabilitiesprocesses & capabilities

– ““Litigation holds” – preservation Litigation holds” – preservation obligations and sanctionsobligations and sanctions

– Forensic information technologyForensic information technology– Duty to maintain anonymity (ethics Duty to maintain anonymity (ethics

hotlines)hotlines)– No retaliation against whistle blowerNo retaliation against whistle blower

148148

Insurance IssuesInsurance Issues

– Duty to disclose to trigger coverage?Duty to disclose to trigger coverage?– Impact of disclosure?Impact of disclosure?

149149

C.C.Ethical Considerations Ethical Considerations for Internal for Internal InvestigationsInvestigations

150150

Define Your RoleDefine Your Role

Clearly define the scope of your engagement at Clearly define the scope of your engagement at each stage each stage

Clearly identify the client or clients you are Clearly identify the client or clients you are representing representing

Communicate your role with clarity to those to Communicate your role with clarity to those to be interviewed be interviewed

Be clear whether the representation extends to Be clear whether the representation extends to the individual directors, officers, employees, the individual directors, officers, employees, former employees of the corporation, as well as former employees of the corporation, as well as the corporation itself.the corporation itself.

151151

Can I Do It…How ?Can I Do It…How ? What factors should be considered in What factors should be considered in

deciding on a simultaneous deciding on a simultaneous representation of the company and some representation of the company and some of its officers or employees? of its officers or employees? 

What are the dangers of later withdrawing What are the dangers of later withdrawing from one of the representations and from one of the representations and attempting to continue the representation attempting to continue the representation of the other party or parties? of the other party or parties? 

What disclosures and consents are What disclosures and consents are required?required?

152152

When may a simultaneous When may a simultaneous representation be representation be undertaken?undertaken? There is no per se bar to simultaneous There is no per se bar to simultaneous

representation.representation. Three limitations on multiple representation Three limitations on multiple representation

(see dr 5-105; similar to PA and NJ and DEL (see dr 5-105; similar to PA and NJ and DEL RPC 1.7(b)):RPC 1.7(b)):– Must be able to conclude that a disinterested lawyer Must be able to conclude that a disinterested lawyer

(DR 5-105) would regard multiple representation as in (DR 5-105) would regard multiple representation as in the interest of corporate client and employee client.the interest of corporate client and employee client.

– Must obtain consent of both clients after full disclosure. Must obtain consent of both clients after full disclosure.

– Must be alert to changes in circumstances that render Must be alert to changes in circumstances that render continuation of multiple representation no longer continuation of multiple representation no longer

permissible.permissible.

153153

Basic TestBasic Test

Basic Test : “[i]f the exercise of Basic Test : “[i]f the exercise of independent professional judgment on independent professional judgment on behalf of a client will be or is likely to be behalf of a client will be or is likely to be adversely affected” or “if it would be adversely affected” or “if it would be likely to involve the lawyer in likely to involve the lawyer in representing differing interests” [NY]representing differing interests” [NY]

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

154154

Basic TestBasic Test Conflicts Subject To Disclosure And Conflicts Subject To Disclosure And

ConsentConsent– If the attorney’s exercise of independent If the attorney’s exercise of independent

professional judgment will be or is likely to professional judgment will be or is likely to be adversely affected, then the second be adversely affected, then the second part of the test must be satisfied: a part of the test must be satisfied: a disinterested lawyer would conclude that disinterested lawyer would conclude that the lawyer can competently represent the lawyer can competently represent both the corporation and the constituent.both the corporation and the constituent.

immaterial conflicts--remote or unlikely to affect the immaterial conflicts--remote or unlikely to affect the lawyer’s judgment lawyer’s judgment

non-consentable conflictsnon-consentable conflicts consentable conflictsconsentable conflicts

155155

Basic TestBasic Test

– The “disinterested lawyer”: an The “disinterested lawyer”: an objective, hypothetical lawyer objective, hypothetical lawyer whose only aim would be to give whose only aim would be to give the best advice possible about the best advice possible about whether the client should consent whether the client should consent to the conflicted representation.to the conflicted representation.

156156

Easy Cases Easy Cases Example:Example: Disinterested Lawyer Test Not Disinterested Lawyer Test Not

Satisfied:Satisfied:Case 1:Case 1: The government is investigating securities The government is investigating securities law violations in the filing of false or misleading law violations in the filing of false or misleading statements and the employee has admitted statements and the employee has admitted wrongdoing in connection with the financial wrongdoing in connection with the financial statements under investigation.statements under investigation.– Corporation would have strong interest in avoiding or Corporation would have strong interest in avoiding or

limiting liability by cooperating fully with the government limiting liability by cooperating fully with the government and providing any information sought by the government and providing any information sought by the government regarding preparation of the financial statements.regarding preparation of the financial statements.

157157

Easy CasesEasy Cases

– The individual would have to The individual would have to consider a variety of factors before consider a variety of factors before deciding whether it was in his deciding whether it was in his interest to cooperate with the interest to cooperate with the government and would need government and would need counsel able and willing to counsel able and willing to negotiate a resolution of the matter.negotiate a resolution of the matter.

– (See New York City Bar Formal (See New York City Bar Formal Opinion 2004-02) Opinion 2004-02)

158158

More Easy Cases…More Easy Cases… Example:Example: Disinterested Lawyer Test Satisfied Disinterested Lawyer Test Satisfied

Case 2:Case 2: Same investigation as Case 1 above, except Same investigation as Case 1 above, except maintenance employee only overheard comments maintenance employee only overheard comments regarding need to alter the corporation’s financial regarding need to alter the corporation’s financial statements but would have no concern about statements but would have no concern about personal liability for wrongdoing. No need for counsel personal liability for wrongdoing. No need for counsel to negotiate independently with governmentto negotiate independently with government. .

Therefore, lawyer could represent individual as well Therefore, lawyer could represent individual as well as the Company.as the Company.

159159

Closer Cases …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.

160160

Closer Cases …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.

