JANUARY/FEBRUARY 2008 · 2018-05-29 · out in its Memorandum of Association (the Memorandum), a...

CORPORATE Top Ten Tips for U.S. Directors of UK Companies

Board Minutes That Survive Scrutiny Page 4

CONSTRUCTION LAW Returning Arbitration to an Effective

Process in Construction Contracts Page 8

INTELLECTUAL PROPERTY Selling Into Europe: A Pitfall for the Unwary

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FIRM NEWS Page 12

ELECTION LAW U.S. Supreme Court Favors Corporate

Free Speech Rights Over Campaign Finance Reforms . . . This Time Around

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JANUARY/FEBRUARY 2008

W W W . F A E G R E . C O M

U N I T E D S TA T E S | E N G L A N D | G E R M A N Y | C H I N A

TRENDS® is published bimonthly by the law firm of Faegre & Benson llp. Further details are necessary for a complete understanding of the subjects covered by this magazine. For that reason, the specific advice of legal counsel is recommended before acting on any matter discussed on these pages.

For the latest legal news, or copies of any article in this magazine, visit Faegre & Benson online at www.faegre.com. For address and other changes, contact [email protected].

© 2008 Faegre & Benson LLP. All rights reserved.

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To find out why corporate clients regularly turn to Faegre & Benson for the most challenging legal matters, please visit www.faegre.com/go-to.

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M I N N E S O T A | C O L O R A D O | I O W A | E N G L A N D | G E R M A N Y | C H I N A

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The Companies Act 2006 (the 2006 Act) is the largest piece of legislation ever enacted in the United Kingdom, fundamentally changing the rules that govern most aspects of the operations of UK companies. The current legislation is set out in the Companies Act 1985 (the 1985 Act) and the Companies Act 1989, with the changes contained in the 2006 Act gradually being phased in over a period of three years, from November 2006 to October 2009.

Many of the provisions in the 2006 Act are of particular relevance to U.S. corporations with UK subsidiaries as well as to U.S. corporations and individuals who are directors of UK companies. A description of all those new provisions is beyond the scope of this article, but listed below are ten important changes to be aware of:

1. DirectorsA minimum-age requirement of 16 for directors of all companies is introduced in the 2006 Act. The previous upper-age limit of 70 has been removed to reflect EU laws prohibiting age discrimination.

Directors’ service contracts that are longer than two years will need to be approved by shareholders, whereas the threshold for approval under the 1985 Act was five years. Directors are also obliged under the 2006 Act to make their service contracts available for inspection by any shareholder

upon request—a point that should be borne in mind by directors whose employees are shareholders in the companies for which they work.

Starting Oct. 1, 2009, a company must have at least one natural person on its board of directors. However, a company that did not have a natural person (as opposed to a corporation) as a director on Nov. 8, 2006, has until October 2010 to appoint one. If a U.S. company has an existing UK subsidiary with only corporate directors, it will need to appoint an individual. Any person acting as a director should bear in mind that if a UK company gets into financial difficulties, directors may in some circumstances be personally liable for ongoing debts.

2. Directors’ DutiesThe 2006 Act introduces the first-ever statutory statement of UK directors’ duties. This statement clarifies and adds to the many common law rules and equitable principles that govern current practice.

The fiduciary and common law duties of directors in the United Kingdom have evolved through case law and include the following obligations: to exercise skill and care; to act in good faith and in the best interests of the company; to act within the powers conferred by the company’s constitutional documents; not to fetter their discretion regarding management of the

TRENDS® January/February 2008

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Paul Taylor ([email protected]) is a partner, and Robert Darwin ([email protected]) an associate. Both are London—based lawyers in the firm’s corporate practice.

Top 10 Tips for U.S. Directors of UK Companies

By Paul Taylor and Robert Darwin

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company; to avoid conflicting interests and duties; and not to make a secret profit.

Since Oct. 1, 2007, directors have had a statutory duty to “promote the success of the company.” In doing so, they must consider a non-exhaustive list of factors, referred to as the principle of “enlightened shareholder value.” Such factors include an obligation to consider the interests of the company’s employees and the environment. However, there is at present little guidance as to the weight each factor should be given and what a director should do where these considerations contradict one another; nor are directors advised whether they need to list their consideration of various factors in the records of board meetings. Current thinking is that all UK directors need to show that they have received and are aware of the list of duties and factors. It is therefore recommended that each set of board minutes should record that the directors took those duties and principles into account in their deliberations.

Additionally, starting in either October 2008 or 2009 (there is uncertainty over the implementation timetable), directors must actively avoid putting themselves in situations in which they have a conflict of interest, although if one arises, it can be authorized by the independent directors on the board.

3. Company SecretariesCurrently, every company is required to have a company secretary who is responsible for the internal administration of the company and for making certain filings on behalf of the company with Companies House (the administrative corporate record center in the United Kingdom). A sole director is prohibited from simultaneously holding the post of company secretary.

Under the 2006 Act, only public companies will be required to have a company secretary. Private companies will have a choice. Many companies appoint external professional company secretaries, and there may be cost savings to be had by a private company as a result of choosing not to appoint one.

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4. Constitution of the CompanyCurrently, a company’s constitution and the rules governing its administration are set out in its Memorandum of Association (the Memorandum), a document governing the way in which the company can interact with the world, and its Articles of Association (the Articles), a document governing the internal administration of the company and relations between the company and its shareholders.

Under the 2006 Act, the Memorandum will simply be a historical document recording the facts at the time of incorporation, i.e., a statement that the founders wish to form a company and the details of the subscriber shares. Once a company is incorporated, the Memorandum will not be capable of amendment.

The Memorandum will also no longer contain an objects clause stating the purpose for which the company was formed; hence, all companies will be deemed to have unlimited objects unless they choose to restrict them. In practice, the elimination of the objects clause means that companies will not be limited in their actions unless a restriction is specifically imposed. All matters that govern the regulation and administration of companies will be dealt with in the Articles.

5. Meetings and ResolutionsShareholders of UK companies make decisions relating to their company in general meetings. There are various types of shareholder resolutions in the United Kingdom. Of these, the most common are “Ordinary” and “Special” resolutions. An Ordinary resolution requires the consent of 50 percent of shareholders, while a Special resolution requires the consent of 75 percent of shareholders. Previously, the notice period to pass an Ordinary resolution was 14 days, and for Special resolutions it was 21 days.


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Since Oct. 1, 2007, the notice period for all general meetings has been 14 days regardless of the type of resolution being passed. Shorter notice may be agreed upon by 90 percent of the members entitled to attend and vote in the case of private companies, or by 95 percent of the members in the case of public companies.

Private companies are no longer obliged to hold annual general meetings, although if they elect to do so, only 14 days’ notice is required. A public company is still required to hold an annua l general meeting, for which 21 days’ notice must be given.

6. Written ResolutionsUnder UK law, shareholders may pass resolutions without having a shareholders’ meeting by circulating to all members a paper containing the resolutions, referred to as “Written Resolutions.” Previously, all types of Written Resolutions had to be passed by 100 percent of shareholders.

Since Oct. 1, 2007, private companies have been able to pass both Ordinary and Special resolutions as Written Resolutions, with 50 percent or 75 percent majorities, respectively.

7. Electronic CommunicationS i nc e Ja n . 2 0 , 2 0 0 7, e l e c t r o n i c communication between shareholders and companies has been permitted under the 2006 Act. Companies may now send documents to shareholders in electronic form (e.g., by email) or by posting them on the company’s Web site, subject to prior shareholder approval. Such approval will be deemed given by shareholders who have not responded to a company’s request for such approval within 28 days.