161161

Getting The FactsGetting The Facts Obtaining The Relevant Facts Obtaining The Relevant Facts

In determining whether the Disinterested Lawyer In determining whether the Disinterested Lawyer Test is satisfied, the lawyer will require a detailed Test is satisfied, the lawyer will require a detailed grasp of the relevant facts. How can this be done grasp of the relevant facts. How can this be done before making the judgment to engage in a before making the judgment to engage in a multiple representation? multiple representation? 

– Initial Interview with Employee: The “Miranda Initial Interview with Employee: The “Miranda Warning”Warning” The lawyer is representing only the corporation in The lawyer is representing only the corporation in

this interview.this interview.

162162

Getting The FactsGetting The Facts Advise the employee/director/officer: Advise the employee/director/officer:

– ““I represent the corporation and do not represent I represent the corporation and do not represent you.” you.”

– ““Any information you provide is privileged under Any information you provide is privileged under the attorney-client privilege but the privilege is held the attorney-client privilege but the privilege is held by the corporation and not you.”by the corporation and not you.”

– ““It is up to the corporation and not you whether to It is up to the corporation and not you whether to waive that privilege and share that information with waive that privilege and share that information with third parties [and the corporation may decide to do third parties [and the corporation may decide to do that without asking you or informing you].” that without asking you or informing you].”

163163

““Should I Get My Own Should I Get My Own Lawyer? Are You My Lawyer? Are You My Lawyer?”Lawyer?”

What if the employee asks whether he What if the employee asks whether he should consult with his own counsel?should consult with his own counsel?

– Suggested response: “I represent the Suggested response: “I represent the corporation and cannot advise you one way corporation and cannot advise you one way or the other on that.”or the other on that.”

– Should corporate counsel recommend getting Should corporate counsel recommend getting counsel? No, that potentially acts against the counsel? No, that potentially acts against the interest of the corporation, the lawyer’s interest of the corporation, the lawyer’s client.        client.       

164164

““Should I Get My Own Should I Get My Own Lawyer? Are You My Lawyer? Are You My Lawyer?”Lawyer?”

What if prior to the interview the What if prior to the interview the employee asks corporate counsel to employee asks corporate counsel to represent him/her?represent him/her?

– Corporate counsel should ordinarily decline to Corporate counsel should ordinarily decline to represent the employee at this stage.represent the employee at this stage.

– In most cases, the lawyer will not have sufficient In most cases, the lawyer will not have sufficient facts at this stage to make a determination that facts at this stage to make a determination that the Disinterested Lawyer Test is satisfied and a the Disinterested Lawyer Test is satisfied and a multiple representation can be undertaken, multiple representation can be undertaken, subject to disclosure and consent of both clients. subject to disclosure and consent of both clients. It will be the exceptional case where this will be It will be the exceptional case where this will be permissible or appropriate. permissible or appropriate.

165165

Later RetentionLater Retention– The Later Request for Multiple Representation.The Later Request for Multiple Representation.

If the government requests an interview with the employee If the government requests an interview with the employee who has already been interviewed by company counsel, and who has already been interviewed by company counsel, and this triggers a request that corporate counsel represent the this triggers a request that corporate counsel represent the employee, then the lawyer should determine whether he/she employee, then the lawyer should determine whether he/she has enough information to make the determination called for has enough information to make the determination called for by the Disinterested Lawyer Test.  by the Disinterested Lawyer Test.  

– If the lawyer does not, how can this information be obtained?If the lawyer does not, how can this information be obtained?– In further interviews of the employee, the lawyer must always In further interviews of the employee, the lawyer must always

make it clear that the lawyer represents only the corporation, not make it clear that the lawyer represents only the corporation, not the employee, and that any information received will be provided the employee, and that any information received will be provided to the corporation.to the corporation.

166166

Later RetentionLater Retention

– If this is not done, then since information If this is not done, then since information received from a prospective client is received from a prospective client is subject to the lawyer's duty of subject to the lawyer's duty of confidentiality,confidentiality,

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

in some cases, the lawyer who fails to in some cases, the lawyer who fails to handle the interview in this manner may handle the interview in this manner may be precluded from continuing to be precluded from continuing to represent the corporation. Restatement represent the corporation. Restatement (Third) of the Law Governing Lawyers, § (Third) of the Law Governing Lawyers, § 15 (2000). 15 (2000).

167167

Full DisclosureFull Disclosure What Disclosures Must Be Made To What Disclosures Must Be Made To

Render Multiple Representation Render Multiple Representation Permissible?Permissible?

If the lawyer determines that the If the lawyer determines that the Disinterested Lawyer Test has been Disinterested Lawyer Test has been satisfied, the lawyer must then make a satisfied, the lawyer must then make a full disclosure to both clients and obtain full disclosure to both clients and obtain their knowing consent.their knowing consent.

168168

Full DisclosureFull Disclosure

– What is involved in a “full disclosure”? What is involved in a “full disclosure”?  information reasonably sufficient, giving due information reasonably sufficient, giving due

regard for the sophistication of the client, to regard for the sophistication of the client, to permit the client to appreciate the permit the client to appreciate the significance of the potential conflict.significance of the potential conflict.

disclosure of any and all defenses and disclosure of any and all defenses and arguments that a client will not have because of arguments that a client will not have because of the joint representation and the lawyer's fair and the joint representation and the lawyer's fair and reasoned evaluation of those defenses and reasoned evaluation of those defenses and arguments, and the possible effect of failing to arguments, and the possible effect of failing to raise them.raise them.

risks and advantages of the joint representation. risks and advantages of the joint representation.

169169

Risks….AdvantagesRisks….Advantages

– Usual advantages   Usual advantages    Avoiding expense of other counselAvoiding 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 a conflict may arise in the future that will disable

corporate counsel from continuing for the corporation--corporate counsel from continuing for the corporation--prejudice to the corporation from the need to switch prejudice to the corporation from the need to switch counsel; similar risk to employeecounsel; similar risk to employee

need to obtain a prospective consent need to obtain a prospective consent 

170170

Risks….AdvantagesRisks….Advantages the loss of credibility to the investigating agencythe loss of credibility to the investigating agency limitation on the lawyers’ ability to pass on to the limitation on the lawyers’ ability to pass on to the

corporation confidences and secrets that are not corporation confidences and secrets that are not germane to the matter--less of a risk where the employee germane to the matter--less of a risk where the employee has been fully interviewed, but always presenthas been fully interviewed, but always present

possible complications for the corporation in crippling or possible complications for the corporation in crippling or preventing the corporation’s full ability to cooperate with preventing the corporation’s full ability to cooperate with the government. The corporation may have in its the government. The corporation may have in its possession information which its counsel obtained from possession information which its counsel obtained from the employee that would help the corporation cooperate the employee that would help the corporation cooperate with the government to its advantage, but be unable to with the government to its advantage, but be unable to share this information because the employee does not share this information because the employee does not wish to waive the attorney-client privilegewish to waive the attorney-client privilege

171171

Structuring and Getting Structuring and Getting ConsentsConsents Steps include obtaining prospective Steps include obtaining prospective

consents and consents to withdrawal:consents and consents to withdrawal:– Prospective WaiversProspective Waivers

Should be accompanied by full disclosureShould be accompanied by full disclosure Should be in writing signed by the clientShould be in writing signed by the client Should advise of the types of conflicts that may arise to Should advise of the types of conflicts that may arise to

the extent possible--who the conflicted parties would the extent possible--who the conflicted parties would be, and the source of the potential conflictbe, and the source of the potential conflict

172172

Structuring and Structuring and Getting ConsentsGetting Consents

Subjects of waivers:  Subjects of waivers:                                        – the possibility of future litigationthe possibility of future litigation– client’s waiver of objection to former lawyer’s client’s waiver of objection to former lawyer’s

right to cross examine former clientright to cross examine former client– potential need to revisit the scope of the waiver potential need to revisit the scope of the waiver

and the conflict that actually did ariseand the conflict that actually did arise– contractual limitations of the scope of the contractual limitations of the scope of the

representation, e.g.representation, e.g.  representation through representation through investigatory stage only, to a single interview, investigatory stage only, to a single interview, or to a series of interviews with the government or to a series of interviews with the government or on designated topicsor on designated topics

173173

Agreements On Privilege Agreements On Privilege And Separate Shadow And Separate Shadow CounselCounsel

– Understandings on privileged informationUnderstandings on privileged information   whether and what kind of confidential information will whether and what kind of confidential information will

be shared with the two clientsbe shared with the two clients who will control the privilegewho will control the privilege what will happen in the event of a dispute between the what will happen in the event of a dispute between the

clients clients 

– Shadow Counsel and Co-counselShadow Counsel and Co-counsel Middle ground representation for attorney who is Middle ground representation for attorney who is

involved to take over in the event of withdrawal and to involved to take over in the event of withdrawal and to provide independent advice at times where conflict provide independent advice at times where conflict arisesarises

Adds to cost but reduces risk of potential conflicts and Adds to cost but reduces risk of potential conflicts and their resolutiontheir resolution

174174

1.1. The Thompson The Thompson MemorandumMemorandum

175175

2.2. Selective WaiverSelective Waiver

176176

1.1. Payment of Attorney Fees for employeesPayment of Attorney Fees for employees

2.2. Thompson Memorandum and DOJ’s Thompson Memorandum and DOJ’s consideration of payments of an consideration of payments of an employee’s legal fees when determining employee’s legal fees when determining whether to indict the corporation.whether to indict the corporation.

a.a. U.S. v. SteinU.S. v. Stein, No. S1 05 Crim. 0888, 2006 WL , No. S1 05 Crim. 0888, 2006 WL 1735260 (S.D.N.Y. June, 2006)1735260 (S.D.N.Y. June, 2006)

177177

E.E. Enron: A Case StudyEnron: A Case Study

Whose Privilege Is It Anyway?

Presented by:

Lesli C. Esposito, Blank Rome LLPJohn D. Kimball, Blank Rome LLPJeremy A. Rist, Blank Rome LLP, ModeratorDaniel L. Stackhouse, Blank Rome LLP

179179

The Privilege Is Under The Privilege Is Under Attack!Attack!

The attorney-client privilege is, more than ever, The attorney-client privilege is, more than ever, subject to increasing challenge:subject to increasing challenge:

1.1. Aggressive government investigatory Aggressive government investigatory techniquestechniques2.2. Increasingly insistent transaction partnersIncreasingly insistent transaction partners3.3. Technology changing conditions and Technology changing conditions and frequency of frequency of communicationcommunication4.4. Heightened auditor independence and Heightened auditor independence and demand for demand for informationinformation

Each of these phenomena places the exercise of the Each of these phenomena places the exercise of the attorney-client privilege at a higher risk than ever attorney-client privilege at a higher risk than ever before.before.

180180

Special TopicsSpecial Topics

Waiver of the privilege through Waiver of the privilege through transaction disclosurestransaction disclosures

Waiver of the privilege through Waiver of the privilege through disclosure to the governmentdisclosure to the government

Waiver of the privilege through Waiver of the privilege through disclosure to insurers and auditorsdisclosure to insurers and auditors

Bonus Topic: “Opinion-Shopping”Bonus Topic: “Opinion-Shopping”

181181

I. Transactional I. Transactional DisclosuresDisclosures

Whether a company waives the Whether a company waives the attorney-client privilege through due attorney-client privilege through due diligence or other disclosures to a diligence or other disclosures to a transaction partner is a question that transaction partner is a question that arises frequently, and increasingly arises frequently, and increasingly often.often.

ExamplesExamples: Patent opinions; attorney : Patent opinions; attorney memoranda on litigation exposure; memoranda on litigation exposure; unredacted board minutesunredacted board minutes

182182

Disclosure Destroys Disclosure Destroys PrivilegePrivilege Basic RuleBasic Rule: A disclosure of privileged : A disclosure of privileged

information to a potential transaction partner information to a potential transaction partner waives the privilegewaives the privilege, as the confidential , as the confidential nature of that information has been nature of that information has been destroyed.destroyed.