8. Publication and Filing of AccountsEffective Apr. 6, 2008, the time limit allowed for filing company accounts with the Registrar of Companies from the end of an accounting period will be reduced

from 10 months (as under the 1985 Act) to nine months for private companies, and from seven months (as under the 1985 Act) to six months for public companies.

Companies listed on a stock exchange must also publish their full accounts and reports

on their Web sites. Note that private companies will no longer be required to distribute accounts and reports before general meetings.

9. Share CapitalEffective Oct. 1, 2009, private companies must state the nominal value of their shares but are no longer required to have an “authorized share capital” in their Memoranda. Shareholders who want to limit the number and value of shares that can be issued must amend the company’s Articles by Special resolution, i.e., with a 75 percent majority. Public companies, however, are still required to have a minimum share capital of £50,000 (or the equivalent in euros).

Additionally, there have been significant changes under the 2006 Act to the procedures by which a company may alter its share capital. For example, currently, a company can only reduce its share capital by gaining authorization from a court. After Oct. 1, 2009, a private company will be able to reduce its share capital by simply providing a solvency statement to the Registrar of Companies, without the need for court approval. A company will be deemed to have been authorized to reduce its share capital unless it is specifically restricted from doing so in its Articles.

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corporate

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The Delaware Chancery Court recently declared board minutes to be the single best record of corporate directors’ deliberations—better even than director testimony or Securities and Exchange Commission (SEC) f ilings. Accurate minutes are integral to good corporate governance, while altered or fabricated minutes are a red flag about the integrity of company management or procedures. In a later deciphering of board decisions, properly prepared and processed minutes have the advantage of being contemporaneous (like the testimony of directors present

Jeanne Hamm ([email protected] ) is an attorney in the firm’s Minneapolis office, working in our corporate practice. Before joining Faegre & Benson, she served as in-house counsel for several major corporations.

Board Minutes That Survive ScrutinyBy Jeanne M. Hamm

at the meeting) as well as reviewed and approved (like the company’s SEC filings). Ultimately, well-crafted minutes support strong, focused company performance.

Purpose Clear board minutes reduce the risks related to faded director recollections of what happened at a board meeting. As a contemporaneous record of decisions considered and made, they are valuable if court or regulatory scrutiny occurs later, or

10. Financial AssistanceA company has until the passage of the 2006 Act been prohibited from giving financial assistance to any party for the purpose of the acquisition of the company’s own shares. Financial assistance is interpreted broadly and can be given, for example, by way of payment of a success fee to a corporate financer that facilitates a deal or by the granting of security to the funder of acquisition debt. The restriction on giving financial assistance is born of the legal doctrine that a company should not voluntarily diminish its share capital, which would otherwise damage the interests of its creditors. These rules will be eliminated under the 2006 Act for private companies, starting either Oct. 1, 2008, or Oct. 1, 2009 (again, the exact timing of the change is uncertain at the time of writing). Public companies, however, will still be subject to certain restrictions on giving financial assistance.

ConclusionThe 2006 Act aims to simplify and modernize company legislation in the United Kingdom. It is intended to reduce the administrative cost and streamline the regulatory regime for running a company. As with any substantive piece of new legislation, the full impact of the 2006 Act will emerge only with time and practice. Although the 2006 Act will not be fully implemented until Oct. 1, 2009, some of its provisions are already in force and some will take effect during 2008. United Kingdom companies thus have little time to ensure that their operations comply with this vast change to the law. It is therefore essential that U.S. companies seek professional advice in relation to any duties and obligations they (or their subsidiaries) may become subject to, or any advantages they (or their subsidiaries) may derive from the implementation of the 2006 Act in the United Kingdom.

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Under the business judgment rule, courts presume that boards of directors make decisions on an informed basis, in good faith and with the

reasonable belief that their actions are in the best interest of the corporation.

if someone challenges the directors’ exercise of their duties of care and loyalty. Your company’s board minutes provide credible evidence to buttress directors’ recollections, averting a wry evaluation such as that given by a Delaware court in the case In re Netsmart Technologies, Inc. Shareholders Litigation “In any event, given the un-minuted nature of the May 19 meeting and the lack of good recollection by defendants involved, it is difficult to determine what exactly motivated the board’s decision, or if decision is really even the right word.”

Under the business judgment rule, courts presume that boards of directors make decisions on an informed basis, in good faith and with the reasonable belief that their actions are in the best interest of the corporation. A decision will not be disturbed if it serves a rational business purpose. Good minutes embody the soundness of the board’s deliberations and make them transparent to outside review by courts, government agencies or shareholders.

On the other hand, judges look askance on decisions that are informal, haphazard and precipitous, as a Delaware court noted in In re Prime Hospitality, Inc. Shareholders Litigation. Consequently, the board process must be appropriate given the time available and the seriousness of the matter. Strong minutes, ref lecting directors’ diligent exercise of their duty of care, demonstrate that they understood the issues and facts before taking action.

ContentYour minutes should clearly capture how directors discharged their duties. Good minutes must be precise and well-organized; they typically contain all of the following elements.

Agenda. In preparing the meeting agenda, keep in mind which matters must or should be brought to the board. Typically, boards review operations and finances, major capital expenditures, material contracts, competitive situations, strategic direction, acquisitions and sales, dividends, recapitalizations, executive performance and compensation, workforce changes, policies and internal controls, compliance matters, contingencies, major litigation, investor relations and external communications. A yearly calendar assures that the board reviews these matters regularly.

Next, consider what the board will do with the matters brought before it: take action via a formal vote; give guidance; or listen and discuss, in order to be better informed for a later decision. Check the company’s bylaws, operating agreements and risk management policies to determine when the board should be involved, and how. Company attorneys can interpret these documents and advise the board on statutory requirements, such as the appropriate public disclosure of risks and developments identified by management.


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Meeting Circumstances. Specify how the board met, whether in-person, via phone, video conference or another means. Include the date and the time of the meeting. Not all gatherings of board members qualify as a board meeting. The board secretary, in particular, needs to distinguish between a board meeting and an informal gathering or informational session, for which minutes are not prepared.

Persons Present. Name all board members, noting which ones are present and which absent, as well as advisers in attendance and when they join and depart the meeting. Confirm the presence of a quorum. If you are dealing with sensitive matters that might require a director to abstain from discussion or voting—such as when a director has an interest in the matter being considered—then the minutes should indicate the director’s departure and abstention from voting. Legal counsel can advise the board on how to address the directors’ duties of loyalty to the company in these situations.

Pre-Meeting Materials. Indicate what was in the board package distributed prior to the meeting, such as current financials, management presentations and reports, and when directors received it. This information shows that directors made good-faith efforts to obtain, analyze and reflect on material information that was reasonably available. If briefing books are distributed, remind directors of any confidentiality restraints. These materials can be retained in the meeting archive but generally would not be included in the meeting minutes.

Discussion. It is essential that you record directors’ consideration of important issues and the actions taken, in order to document active discharge of their f iduciary duties to the company. For important agenda items, include the scope of the discussion, options considered and discarded, materials reviewed, adviser presentations and recommendations, and—of special importance—a summary of the board’s conceptual reasons for reaching its decision. For matters to which the board devoted significant time, consider indicating how long the discussion took;

otherwise remain silent on the duration of board deliberations, as recommended by Brian Pastuszenski in “Practical Steps for Directors to Consider After Disney,” which was published in the April 2007 issue of The Practical Lawyer.

Minutes can be used to your board’s advantage to demonstrate that it:

• Received information prior to the board meeting when appropriate;

• Reviewed material information and became informed;

• Understood developments leading to the decision;

• Made a reasoned inquiry, consulting independent advisors as necessary;

• Identified the range of financial and other values or risks involved;

• Deliberated, evaluating pros and cons and;

• Made a decision.