““Confidentiality Agreement” irrelevant.Confidentiality Agreement” irrelevant. Privilege waived even if disclosure is required Privilege waived even if disclosure is required

by law (by law (e.g.e.g., “material information”)., “material information”). Waiver of certain privileged information may Waiver of certain privileged information may

waive privilege as to waive privilege as to all all communications on communications on same subject.same subject.

183183

Waiver ofWaiver ofPrivilege IdentifiedPrivilege Identified

Oaks Industries, Inc. v. Zenith Industries, Oaks Industries, Inc. v. Zenith Industries, Inc.Inc., 1998 WL 79614 (N.D. Ill. July 27, 1988):, 1998 WL 79614 (N.D. Ill. July 27, 1988):““We decline to expand the coverage of the We decline to expand the coverage of the attorney-client privilege to information which a attorney-client privilege to information which a party freely shares with other business persons. party freely shares with other business persons. Such an expansion – to all persons with whom the Such an expansion – to all persons with whom the party may enter or consider entering into a party may enter or consider entering into a business transaction – would quickly swallow up business transaction – would quickly swallow up the general rule that disclosure waives the the general rule that disclosure waives the attorney-client privilege. Moreover, it would do attorney-client privilege. Moreover, it would do little to promote the underlying purpose of the little to promote the underlying purpose of the privilege, that of encouraging open discussions privilege, that of encouraging open discussions between clients and their attorneys.”between clients and their attorneys.”

184184

Waiver ofWaiver ofPrivilege IdentifiedPrivilege Identified

Libbey Glass, Inc. v. Oneida, Ltd.Libbey Glass, Inc. v. Oneida, Ltd., 197 F.R.D. , 197 F.R.D. 342, 347-49 (N.D. Ohio 1999) (client waived 342, 347-49 (N.D. Ohio 1999) (client waived privilege as to attorney’s opinion on trade dress privilege as to attorney’s opinion on trade dress infringement issues by disclosing it during infringement issues by disclosing it during negotiations to representatives of an entity with negotiations to representatives of an entity with whom a joint venture was eventually formed)whom a joint venture was eventually formed)

Intl’l Honeycomb Corp. v. Transtech Serv. Intl’l Honeycomb Corp. v. Transtech Serv. NetworkNetwork, 1992 WL 314897 (E.D.N.Y. Oct. 9, , 1992 WL 314897 (E.D.N.Y. Oct. 9, 1992) (decision to reveal privileged information 1992) (decision to reveal privileged information to potential investors for “legitimate business to potential investors for “legitimate business purposes” was rational, yet entailed purposes” was rational, yet entailed consequence of waiver)consequence of waiver)

185185

Waiver ofWaiver ofPrivilege IdentifiedPrivilege Identified

Cheeves v. Southern Clays, Inc.Cheeves v. Southern Clays, Inc., 128 F.R.D. , 128 F.R.D. 128, 131 (M.D. Ga. 1989)128, 131 (M.D. Ga. 1989)

AMCA Int’l Corp. v. PhipardAMCA Int’l Corp. v. Phipard, 107 F.R.D. 39, 43 , 107 F.R.D. 39, 43 (D. Mass. 1985) (client’s disclosure of (D. Mass. 1985) (client’s disclosure of counsel’s memorandum explaining royalty counsel’s memorandum explaining royalty payments waived privilege on that payments waived privilege on that memorandum and on all other memorandum and on all other communications with any attorneys communications with any attorneys regarding such payments)regarding such payments)

Paul R. Rice, Paul R. Rice, Attorney-Client Privilege in the Attorney-Client Privilege in the United StatesUnited States (2d ed.) (2003) (2d ed.) (2003) § 9:90§ 9:90

186186

PrivilegePrivilegeDeemed PreservedDeemed Preserved

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

Three factors identifiedThree factors identified::– party had duty to disclose possibility that party had duty to disclose possibility that

patent litigation could arisepatent litigation could arise– disclosure made only after special disclosure made only after special

confidentiality agreement to protect this confidentiality agreement to protect this specific information specific information

– ““real possibility” that potential purchaser real possibility” that potential purchaser would purchase the businesswould purchase the business

187187

PrivilegePrivilegeDeemed PreservedDeemed Preserved

Tenneco Pck’g Specialty and Consumer Tenneco Pck’g Specialty and Consumer Prods., Inc. v. S.C. Johnson & Sons, Inc.Prods., Inc. v. S.C. Johnson & Sons, Inc., 1999 , 1999 WL 754748 (N.D. Ill. Sept. 14, 1999) (also WL 754748 (N.D. Ill. Sept. 14, 1999) (also stressed late stage of disclosure and stressed late stage of disclosure and extremely limited confidentiality agreement extremely limited confidentiality agreement as to the specific information in question)as to the specific information in question)

Rayman v. Am. Charter Fed. Savings & Loan Rayman v. Am. Charter Fed. Savings & Loan Ass’nAss’n, 148 F.R.D. 647 (D. Neb. 1993), 148 F.R.D. 647 (D. Neb. 1993)

Cavallaro v. United StatesCavallaro v. United States, 153 F. Supp.2d 52, , 153 F. Supp.2d 52, 62 (D. Mass. 2001) (dicta) (erroneously stating 62 (D. Mass. 2001) (dicta) (erroneously stating that disclosure of information during merger that disclosure of information during merger negotiations does not pose problems for negotiations does not pose problems for privilege)privilege)

188188

Can a Common Interest Can a Common Interest Agreement Preserve Agreement Preserve Privilege?Privilege? Answer generally “no” in negotiation context.Answer generally “no” in negotiation context. A “community of interests exists among . . . A “community of interests exists among . . .

separate corporations where they have an separate corporations where they have an identical legal interestidentical legal interest with respect to the subject with respect to the subject matter of a communication between an attorney matter of a communication between an attorney and a client concerning legal advice . . . The key and a client concerning legal advice . . . The key consideration is that the nature of the interest be consideration is that the nature of the interest be identicalidentical, not similar, and be , not similar, and be legallegal, not solely , not solely commercial.”commercial.” – Duplan Corp. v. Deering Milliken, Inc.Duplan Corp. v. Deering Milliken, Inc., 397 F. Supp. 1146, 1172 (D. , 397 F. Supp. 1146, 1172 (D.

S.C. 1975).S.C. 1975).

Transaction-related interests are usually deemed Transaction-related interests are usually deemed “commercial,” “commercial,” at least at least until final stages where until final stages where regulatory scrutiny may be at hand.regulatory scrutiny may be at hand.

189189

When Privilege May Be When Privilege May Be Preserved Despite Preserved Despite DisclosureDisclosure Legal duty to discloseLegal duty to disclose Transaction is near closingTransaction is near closing Transaction is a merger or a stock Transaction is a merger or a stock

transaction (transaction (i.e.i.e., not an asset sale), not an asset sale) Special precautions are taken to Special precautions are taken to

ensure the confidentiality of the ensure the confidentiality of the privileged information in questionprivileged information in question

Formal regulatory inquiry has begun Formal regulatory inquiry has begun or is imminentor is imminent

190190

II. Waiver Through DisclosureII. Waiver Through Disclosureto the Governmentto the Government

Incentives to produce privileged Incentives to produce privileged information to the government in information to the government in connection with an investigationconnection with an investigation

Effects of such disclosureEffects of such disclosure Attempts to ameliorate consequences Attempts to ameliorate consequences

of disclosure or refusal to discloseof disclosure or refusal to disclose

191191

Incentives to Produce Incentives to Produce Privileged InformationPrivileged Information

Intense pressureIntense pressure Required for favorable treatmentRequired for favorable treatment

– Thompson Memorandum: “one factor a Thompson Memorandum: “one factor a prosecutor may weigh in assessing the prosecutor may weigh in assessing the adequacy of a corporation’s cooperation adequacy of a corporation’s cooperation is the completeness of its disclosure, is the completeness of its disclosure, including, if necessary, a waiver of the including, if necessary, a waiver of the attorney-client and work product attorney-client and work product protections.”protections.”

192192

The Effects ofThe Effects ofVoluntary DisclosureVoluntary Disclosure

Effect on communications with Effect on communications with attorneysattorneys

Does the disclosure to the government Does the disclosure to the government constitute a waiver with respect to the constitute a waiver with respect to the materials produced?materials produced?

With respect to all materials on the With respect to all materials on the same subject matter?same subject matter?

193193

Waiver of the Privilege Waiver of the Privilege With Respect to the With Respect to the Materials ProducedMaterials Produced The law regarding “selective waiver” is in a “state of The law regarding “selective waiver” is in a “state of

hopeless confusion.” hopeless confusion.” – See, e.g., Columbia/HCA Healthcare Corp. Billing Practices Litig.See, e.g., Columbia/HCA Healthcare Corp. Billing Practices Litig. , 293 F.3d , 293 F.3d

289 (6289 (6thth Cir. 2002). Cir. 2002).

Most of the Courts of Appeals have held voluntary Most of the Courts of Appeals have held voluntary disclosure to the government to constitute a waiver with disclosure to the government to constitute a waiver with respect to the materials produced. respect to the materials produced. – See, e.g., Permian Corp. v. United StatesSee, e.g., Permian Corp. v. United States , 665 F.2d 1214 (D.C. Cir. 1981)., 665 F.2d 1214 (D.C. Cir. 1981).

HoweverHowever, the Eighth Circuit has accepted the theory that , the Eighth Circuit has accepted the theory that disclosure taking place in a “non-public” setting may disclosure taking place in a “non-public” setting may preserve the privilege, with or without special preserve the privilege, with or without special confidentiality agreement. confidentiality agreement. – See, e.g., Diversified Indus. v. MeredithSee, e.g., Diversified Indus. v. Meredith , 572 F.2d 596, 611 (8, 572 F.2d 596, 611 (8thth Cir. 1978). A Cir. 1978). A

party may “selectively” waive the privilege as to the government, but party may “selectively” waive the privilege as to the government, but preserve it against outsiders. Most other courts have rejected this.preserve it against outsiders. Most other courts have rejected this.

194194

Waiver of the Privilege With Waiver of the Privilege With Respect to the Materials Respect to the Materials ProducedProduced Some courts, however, have noted Some courts, however, have noted

that special confidentiality that special confidentiality agreements may be effective in agreements may be effective in preserving the privilege.preserving the privilege.– See, e.g., Enron Corp. v. BorgetSee, e.g., Enron Corp. v. Borget, 1990 WL 144879 , 1990 WL 144879

(S.D.N.Y. Sept. 22, 1990)(S.D.N.Y. Sept. 22, 1990)

Confidentiality agreements are Confidentiality agreements are generally ineffective. generally ineffective. – See, e.g., Columbia/HCASee, e.g., Columbia/HCA

195195

3 Basic Positions as to 3 Basic Positions as to Selective WaiverSelective Waiver

Selective waiver never permissibleSelective waiver never permissible Selective waiver permissibleSelective waiver permissible Selective waiver permissible where Selective waiver permissible where

government agrees to special government agrees to special confidentiality protectionsconfidentiality protections

The first position is dominantThe first position is dominant

196196

Waiver of the Privilege with Waiver of the Privilege with Respect to all Materials on Respect to all Materials on the Same Subject Matterthe Same Subject Matter

Some courts have determined that “partial Some courts have determined that “partial waiver” of some privileged information waives waiver” of some privileged information waives privilege as to all other privileged privilege as to all other privileged communications related to the same subject. communications related to the same subject. – See, e.g., In re Sealed CaseSee, e.g., In re Sealed Case, 676 F.2d 793, 818 (D.C. Cir. 1982); , 676 F.2d 793, 818 (D.C. Cir. 1982); In In

re Martin Marietta Corp.re Martin Marietta Corp., 856 F.2d 619 (4, 856 F.2d 619 (4thth Cir. 1988). Cir. 1988).