The Decision. The board’s decision on each matter must be clearly stated. This may be in the form of a formal motion and vote (passed, defeated or tabled). Upon request, a director’s dissenting vote may be separately noted by name. A formal resolution can be prepared before the meeting for major decisions or when required by business partners. Any delegation of authority or responsibility that is made as part of the decision should be noted in the minutes.

Longer Is Not Necessarily Better. Long, narrative board minutes that transcribe minute by minute the board’s confusion, discord and hesitancy, as well as its professional insight and incisive action, are of limited use and could potentially be inflammatory in litigation. Recognize that board minutes can either raise or allay concerns and, later, will often be examined as part of a sequence of events. To demonstrate that directors fulfilled their obligations, minutes need to be organized around agenda items with key points summarized. Strive for precision above unnecessary detail.


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Potential disclosure of the board minutes to outsiders may have a chilling effect on board deliberations, especially if the minutes disclose details of options that were weighed or individual directors’ opinions and assessments. Because of this concern, some boards use summary minutes that contain only the items reviewed and decisions made. This traditional strategy focuses on minimizing the potential for use of board minutes in litigation by making the content sparse. Others argue, much as Marc Morgenstern does in Corporate Governance: Building an IPO and Merger Due Diligence Defense Through Board Minutes (Annual Securities Practitioners Conference, Practicing Law Institute, November 2007), that robust board minutes are pivotal in protecting directors under the business judgment rule, demonstrating SEC compliance and satisfying third-party due diligence. In all events, it is better to draft minutes understanding that they could appear in court someday. The board’s attorney can give guidance as to what amount of detail is most provident for your board, company and situation.

Approval and IntegrityMinutes derive value from their proximity in time to the board meeting, so the best practice is to circulate them shortly after the meeting, while details are still fresh in directors’ memories. On the other hand, as the Netsmart court noted, “tardy, omnibus consideration of meeting minutes is, to state the obvious, not confidence-inspiring.” If the prior meeting’s minutes have not already been approved, the first agenda item at each board meeting should be their formal approval. In some situations, drafts of minutes and directors’ notes may be destroyed, leaving the reviewed and approved minutes to stand alone as the meeting’s written record. Your attorney can advise as to when this is appropriate.

The final board minutes are an official corporate record, subject to Sarbanes-Oxley Act penalties if altered, as Brendan Sheehan points out in the June 2007 issue of Corporate Secretary. Consequently, board minutes should be permanently stored in a

way that will safeguard their integrity, while making copies readily accessible to existing board members and the company’s auditors. Any changes made to final minutes should be limited to correcting errors approved by the board and noted in future minutes.

Privileged InformationRecognize that shareholders have a right to inspect board minutes. In addition, under certain circumstances (such as a potential purchase or an investigation), they might also be read by buyers, lenders, the SEC, the IRS and numerous regulatory agencies. If information reviewed during the meeting is protected by an attorney-client privilege, or if it contains other company-confidential information, consult with counsel on where to record these facts and how to shield them from the eyes of others. At the most, include generic comments that the company’s counsel discussed the board’s obligations on confidential or protected matters.

Conclusion“Name a corporate blowup, and there is usually an example of board minutes being altered or left incomplete,” warned The Wall Street Journal in February 2004. Board minutes are trustworthy because they collectively become a historic book of the board’s decisions, written chapter by chapter, cataloging decisions, assignments and deadlines with precision. Your well-drafted board minutes create an ongoing record that board members diligently discharged their duties, while providing oversight and guidance for the company and its shareholders.


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In recent years, the arbitration process has been under increased scrutiny in both the local and national press. Lawyers and business commentators alike have expressed divergent views about whether arbitration, in practical terms, is any less expensive or time-consuming than litigation. That debate, however, has often focused on abuses of the arbitration process that make it more like traditional litigation, rather than problems that are inherent to what can be a useful, efficient and effective way to resolve disputes outside the court system.

Within the construction industry, that debate is particularly relevant. Deciding between arbitration and litigation as the favored dispute-resolution process for construction projects has never been more important because of recent changes in the standard construction contracts published by the American Institute of Architects (AIA). The AIA revises and updates these standard contracts, which are the primary contract documents used across the country on every type of construction project, every ten years.

The AIA released the latest revision to its most widely used standard contract document, AIA A201, “General Conditions of the Contract for Construction,” in early November 2007. Under the 1997 version of A201, boilerplate provisions mandated that the parties to the contract participate in

the arbitration process, but that is no longer true. Under the new version of A201, if the parties fail to check the box for arbitration in their contract agreements, they will be opting, by default, for litigation.

For everyone in the construction industry, that’s a small but important change. As you consider your options for the contractual dispute-resolution provisions under the new AIA contract documents, you need to decide which is the better option—arbitration or litigation? And if the answer is arbitration, how can you make sure the process works effectively and efficiently for your company?

Arbitrations are more efficient. They are almost always less time-consuming than litigation, primarily because arbitrations, when limited to an exchange of documents between the parties, have fewer discovery practices. Without question, it is the discovery part of the litigation process—from long lists of written questions called interrogatories to the endless questioning under oath of witnesses in pretrial depositions—that makes the time expended in litigation add up. Parties are allowed 20 days to answer complaints and 30 days to answer each set of interrogatories. If motions are brought, briefing schedules add significant additional time to the litigation schedule. Months are automatically built into the process through the time periods established under litigation’s rules of procedure. When counsel

Returning Arbitration to an Effective Process in Construction Contracts

By William R. Joyce

Bill Joyce ([email protected]) is a partner in Faegre & Benson’s Minneapolis office. He heads the firm’s construction law practice.


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construction law

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submit so-called informational statements to state judges to establish the discovery, motion and trial schedules for a litigated case, it is rare that they can agree on a schedule of less than a year.

According to federal court statistics, the median length of a federal jury or bench trial in construction cases is almost two years. In contrast, according to 2006 data from the American Arbitration Association, the median length of a construction arbitration is less than a year for disputes that involve between US $75,000, and US $500,000, and less than six months for matters below US $75,000. Arbitration hearings, without extended discovery, can be scheduled in a matter of months, with the calendars of attorneys and arbitrators being the only obstacles to an expeditious hearing.

Arbitrations are more economical. In most cases, the cost of arbitration is also much lower than that of litigation. Lawyers are paid by the hour, and it simply takes more hours to draft and answer interrogatories, prepare for and take depositions, write briefs and argue motions than it does to review a party’s documents and prepare for an arbitration hearing. The administrative and arbitrator fees involved in arbitration are usually modest financial considerations when viewed against the legal costs incurred in complex litigation. Judges and juries may not charge for their time, but the legal fees spent on litigation before they ever hear the case more than make up the difference.

Arbitrations limit appeals. They virtually eliminate the unnecessary costs and time of expensive appeals. The grounds for a successful appeal from arbitration are strictly limited to cases involving fraud or corruption by the arbitrator. Legitimate appeals from arbitration awards amount to a mere handful of cases across the United States each year. In all but the most unusual arbitrations, when the hearing is over, the loser pays and the parties’ dispute is forever resolved.

Arbitrations involve decision makers who are experts in the technical field. One key advantage of arbitration is that the f inders of fact are experts in the

field who are selected by the parties. In construction arbitrations, the parties often select experienced construction lawyers, engineers, architects or construction professionals who know the industry and terminology, and can quickly focus on the material disputed issues. Important items that are familiar to expert arbitrators, such as critical path schedules and implied warranties of plans and specifications, are not terms and legal theories the average juror or even experienced judge routinely encounters. Only rarely do jurors or judges have any significant previous knowledge of the technical matters being considered in a complex construction dispute. To expect them to learn and correctly apply these complex concepts over the short duration of a trial is often unrealistic.