Probably only triggered at a certain point after Probably only triggered at a certain point after a significant quantum of privileged information a significant quantum of privileged information related to the subject has been disclosed.related to the subject has been disclosed.

May not apply where partial information is not May not apply where partial information is not put into public record.put into public record.

““What does fairness dictate?”What does fairness dictate?”

197197

Efforts to PreserveEfforts to Preservethe Privilegethe Privilege

H.R. 2179 (2004) would have limited waiver of H.R. 2179 (2004) would have limited waiver of privilege to any information disclosed to the S.E.C. privilege to any information disclosed to the S.E.C. pursuant to a written confidentiality agreement.pursuant to a written confidentiality agreement.

Sentencing Commission: April 5, 2006, Commission Sentencing Commission: April 5, 2006, Commission voted to remove language from 8C2(g), cmt. 12, voted to remove language from 8C2(g), cmt. 12, which required waiver of privilege as prerequisite which required waiver of privilege as prerequisite for finding “full cooperation.”for finding “full cooperation.”

Proposed F.R.E. 502: would preserve privilege and Proposed F.R.E. 502: would preserve privilege and work product protections where information is work product protections where information is disclosed to a “federal, state, or local government disclosed to a “federal, state, or local government agency during an investigation by that agency, and agency during an investigation by that agency, and is limited to persons involved in the investigation.”is limited to persons involved in the investigation.”

198198

III. Waiver of the Privilege III. Waiver of the Privilege Through Disclosures to Insurers Through Disclosures to Insurers and Auditorsand Auditors

InsurersInsurers

Insurance policy “cooperation clauses” may Insurance policy “cooperation clauses” may require the insured to share privileged require the insured to share privileged information with the insurer.information with the insurer.

Disclosure of privileged or work product Disclosure of privileged or work product information to an insurer information to an insurer may may waive the waive the privilege as to other parties.privilege as to other parties.

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

199199

Location, Location, Location:Location, Location, Location:Know What States’ Laws May Know What States’ Laws May ApplyApply A majority of insurance disputes are A majority of insurance disputes are

litigated in federal court based on litigated in federal court based on diversity jurisdiction.diversity jurisdiction.

State law is not uniform regarding State law is not uniform regarding attorney-client privilege in the attorney-client privilege in the insurance context.insurance context.

As a result, disclosure to an insurer As a result, disclosure to an insurer may result in a waiver in one may result in a waiver in one jurisdiction, but not in another.jurisdiction, but not in another.

200200

The “Common Interest” The “Common Interest” DoctrineDoctrine Insurer providing a defenseInsurer providing a defense: The “common interest” : The “common interest”

doctrine is most likely to preserve the privilege doctrine is most likely to preserve the privilege where the insurer has retained counsel to defend the where the insurer has retained counsel to defend the insured.insured.– See e.g., Metropolitan Life Ins. Co. v. Aetna Cas. & Surety Co., See e.g., Metropolitan Life Ins. Co. v. Aetna Cas. & Surety Co., 730 A.2d 51, 65 730 A.2d 51, 65

(Conn. 1999); (Conn. 1999); Lectrolarm Custom Sys., Inc. v. Pelco Sales, Inc., Lectrolarm Custom Sys., Inc. v. Pelco Sales, Inc., 212 F.R.D. 212 F.R.D. 567,571 (E.D. Cal. 2002).567,571 (E.D. Cal. 2002).

Reservation of rightsReservation of rights: The doctrine is less likely to : The doctrine is less likely to apply if the insurer has reserved its rights or the apply if the insurer has reserved its rights or the scope of any identity of interest is uncertain.scope of any identity of interest is uncertain.– See e.g., North River Ins. Co. v. Philadelphia Reinsurance Corp., See e.g., North River Ins. Co. v. Philadelphia Reinsurance Corp., 797 F.Supp. 797 F.Supp.

363 (D.N.J. 1992); Lectrolarm, supra.363 (D.N.J. 1992); Lectrolarm, supra.

Separate counselSeparate counsel: Most courts will not find a : Most courts will not find a “common interest” if the insurer declines coverage “common interest” if the insurer declines coverage or the insured has its own counsel and acts or the insured has its own counsel and acts independently of the insurer.independently of the insurer.– See e.g., Lectrolarm, supra; Metropolitan Life, supra at 65 n. 33.See e.g., Lectrolarm, supra; Metropolitan Life, supra at 65 n. 33.

201201

Common Interest: Common Interest: Sword and ShieldSword and Shield

In a coverage dispute, insurers may use In a coverage dispute, insurers may use the “common interest” doctrine to seek the “common interest” doctrine to seek access to the insured’s privileged access to the insured’s privileged materials from the underlying case.materials from the underlying case.– The unity of interest eliminates any The unity of interest eliminates any

expectation of confidentiality for expectation of confidentiality for communications relating to the defense of the communications relating to the defense of the underlying case.underlying case.

– Privilege may still attach to communications Privilege may still attach to communications related to coverage because the interests of related to coverage because the interests of the insurer and its insured are adverse. the insurer and its insured are adverse.

– See, e.g., Nationwide Mut. Fire Ins. Co. v. See, e.g., Nationwide Mut. Fire Ins. Co. v. Bourlon, Bourlon, 617 S.E.2d 40, 47 (N.C. Ct. App. 617 S.E.2d 40, 47 (N.C. Ct. App. 2005).2005).