So What’s the Problem with Arbitration?Given the advantages of arbitration, why did the AIA make that small but important change in its newly issued standard contract documents? The answer does not reflect a fundamental flaw in the arbitration process itself but rather how contracting parties have debased it—converting the arbitration process from an economical and efficient alternative dispute resolution process into one that almost mirrors litigation, with all of litigation’s warts, such as lengthy delays and excessive legal fees.

In arbitration proceedings, lawyers increasingly want wide-ranging discovery, from interrogatories to depositions to elaborate pre-hearing submissions. In one recent arbitration that I handled, counsel for the adverse party demanded more than ten depositions in an arbitration involving a US $1 million claim. When I asked opposing counsel to list ten witnesses he wanted to depose, he couldn’t even name them. He just knew that he needed more than 10 depositions before the hearing. I needed two at the most. In another arbitration, counsel for the adverse party, upset over the arbitrator’s award, filed an appeal with the court claiming that a distinguished arbitrator from a venerable law firm,

Returning Arbitration to an Effective Process in Construction Contracts


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with more than 30 years’ experience, had manifestly disregarded the law. The award was subsequently upheld.

When lawyers convert an effective, efficient alternative dispute-resolution procedure into one that is nearly identical to litigation, it’s no wonder that certain people question the value of arbitration. It ’s also no surprise that in light of the controversy, the AIA has decided to allow contracting parties to choose their preferred dispute-resolution process. But the way to remedy the problem with arbitration is not to reject arbitration for litigation; the remedy is to return arbitration to its pure alternative form, a form that creates a distinctly better alternative procedure for resolving many business disputes more efficiently and economically.

Tailoring the Arbitration Process to Your Business Needs The AIA’s new contract documents offer contracting parties a unique opportunity to negotiate procedural terms that ensure an economical and efficient alternative to litigation. In the latest version of the A201, arbitration is a process created under the terms of the construction contract, thus affording both parties an opportunity to supplement and tailor the basic boilerplate language so as to fit the needs of each particular project.

Since selecting an arbitrator is one of the most important aspects of arbitration, in some cases the parties to a construction contract will want to pre-select one or more arbitrators to hear any disputes, or at least stipulate the arbitrator’s qualifications within the contract documents. Parties can also decide, for example, whether a dispute should be heard by one or three arbitrators. The contract terms might also limit pre-hearing discovery to an exchange of written and electronic documents, with no interrogatories or depositions, unless both parties mutually decide otherwise. The contract can select the venue for a hearing, and how much time each side will be given to present its case. The parties can also agree to schedule the hearing within months of the commencement of the arbitration. They can incorporate standard rules of procedure to follow during the arbitration, including the rules of evidence for admitting testimony and documents. They can agree to dispositive motion procedures to ensure that arbitrators resolve frivolous arbitration claims promptly.

The key point to understand is that in negotiating a construction contract, you can not only choose arbitration but can also decide in advance how the arbitration process will work. By seeking the counsel of an experienced construction lawyer during negotiation of the construction agreement, parties can select arbitration procedures that best fit their particular type of contract and potential disputes. In the end, they can create reasonable boundaries to ensure fair, efficient and economical arbitrations that are a far cry from what typically happens in litigation.

The key point to understand is that in negotiating a construction contract, you can not

only choose arbitration but can also decide in advance how the arbitration process will work.


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intellectual property

cont inued on page 16

The current exchange rate—US $.50 to the English pound, $.69 to the euro in mid-December 2007—makes American exports appear very attractive in Europe; but care needs to be taken by American businesses looking to take advantage, as the courts in England have been willing to defend the English (and thus European) market for goods protected by intellectual property rights. And that willingness has implications both for businesses trying to sell protected products directly to European consumers as well as companies trying to maintain higher prices in wealthier countries through the exercise of their intellectual property rights.

By law, copyright, patent and trademark owners can legally divide the market for their goods and charge higher prices where the market will support them. Sellers of such protected goods can therefore sell to buyers in one market at a particular price and, using their copyright, patent and/or trademark rights, protect the price levels in that market by prohibiting buyers of their goods located outside the market from selling the same goods into that market at a lower price.

The law thus allows rights owners to “manage” pricing. They can, for instance, maintain the image—and high cost—of luxury brands by investing in luxury marketing and preventing imports from markets where “luxury” comes at a lower price.

Once a product has been (lawfully) sold into a particular market, however, the copyright, patent and/or trademark rights are said to have been “exhausted”: The rights owner no longer has exclusive distribution rights, allowing further sales without the owner’s consent. For these purposes, the European Economic Area (EEA—the 27 member states of the European Union, plus Iceland, Norway and Liechtenstein) is treated as one market.

This broad treatment of 30 separate nations as a single market has created within the EEA a “gray” market for branded and patented goods as well as those protected by copyright, which are produced for and sold in weaker EEA economies, such as Latvia and Lithuania, then resold (at a premium) into the stronger economies, such as Germany, France and the United Kingdom.

On the other hand, European antitrust law permits companies to appoint exclusive distributors within member states, in most circumstances. However, while companies can prohibit an exclusive distributor from actively selling into other EU markets, they cannot prohibit a distributor from responding to inquiries or otherwise selling “passively” into those other markets.

A nd as more d istr ibutors star t to sel l protected products onl ine, the opportunities for “passive” selling increase dramatically.

Selling Into Europe: A Pitfall for the Unwary

By Michael Evans

Michael Evans ([email protected]) is a solicitor in the firm’s London office. He works with companies throughout the European Union on intellectual property matters.


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firm newsFaegre & Benson llp is pleased to announce it has named nine new partners, effective January 1, 2008.

The new partners represent a diverse mix of backgrounds and practice areas. Nearly half are women. Areas of expertise include: litigation, mergers and acquisitions, corporate finance and securities, wealth management, government relations, intellectual property, real estate, and health care.

“Admission to the partnership is a milestone for each of these individuals and for the firm,” said Tom Morgan, chair of the firm’s Management Committee. “These partners add practice strength, leadership talent and new perspectives. Our firm grows stronger and more diverse—and better able to serve our clients—with the addition of this new class of partners.”

Jeffrey A. Beuche is a corporate lawyer who focuses his practice on mergers and acquisitions and financing transactions. He has represented buyers and sellers in a broad range of M&A transactions. Jeff also has substantial experience in lending transactions, including leveraged acquisitions, term and revolving credit facilities, and private debt and equity financings. He is a graduate of the University of Michigan (B.A., 1997) and the University of Colorado (J.D., 2000).

Jolene M. Cutshall focuses her practice on wealth management. She counsels high-net-worth individuals and individual and corporate trustees in a wide range of matters, including transfers of wealth and related issues that involve federal and state income, gift, estate and generation-skipping taxes; business succession; the design and implementation of estate plans; and estate and trust administration. She is a graduate of the University of Nebraska (B.A. and B.J., with distinction, 1994; J.D., 1998).

Kathryn S. Hahne is a member of Faegre & Benson’s government relations team. She provides legislative advocacy for trade and professional associations, local units of government and corporations before the Minnesota Legislature, state agencies and local units of government. Kathy has been named one of Minnesota’s best lobbyists by Minnesota Law & Politics magazine. She is a graduate of Northwestern University (B.S., 1971) and William Mitchell College of Law (J.D., 1999).