202202

Little Clarity From the Little Clarity From the CourtsCourts Several courts have found that a “common Several courts have found that a “common

interest” eliminates a claim of privilege interest” eliminates a claim of privilege between the insured and insurer.between the insured and insurer.– See, e.g., Waste Mgmt., Inc. v. Int’l Surplus Lines Ins. Co.,See, e.g., Waste Mgmt., Inc. v. Int’l Surplus Lines Ins. Co.,

579 N.E.2d 322, 328 (Ill. 1991); 579 N.E.2d 322, 328 (Ill. 1991); Dendema v. Denbur, Inc.,Dendema v. Denbur, Inc., 2002 U.S. Dist. LEXIS 3804 (N.D. Ill. Mar. 8, 2002); 2002 U.S. Dist. LEXIS 3804 (N.D. Ill. Mar. 8, 2002); Metro Metro Wastewater Reclamation Dist. v. U.S. Fire Ins. Co.,Wastewater Reclamation Dist. v. U.S. Fire Ins. Co., 142 142 F.R.D. 471 (D. Col. 1992)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 See, e.g., N. River Ins. Co. v. Columbia Cas. Co., 1995 WL

5792 (5792 (S.D.N.Y. Jan. 5, 1995);S.D.N.Y. Jan. 5, 1995); Int’l Ins. Co. v. Newmount Int’l Ins. Co. v. Newmount Mining Corp., Mining Corp., 800 F. Supp. 1195 (S.D.N.Y. 1992); 800 F. Supp. 1195 (S.D.N.Y. 1992); Owens-Owens-Corning Fiberglass Corp. v. Allstate Ins. Co., Corning Fiberglass Corp. v. Allstate Ins. Co., 660 N.E.2d 660 N.E.2d 755 (Ohio Ct. Com. Pl. 1993).755 (Ohio Ct. Com. Pl. 1993).

203203

Privilege and Insurance Privilege and Insurance Policy Cooperation ClausesPolicy Cooperation Clauses

Insurers have argued, and some courts have Insurers have argued, and some courts have agreed, that the insured’s contractual duty to agreed, that the insured’s contractual duty to cooperate waives the privilege with respect cooperate waives the privilege with respect to materials in the underlying case.to materials in the underlying case.– See, e.g., Waste Mgmt., Inc. v. Int’l Surplus Lines Ins. Co., See, e.g., Waste Mgmt., Inc. v. Int’l Surplus Lines Ins. Co.,

579 N.E.2d 322, 328 (Ill. 1991).579 N.E.2d 322, 328 (Ill. 1991).

Most courts have rejected the cooperation Most courts have rejected the cooperation clause waiver argument.clause waiver argument.– See, e.g., Bituminous Cas. Corp. v. Tonka Corp., See, e.g., Bituminous Cas. Corp. v. Tonka Corp., 140 140

F.R.D. 381, 386 (D. Minn. 1992); F.R.D. 381, 386 (D. Minn. 1992); Metropolitan Life, supra Metropolitan Life, supra at 63-64.at 63-64.

204204

DisclosuresDisclosures to to Accountants & AuditorsAccountants & Auditors

AuditorsAuditors

In general, the attorney-client privilege does In general, the attorney-client privilege does not apply to communications that are not apply to communications that are intended to be disclosed to third parties, or intended to be disclosed to third parties, or that are in fact so disclosed.that are in fact so disclosed.– See, e.g., U.S. v. Rockwell Intern., See, e.g., U.S. v. Rockwell Intern., 897 F.2d 1255 (3d 897 F.2d 1255 (3d

Cir.) 1990).Cir.) 1990).

““[N]o accountant-client privilege exists under [N]o accountant-client privilege exists under federal law, and no state-created privilege federal law, and no state-created privilege has been recognized in federal cases.” has been recognized in federal cases.” – United States v. Arthur Young & Co., United States v. Arthur Young & Co., 465 U.S. 805, 817 465 U.S. 805, 817

(1984). (1984).

205205

State Law All Over the Map on State Law All Over the Map on Accountant-Client PrivilegeAccountant-Client Privilege

At least 31 states have codified some form of At least 31 states have codified some form of accountant-client privilege, but the statutes accountant-client privilege, but the statutes and the protection afforded thereunder vary and the protection afforded thereunder vary considerably.considerably.

Only about 12 states provide a “meaningful Only about 12 states provide a “meaningful privilege.” Many others have merely codified privilege.” Many others have merely codified accountants’ existing ethical obligations.accountants’ existing ethical obligations.– The Accountant-Client Privilege: A The Accountant-Client Privilege: A

Prescription for Confidentiality or Just a Prescription for Confidentiality or Just a Placebo?,” Placebo?,” New Eng. L. Rev. 697, 735 New Eng. L. Rev. 697, 735 (2000).(2000).

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

206206

An Exception to Every Rule:An Exception to Every Rule:Accountants as TranslatorsAccountants as Translators

Accountant may be deemed privileged agent Accountant may be deemed privileged agent where the accountant serves as a translator to where the accountant serves as a translator to facilitate communications between counsel and facilitate communications between counsel and client for the purpose of obtaining legal advice.client for the purpose of obtaining legal advice.– See, e.g., United States v. Kovel, See, e.g., United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).296 F.2d 918 (2d Cir. 1961).

This exception does not apply where the This exception does not apply where the accountant is providing accounting services or accountant is providing accounting services or information that is not necessary to counsel’s information that is not necessary to counsel’s provision of legal advice to the client.provision of legal advice to the client.– See, e.g., United States v. Ackert, See, e.g., United States v. Ackert, 169 F.3d 136, 139 (2d Cir. 169 F.3d 136, 139 (2d Cir.

1999); 1999); In re G-I Holdings, Inc., In re G-I Holdings, Inc., 218 F.R.D. 428, 436-37 (D.N.J. 218 F.R.D. 428, 436-37 (D.N.J. 2003); 2003); United States v. Chevron Texaco Corp., United States v. Chevron Texaco Corp., 241 F. Supp. 241 F. Supp. 2d 1065, 1072 (N.D. Cal. 2002).2d 1065, 1072 (N.D. Cal. 2002).