Bruce A. Johnson’s extensive experience as a health care attorney and consultant includes representation of medical groups, hospitals, academic practice plans and other health care enterprises in a variety of operational, regulatory and transactional matters. He is a graduate of the University of Nebraska (B.S., magna cum laude, 1981), Ohio State University (Master of Public Administration, 1984), and the University of Colorado (J.D., Order of the Coif, 1990).

Michael M. Krauss focuses primarily on financial services litigation, including actions on behalf of indenture trustees and other lenders on defaulted credits, lender liability actions, and data security breach litigation. Michael also focuses on public company and M&A litigation. He graduated from the University of Michigan (B.A., with highest distinction and high honors, 1993) and Stanford University (J.D., with distinction, 1996).

Faegre & Benson Announces Nine New Partners

Jeffrey A. Beuche

Kathryn S. Hahne

Jolene M. Cutshall

Bruce A. Johnson

Michael M. Krauss


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Ben J. Horn and Roger Hopkins, lawyers in the London office of Faegre & Benson, have together compiled the Arbitration Law Handbook, published by Informa Law in December 2007. It is the first book to collect and review arbitration laws (including international, commercial and maritime) from various countries in a single publication—a time-saving, handy reference for practitioners.

The Arbitration Law Handbook conveniently reviews the laws in force in more than 20 countries, with the main procedural rules used in each of them. Every section has a short overview identifying relevant treaty obligations, the main arbitral bodies and principal laws in force.

Also included is a section in which the United Nations Commission on International Trade Law (UNCITRAL) Model Law and Arbitration Rules are set out and in which the major international conventions relating to arbitration, such as the New York Convention and table of signatories, are reproduced. In addition, this section contains the International Centre for Settlement of Investment Disputes (ICSID) arbitration rules, as well as those of the World Intellectual Property Organization (WIPO).

Organized by country, the handbook will be an indispensable reference guide for arbitration lawyers, law libraries, students (particularly post graduates), arbitrators and arbitrator institutes or nominating bodies.

Faegre & Benson Lawyers Complete First-Ever Arbitration Law Handbook

Ben J. Horn

Roger Hopkins

Todd P. Walker represents clients in a wide range of complex litigation matters, including environmental and real estate disputes and class actions. He has particular experience litigating cases with technical and engineering issues. He graduated from Colorado College (B.A., 1987) and the University of Denver (J.D., Order of St. Ives, 1999).

Nina Y. Wang’s practice focuses on intellectual property litigation for clients in a wide range of industries. Her experience includes representing clients in patent infringement, trademark, copyright and trade secret cases in the areas of biotechnology, software and mechanical devices. She is a graduate of Washington University (A.B., summa cum laude, 1994) and Harvard Law School (J.D., 1997).

Marie E. Williams focuses on complex commercial litigation, including class action litigation, financial services litigation, and appellate practice in state and federal courts. She also handles a large number of insurance coverage issues, and she has extensive experience litigating insurance bad faith claims. She is a graduate of Wake Forest University (B.S., magna cum laude, 1997) and the University of Colorado (J.D., Order of the Coif, 2000).

Jonathan R. Zimmerman represents public and privately held companies, as well as investment banks, in many areas including public securities offerings, private placements of both debt and equity securities, mergers and acquisitions, structuring and creation of joint ventures and strategic alliances, and creation of stock incentive and compensation plans. He has significant experience working with medical technology companies and software companies. He is a graduate of Pomona College (B.A., 1997) and New York University (J.D., 2000).

Todd P. Walker

Nina Y. Wang

Marie E. Williams

Jonathan R. Zimmerman

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Corporate Counsel magazine recently named Faegre & Benson a Go-To Law Firm® in the areas of corporate transactions, intellectual property, labor and employment, and litigation.

To select Go-To Law Firms, Corporate Counsel surveys general counsel at Fortune 500 ® companies and asks which f irms they rely on in various practice areas. Faegre & Benson has been recognized in this annual survey since 2003.

In the most recent survey, the legal teams for five Fortune 500 companies—Ashland, C. H. Robinson Worldwide, General Mills, Monsanto and Principal Financial Group—indicated Faegre & Benson as one of their preferred choices for outside legal counsel.

Faegre & Benson Named a 2008 Go-To Law Firm

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firm news

William R. Busch, Charles S. Ferrell and Philip S. Garon—all partners in Faegre & Benson’s Minneapolis office—were included on Lawdragon magazine’s 2007 Lawdragon 500 Leading Dealmakers in America list, which recognizes lawyers who are at the top of the corporate legal world in areas such as mergers and acquisitions, project financing and real estate deals.

Busch is noted in the Lawdragon 500 for arranging major sales, including The Star Tribune Company/Cowles Media, CableScope, Inc., and the Minnesota Vikings and Timberwolves franchises.

Lawdragon recognizes Ferrell for leading the development and operation of office buildings, mixed-use projects and hotels across Minnesota, Iowa and Colorado.

Garon is commended in the publication for overseeing Target’s sale of Marshall Fields and Mervyn’s, along with International Multifoods’ sale to The J. M. Smucker Co.

The magazine selects its 500 Leading Dealmakers in America through a proprietary review process that includes client and peer evaluations and interviews.

Lawdragon List Includes Three From Faegre & Benson

Faegre & Benson is ranked in the top 100 law firms for mergers and acquisitions in Law Firm Leaders in the Corporate Transactions Market, a national report recently issued by the BTI Consulting Group.

Rankings in Law Firm Leaders in the Corporate Transactions Market are based on in-depth interviews with more than 150 corporate counsel at large and Fortune 1000 companies in key industries. Faegre & Benson is recognized among law firms that have established the largest number of primary relationships with major corporations.

Faegre & Benson represents buyers, sellers, investment bankers and lenders in connection with various types of M&A transactions. The firm’s M&A clients span the entire spectrum of industries and range from small, privately held businesses to large, multinational public corporations.

Faegre & Benson Among Top 100 Firms for M&A


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A report in the November 2007 issue of IP Law & Business counts Faegre & Benson among the top U.S. law firms protecting intellectual property for the world’s 50 most innovative companies. The report titled, “Who Protects Innovation in America 2007,” shows which firms are doing the most IP litigation work and patent prosecution for those companies. With clients such as Google, Target and 3M, Faegre & Benson was ranked as one of the leading 15 firms mentioned.

Innovation rankings for the report are based on a Business Week-Boston Consulting Group survey of the 1,500 largest global corporations. To determine which firms were getting the most work, researchers looked at the top-ranked companies’ IP litigation and patent-prosecution activity from January through September 2007.

Faegre & Benson’s IP Practice Ranks Among Top Protectors of Innovation in America

Leslie A. Fields (Partner, Denver) has authored Colorado Eminent Domain Practice, a new reference guide to eminent domain law in that state. Topics covered in the book and accompanying searchable CD include: an explanation of procedural and substantive constitutional provisions, statutes and case law governing condemnation of property, discussion of core legal principles encountered in eminent domain cases, descriptions of key valuation and appraisal concepts and approaches, and standard pleading forms and relevant pattern jury instructions. An eminent domain law practitioner since 1983,

Fields been involved in an array of major governmental projects in Colorado, including the Denver International Airport, the Colorado Convention Center and a number of highway expansions.

Leslie A. Fields

Leslie Fields Authors Eminent Domain Guide

Faegre & Benson llp is pleased to announce that Frances Taft has joined the firm as a special counsel in the employment practice. Taft is qualified to practice in both the United States and the United Kingdom, and she has extensive experience counseling multinational companies on cross-jurisdictional matters involving employment and labor issues, employee benefits, plan administration, mergers and acquisitions, corporate-governance and regulatory-compliance requirements.