207207

Disclosures to AuditorsDisclosures to Auditors

Generally, disclosure of privileged information to auditors Generally, disclosure of privileged information to auditors will waive the privilege.will waive the privilege.– S.E.C. v. BradyS.E.C. v. Brady, 2006 WL 2880444 (N.D. Tex. Oct. 6, 2006) , 2006 WL 2880444 (N.D. Tex. Oct. 6, 2006)

(disclosure of confidential information to auditors for (disclosure of confidential information to auditors for purposes other than seeking legal advice destroys the right purposes other than seeking legal advice destroys the right to claim the privilege).to claim the privilege).

– First Fed. Savs. Bank v. United States, First Fed. Savs. Bank v. United States, 55 Fed. Cl. 263, 269-55 Fed. Cl. 263, 269-70 (Fed. Cl. 2003) (disclosure of unredacted board minutes 70 (Fed. Cl. 2003) (disclosure of unredacted board minutes during annual audits waived the privilege, because the during annual audits waived the privilege, because the disclosure did not have a legal purpose).disclosure did not have a legal purpose).

– United States v. El Paso Co., United States v. El Paso Co., 682 F.2d 530, 540 (5682 F.2d 530, 540 (5thth Cir. 1982) Cir. 1982) (disclosure of tax pool analysis and underlying (disclosure of tax pool analysis and underlying documentation to outside accountants for tax purposes documentation to outside accountants for tax purposes waived the privilege).waived the privilege).

Where counsel retains an auditor to assist in providing Where counsel retains an auditor to assist in providing legal advice, the auditor acts as a privileged agent.legal advice, the auditor acts as a privileged agent.– See U.S. ex rel. Robinson v. Northrop Grumman Corp., See U.S. ex rel. Robinson v. Northrop Grumman Corp., 2002 2002

WL 31478259 (N.D. Ill. Nov. 5, 2002).WL 31478259 (N.D. Ill. Nov. 5, 2002).

208208

Privilege v. Work Product:Privilege v. Work Product:An Important DistinctionAn Important Distinction Waiver of the attorney-client privilege is not Waiver of the attorney-client privilege is not

necessarily a waiver of the work product protection for necessarily a waiver of the work product protection for the same documents.the same documents.– See S.E.C. v. Brady, supra See S.E.C. v. Brady, supra at *10.at *10.

Most courts find work product waived only when it is Most courts find work product waived only when it is disclosed to an “adversary” or potential “adversary”.disclosed to an “adversary” or potential “adversary”.– See, e.g., Lawrence E. Jaffe Pension Plan v. Household See, e.g., Lawrence E. Jaffe Pension Plan v. Household

Int’l, Inc., Int’l, Inc., 237 F.R.D. 176, 183 (N.D. Ill. July 6, 2006); 237 F.R.D. 176, 183 (N.D. Ill. July 6, 2006); United States v. Stewart, United States v. Stewart, 287 F. Supp.2d 461 (S.D.N.Y. 287 F. Supp.2d 461 (S.D.N.Y. 2003).2003).

Generally, waiver of opinion work product will not Generally, waiver of opinion work product will not result in a broad subject matter waiver.result in a broad subject matter waiver.– See, e.g., S.E.C. v. Brady, supra See, e.g., S.E.C. v. Brady, supra at *14; at *14; Chambers v. Chambers v.

Allstate Ins. Co., Allstate Ins. Co., 206 F.R.D. 579, 589 (S.D. W. Va. 2002).206 F.R.D. 579, 589 (S.D. W. Va. 2002).

209209

Is An Auditor an Is An Auditor an “Adversary”?“Adversary”?

The fact that an auditor must remain The fact that an auditor must remain independent does not establish that it is independent does not establish that it is adversarial to the company it audits.adversarial to the company it audits.– See, e.g., Lawrence Jaffe Pension Plan, supra See, e.g., Lawrence Jaffe Pension Plan, supra at 183.at 183.

Some courts have suggested that auditors Some courts have suggested that auditors and the companies they audit share a and the companies they audit share a common interest in the information shared common interest in the information shared by the company.by the company.– See Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., See Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc.,

229 F.R.D. 441 (S.D.N.Y. 2004). 229 F.R.D. 441 (S.D.N.Y. 2004). But see Medinol Ltd. V. But see Medinol Ltd. V. Boston Scientific Corp., Boston Scientific Corp., 214 F.R.D. 113 (S.D.N.Y. 2002) 214 F.R.D. 113 (S.D.N.Y. 2002) (in view of recent accounting scandals, it is “crystal (in view of recent accounting scandals, it is “crystal clear” that “in order for auditors to properly do their job, clear” that “in order for auditors to properly do their job, they they must must not share common interests with the company not share common interests with the company they audit”) (emphasis added).they audit”) (emphasis added).

210210

Privilege Threat Increased Privilege Threat Increased in Post-Enron Environmentin Post-Enron Environment

The enactment of the Sarbanes-Oxley Act of 2002 in the The enactment of the Sarbanes-Oxley Act of 2002 in the wake of Enron and other corporate scandals has wake of Enron and other corporate scandals has broadened the scope of information requested by broadened the scope of information requested by auditors and increased potential threats to the privilege.auditors and increased potential threats to the privilege.

Areas of inquiry include liabilities and Areas of inquiry include liabilities and contingency/litigation reserves, results of internal contingency/litigation reserves, results of internal investigations, and legal advice regarding regulatory investigations, and legal advice regarding regulatory and transactional matters.and transactional matters.

In response, the ABA recently adopted a resolution In response, the ABA recently adopted a resolution urging the SEC and other governmental and urging the SEC and other governmental and professional organizations to adopt standards, policies, professional organizations to adopt standards, policies, practices and procedures to ensure that the privilege practices and procedures to ensure that the privilege and work product protections are preserved throughout and work product protections are preserved throughout the audit processthe audit process– See See ABA Aug. 7-8, 2006 Resolution and Report of ABA Task ABA Aug. 7-8, 2006 Resolution and Report of ABA Task

Force on the Attorney-Client PrivilegeForce on the Attorney-Client Privilege,, available at available at http://www/abanet.org/buslaw/attorneyclient/home.shtml.http://www/abanet.org/buslaw/attorneyclient/home.shtml.