Phillips Taft’s practice focuses on advising multinational companies about how to streamline and save costs on international pensions. She helps employers capitalize on opportunities resulting from significant market trends.

Before joining Faegre & Benson, Phillips Taft successfully implemented and led the international benefits practice of Hammonds in London. Under her leadership, the practice received Global Pensions magazine’s Law Firm of the Year Award for three consecutive years and was nominated for the award again in 2007. She is a recognized authority on international pension and benefit issues and a regular contributor to the press and international publications.

Phillips Taft received her J.D. from New York Law School and her undergraduate degree from the State University of New York at Albany.

Faegre & Benson Expands International Business Practice

Frances Taft


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In the determination of what is legal and illegal, one critical point occurs when protected goods are “put into the EEA market.” The vacationer returning from the United States with new books does not “put goods into the EEA market” because he is importing those books, which are protected by copyright, for personal use. But what is the legal position when individual consumers wish to buy (authentic, protectable) goods from a Web site based in the United States (or any other country outside the EEA) at a lower price than they would pay within the EEA?

The English High Court in London addressed this precise issue in May 2007, awarding £41 million (US$83 million) in damages against a Hong Kong–based Internet retailer that sold CDs into the United Kingdom at prices well below those that prevailed there. The decision raised many eyebrows, not only for the size of the award but also for the impact the decision will have on Web retailers and consumers.

CD prices in the United Kingdom were until recently much higher than in the rest of Europe, but because of competition from online sales and attention from the English antitrust regulator, they have slowly been falling.

CD-Wow is a Hong Kong–based Web retailer that was in the business of selling CDs and DVDs into Europe at discount prices through the company’s Web site. CD-Wow kept stocks of CDs and DVDs in a warehouse in Hong Kong. It maintained a Web site, in English, which displayed the price of CD-Wow’s products in pounds sterling. A customer in the United Kingdom could easily log onto the CD-Wow Web site and place an order for a CD or DVD.

Each order would generate an order label, and then an employee would locate the relevant product in the CD-Wow warehouse. The CD or DVD would then be passed

to a second employee, who would marry the order label with the product before passing them both to a third employee, who arranged for packing and dispatch using the Hong Kong postal service. The terms and conditions of sale stipulated that ownership in the product passed to the purchaser “once individual Products [had] been appropriated to the contract of sale” in the manner set out above and payment had been received from the customer’s credit card.

Facts of the CD-Wow CaseIn 2002 a number of manufacturers of music recordings (including Sony, EMI and Mercury Records) filed suit, both on their own behalf and as representatives of the British Phonographic Industry Limited (BPI), against CD-Wow for infringement of the claimants’ copyright in sound recordings. The companies alleged that, contrary to Section 18(1) of the English Copyright Designs and Patents Act 1988 (CDPA), CD-Wow had issued to the public copies of the proprietary sound recordings in the EEA without the consent of copyright owners.

The dispute was settled in 2004, with CD-Wow entering into an agreement, approved by the court (the Settlement Order), in which the company agreed not to:

1. Despatch and/or supply any non-EEA Product…from anywhere in the world to any customer in the United Kingdom.

2. Issue any non-EEA Product…to the public in the United Kingdom.

Suspecting that CD-Wow was not complying with the Settlement Order, the claimants bought a number of products from the company online. The test purchases revealed that CD-Wow was continuing to

Selling Into EuropeStory continued from page 11


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intellectual property

import material that was protected by copyright into the EEA without the consent of the owners. The claimants went back to court, seeking damages for breach of the Settlement Order. CD-Wow argued, among other things, that its obligations under the Settlement Order were owed solely to the court and that the order did not create binding obligations between CD-Wow and the claimants.

At a preliminary hearing on this issue, a High Court judge found that the Settlement Order did create contractual obligations between the parties in addition to the duty owed to the court. The decision was upheld on appeal, and a right of appeal to the House of Lords was refused.

Following the decision of the Court of Appeal on the preliminary issue, the claimants issued two sets of proceedings. The first was an action for contempt of court, including an assessment of the damage suffered by the claimants for any infringement found. The second was for summary judgment on the issues. The claimants relied heavily on their evidence of the post-Settlement Order test purchases, of which 33 out of 129 involved an alleged breach of copyright. Furthermore, 14 out of 16 later purchases, made after the claimants had filed suit for contempt of court, also allegedly breached the Settlement Order.

Contempt Decisions of the High Court

The High Court found that CD-Wow had infringed the Settlement Order and was in contempt of court, and that breach of the Settlement Order gave rise to a claim in damages.

CD-Wow argued that the test purchases conducted by the claimants represented a tiny proportion of its sales and did not represent the tip of the iceberg. It claimed that the test purchases were only examples of inadvertent failure to carry out CD-Wow’s reorganization of its procedures following the Settlement Order as CD-Wow transformed the management of its business.

The High Court judge resoundingly rejected these arguments for the following reasons:

• C or r e sp ondenc e b e t we en t he parties’ lawyers revealed CD-Wow’s true position: The sales were not inadvertent; they were deliberate, but justified, on the basis of assurances allegedly given by the claimants’ subsidiaries in Hong Kong. The judge preferred the evidence of the claimants’ subsidiaries, however, showing that no assurances had been given to CD-Wow that it could export products to the United Kingdom without breaching the Settlement Order.

• CD-Wow submitted no direct evidence that procedures had been changed to comply with the Settlement Order. Furthermore, no statements were adduced from any of CD-Wow’s customers giving any evidence on changes in procedure.

• The 14 post-application purchases were not admissible as evidence of contempt but could be used as evidence of a contractual breach of the Settlement Order.

The judge reserved for a later date his decision on the penalty for contempt, noting the possible application of Section 97(2) of the CDPA, which could give rise to additional damages reflecting the flagrancy of the breach. He then moved on to consider the issue of infringement of copyright and a potential inquiry into damages for such a breach, should it be found to exist.


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Breach of CopyrightThe claimants’ case was one for primary infringement under sections 16 and 18 of the CDPA. Section 16 states, “The owner of the copyright in a work has…the exclusive right…to issue copies of the work to the public”; that and other specified acts, the law says, constitute “the ‘acts restricted by the copyright.’” And, “Copyright in a work is infringed by a person who without the licence of the copyright owner does, or authorises another to do, any of the acts restricted by the copyright.”

Section 18, “Infringement by issue of copies to the public,” states:

(1) The issue to the public of copies of the work is an act restricted by the copyright in every description of copyright work.

(2) References in this Part to the issue to the public of copies of a work are to—

(a) the act of putting into circulation in the EEA copies not previously put into circulation in the EEA by or with the consent of the copyright owner.

The key issue for determination by the court was whether CD-Wow, in mailing CDs and DVDs to customers in the United Kingdom, had issued copies to the public within the meaning of the CDPA and, more particularly, had put the product “into circulation” in the EEA.

CD-Wow argued that the act of putting the product into circulation occurred when delivery took place. It argued, furthermore, that under the circumstances, delivery took place when ownership in the protected property passed to the customer, i.e., before the product was issued for dispatch to the United Kingdom. Consequently, CD-Wow argued, it had not put the product into circulation in the EEA, but rather it was the customer who had done so. The customer, of course, would not have been guilty of infringing Section 18, as he would have been importing the product for private use, not issuing it to the public.

The court rejected CD-Wow’s submissions. The judge considered that there were no cases directly on point as to when goods are deemed to have been put into circulation for the purposes of Section 18 of the CDPA. However, relying on Section 32(4) of the English Sale of Goods Act 1979, the judge found that CD-Wow had delivered the product to the customer when the customer, and not the postal authority, took delivery. Section 32(4) states:

In a case where the buyer deals as consumer…if in pursuance of a contract of sale the seller is authorised or required to send the goods to the buyer, delivery of the goods to the carrier is not delivery of the goods to the buyer.

Therefore, the effect of Section 32(4) was to make CD-Wow the importer of the products. As such, CD-Wow thus put goods into circulation in the EEA, contrary to Section 18 and in breach of the claimants’ copyright.

ConclusionsAlthough the CD-Wow case concerns copyright, similar principles operate for goods protected by patents and trademarks. Similarly, although the most obvious lessons apply to companies such as CD-Wow, which sell products via the Internet, there are also important lessons for companies that want to protect their ability to sell protected products in Europe. The CD manufacturers who brought suit against the Hong Kong– based Web retailer were able to succeed only because they had made the effort to preserve distribution rights in England for their chosen distributors.

If you sell through distributors in Europe and want to protect that business, be aware that most goods are sold widely through the Internet. The European market for protectable goods can be preserved for selected distributors; however, your terms of sale must make it clear that those goods are not to be sold by anyone other than your distributors in Europe.


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election law

Last summer, the U.S. Supreme Court narrowly upheld a federal district court decision that ruled unconstitutional a federal law preventing a not-for-profit 501(c)(4) organization from broadcasting certain advertisements in the months leading up to the 2004 presidental primaries and general election. The court’s 5-4 opinion did not overrule a section of the Bipartisan Campaign Reform Act of 2002 (BCRA) outright, however, but let stand the lower court’s decision that the law, as applied to the speech in this particular case, violated First Amendment free speech protections.

While First Amendment advocates might cheer this decision protecting political speech, supporters of campaign finance reform have surely mourned, as the court’s decision takes teeth out of the BCRA, the most recent of many attempts to enact comprehensive campaign finance reform in the United States. (See Timeline of Federal Campaign Finance Laws, p. 23.) Although this decision, Federal Election Commission v. Wisconsin Right to Life, Inc., leaves many questions unanswered, its effects will almost certainly be noticed in the 2008 federal election cycle. First, expect more so-called issue ads to air in the months leading up to the November election. And second, because the Supreme Court based its decision on an “as-applied” analysis of free speech protection—an analysis that is itself divergent and contradictory—expect

more litigation involving this statute as well as challenges to state laws that restrict campaign speech.

Facts of the CaseWisconsin Right to Life, Inc. (WRTL) is an organization that operates through several structures to promote a “pro-life” social ideology. WRTL has a tax-exempt 501(c)(4) “general fund” that accepts corporate contributions, two 501(c)(3) tax-exempt education funds, and both state and federal Political Action Committees (PACs).

WRTL, using its 501(c)(4) general funds, commenced an advertising campaign on July 26, 2004, that urged listeners and viewers to contact Wisconsin’s U.S. senators, Herbert Kohl, and Russell Feingold. Both are Democrats, and both are “pro-choice.” The series of ads, which identified the senators by name, asked listeners and viewers to contact both men and urge them to stop filibustering Senate approval of President George W. Bush’s judicial nominees. Senator Feingold was then running for reelection. Although there were no filibuster votes contemplated in the Senate at the time, both Kohl and Feingold served on the Senate Judiciary Committee, which reviews judicial nominees.

WRTL was concerned that its radio ads would be challenged as a violation of federal election law, particularly BCRA Section

U.S. Supreme Court Favors Corporate Free Speech Rights Over Campaign

Finance Reforms . . . This Time AroundBy Nancy Hylden

Nancy Hylden ([email protected]), an associate in Faegre & Benson’s Minneapolis office, is a member of the firm’s government relations team.


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203, and filed a lawsuit on July 28, 2004, against the Federal Election Commission (FEC). Under the BCRA (also known as the McCain-Feingold law), corporations and labor unions are prohibited from financing “electioneering communications” that air during a period of time leading up to the primary and general elections. The law bans broadcast, cable or satellite communication that refers to a clearly identified federal candidate, airs within 30 days of a primary election or 60 days of a general election, and targets the relevant electorate.

WRTL planned to run its ads throughout August—within the BCRA-mandated, 30-day pre-primary blackout period. The organization sought declaratory and injunctive relief, arguing that free speech rights under the First Amendment protected the three advertisements at issue.

The federal district court denied WRTL’s request for relief, and WRTL did not run the ads during the blackout period leading up to the 2004 elections. Nonetheless, WRTL appealed. In January 2006, the Supreme Court, which had only recently upheld the challenged provisions of the BCRA (McConnell v. Federal Election Commission), said the BCRA could be challenged, as WRTL wanted, on a case-by-case basis. The Supreme Court remanded the case to the district court, asking it to reconsider whether the BCRA restrictions on electioneering communications, as applied to WRTL’s ads, violated the organization’s right to free speech.

A three-member panel of district court judges was appointed. In a reversal of the lower court’s prior decision, this time a majority granted summary judgment in

favor of WRTL, holding that Section 203 was unconstitutional as applied to the WRTL advertisements. The court did not consider the electoral context in which the advertisements would have run but used five factors to identify the type of express advocacy that could be restricted under the BCRA as “electioneering communication.” The lower court considered whether the advertisement:

1. Described an issue that was or “likely” soon would be a “subject of legislative scrutiny”;

2. Referred to the prior voting record or current position of the named candidate on the issue in question;

3. Exhorted the audience to do anything other than contact the candidate about the issue;

4. Promoted, attacked, supported or opposed the named candidate; and

5. Referred to an upcoming election, candidacy or party of the candidate.

Based on these factors, the court concluded that WRTL’s advertisements were issue advocacy, not express advocacy for or against a federal candidate, and therefore were protected speech. The court also noted that the ads asked the audience to contact both Wisconsin senators, not just Senator Feingold, who was up for reelection. The panel found no compelling government interest in this case to restrict the speech contained in the WRTL ads.

The FEC and others appealed.

The Supreme Court DecisionOn June 25, 2007, the Supreme Court issued its 5-4 decision upholding the district court ruling that the BCRA restriction on electioneering communication was unconstitutional as it applied to the WRTL advertisements. A majority on the court agreed on two issues, in addition to affirming the lower court’s final judgment:


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• The court rejected the FEC’s argument that the case was moot, because the action in question—an organization’s desire to run an ad that mentioned a candidate during the pre-election blackout period—was capable of repetition yet had evaded review.

• Because the law at issue burdens political speech, it is subject to strict scrutiny, and therefore the government has the burden of demonstrating that the law, as applied to the WRTL advertisements, furthers a compelling governmental interest and is narrowly tailored to achieve that interest.

That is where the court’s majority opinion ends, however. Chief Justice John Roberts, who wrote the principal opinion in this case, made several key points in his discussion of the substantive campaign finance/free speech issue, but he was joined only by Justice Samuel Alito:

• The government had met its burden in McConnell, which was decided in 2003, to justify the regulation of express advocacy under the BCRA, but McConnell did not create a test for future as-applied challenges.

• He strongly rejected an intent-and-effect test for determining when an ad is the functional equivalent of express advocacy, saying, “A test focused on the speaker’s intent could lead to the bizarre result that identical ads aired at the same time could be protected speech for one speaker, while leading to criminal penalties for another.”

• He suggested that the inquiry must focus on the substance of the communication. In this case, the WRTL ads could be interpreted as something other than an appeal to vote for or against a specific federal candidate and therefore were not the functional equivalent of express advocacy.

• He noted that the WRTL ads: 1) focused on a specific legislative issue; 2) urged the public to take action regarding that issue; and 3) lacked “indicia of

express advocacy” because they did not mention “an election, candidacy, political party, or challenger . . . and [took no] position on a candidate’s character, qualifications, or fitness for office.”

• T he gover n ment ’s i nt erest i n preventing corruption, recognized as recently as McConnell, did not justify application of the restrictions to the WRTL advertisements in this case.

• Because WRTL’s ads were deemed not to be express advocacy or its functional equivalent, and because there was no compelling governmental interest to justify the burden on WRTL’s speech, BCRA Section 203 was unconstitutional as applied to these ads.

Justice Antonin Scalia, who was joined by Justices Anthony Kennedy and Clarence Thomas, wrote that he believed the court’s previous decision in McConnell, which upheld Section 203 as a facially valid law, should be overturned. Scalia also opined that the five-factor test used by the lower court is unconstitutionally vague—and that any functional-equivalent test for express advocacy, attempting to distinguish it from issue advocacy, would be unconstitutionally vague.

A dissenting opinion, drafted by Justice David Souter and joined by Justices John Paul Stevens, Ruth Bader Ginsburg and Stephen Breyer, concludes that the principal opinion effectively does overturn McConnell.

DiscussionIn his concurring opinion in this case, Justice Scalia quotes from McConnell, which states that “what separates issue advocacy from political advocacy is a line in the sand drawn on a windy day.” Lawmakers have struggled for more than a century to curb campaign speech by entities such as corporations and labor unions, which can aggregate large amounts of money in attempts, to favorably influence elections. (See sidebar, p. 23.)


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The Wisconsin Right to Life decision increases uncertainty about how the BCRA’s restrictions on electioneering by corporations and unions should be applied in the future. On the one hand, it does not declare the ban to be an unconstitutional suppression of free speech, although three members of the five-member majority that affirmed the judgment would have done so. Rather, the WRTL decision allows “as applied,” case-by-case challenges to evaluate whether specific ads constitute electioneering and therefore may be banned prior to elections, or whether they are constitutionally protected issue advocacy. One practical result of the ruling is that more ads will likely be challenged, with this section of the BCRA at issue, in coming years. That is particularly likely in light of the close 5-4 decision, which divided the court neatly along its known ideological lines: Five conservatives supported the right of a conservative organization to criticize the position of two liberal senators. We will have to wait for a subsequent challenge, to ads promoting a different ideology, to see whether any one of those five who were inclined to protect free speech in this case shifts position.

In addition, the WRTL decision provides little guidance about how to analyze whether any given ad represents the “functional equivalent” of express advocacy. Because only three members of the court wanted to strike the electioneering ban, it therefore remains good law. Thus McConnell is not overtly overruled, but this decision nearly does so. Only Justice Scalia concurred with the test articulated by Chief Justice Roberts in the principal opinion, which establishes a functional equivalent test for express advocacy that essentially requires the use of “magic words”: Courts should declare an ad to be “the functional equivalent of express advocacy,” the chief justice wrote, “only if the ad is susceptible of no reasonable interpretation other than as an appeal to vote for or against a specific candidate.” And only a slim majority

affirmed the lower court judgment, based on the “language within the four corners” of the ads and not their context, to find that the ads were neither express advocacy nor its functional equivalent and therefore were not regulated by the BCRA, even though three members of the court considered the five factors used by the lower court to be unconstitutionally vague.

ConclusionThis WRTL case portends two trends in the not-so-distant future. Expect even more wink-wink “issue advertising,” which does not support or oppose a candidate but merely discusses issues and asks viewers, listeners or readers to contact incumbents in the months leading up to the 2008 federal elections. And more ads will obviously require more spending on this type of campaign effort. Now that the Supreme Court has shown that it currently, albeit ever so slightly, favors political speech over campaign finance restrictions on speech, expect numerous challenges to state laws designed to exert control over campaign financing.

This court decision opens the door to pr imarily negative ads targeted at incumbents. Expect organizations to craft attack ads so they focus on an issue that is not necessarily impending but is reasonably current. And expect those ads to air primarily in locations with races involving incumbents they oppose.

Because the WRTL case was closely decided and limits its holding narrowly to the immediate facts of the case, there is only minimal guidance to be drawn by organizations interested in undertaking issue advocacy during the upcoming election cycle. Furthermore, because this decision favors free speech in lieu of restricting corporate and union electioneering, expect challenges to state-enacted laws that regulate corporate and union speech.


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The following timeline traces Congress’s struggle over the course of 140 years to impose campaign finance reforms demanded by a cynical and suspicious public.

1868: Naval Appropriations Act. Considered the first federal campaign finance law. It banned “patronage” assessments collected from naval yard employees by political parties.

1883: Pendleton Civil Service Act. Prohibited political parties from raising funds through patronage assessments on federal employees.

1907: Tillman Act. Prohibited corporations and national banks from making campaign contributions to federal candidates.

1910: Publicity Act/Federal Corrupt Practices Act. First federal law to establish spending limits by political parties (but not candidates) and require disclosure of receipts and disbursements involving general congressional elections.

1911: Amendments to Tillman Act and Publicity Act. Spending limits were included for Senate elections, and primary elections were added to disclosure and spending limits.

1925: Federal Corrupt Practices Act (FCPA). Established expenditure caps for all federal candidates and required quarterly itemized contribution and expenditure reports.

1939: Hatch Act. Banned political activity by and solicitation of political donations from federal employees. Regulated primary elections and limited contributions and expenditures in congressional elections. Imposed caps on individual employee contributions to political parties and candidates as well as and an aggregate limit on individual contributions to parties and candidates.

1943: Smith-Connelly Act/War Labor Disputes Act of 1943. Prohibited labor unions from donating to federal candidates in general elections during World War II.

1947: Taft-Hartley Act of 1947. Made permanent the ban on the use of labor union treasury funds for federal general campaigns and expanded campaign finance restrictions on corporations and labor unions to include any indirect expenditures on behalf of federal candidates (e.g., buying ads instead of giving funds to a candidate).

1971: Federal Election Campaign Act (FECA) (and 1974 amendments). Limited the amount of money a candidate could give to his or her own campaign and placed limits on the amount a candidate could spend on television advertising. Also required candidates, PACs and all party committees to file reports on a quarterly basis.

Timeline of Federal Campaign Finance Law


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Further amendments in 1974 increased reporting requirements, tightened political contribution limits to candidates and parties, imposed overall spending limits by candidates, limited party spending on behalf of candidates and created the Federal Election Commission (FEC), the first agency responsible for administering and enforcing federal campaign finance laws.

1972: Pipefitters v. United States. Confirmed that the Taft-Hartley Act did not prevent union members from donating voluntarily to PACs.

1976: Buckley v. Valeo. Found FECA’s contribution limits and disclosure and recordkeeping requirements constitutional, but concluded that independent expenditures by persons could not be restricted, nor could expenditures by candidates using personal funds.

1978: First Nat’l Bank of Boston v. Bellotti. Concluded that corporations do have some free speech rights by striking down a state law prohibiting corporations from referendum-related spending.

1986: FEC v. Mass. Citizens for Life. To avoid being unconstitutionally vague, only corporate and union expenditures on “express advocacy” are prohibited—the so-called magic words test. Also concluded that certain incorporated organizations that did not “engage in business activities” or accept corporate/union donations were not the target of FECA restrictions.

1990: Austin v. Mich. Chamber of Commerce. Upheld a state statute making it a felony for corporations to use treasury funds for independent expenditures on express election advocacy; a compelling government interest existed.

2000: Bipartisan Campaign Reform Act (BCRA, aka McCain-Feingold Act). Prohibited “soft money” contributions by corporations and labor unions to national political parties and indexed individual contribution limits. Prohibited “electioneering communications” at issue in Wisconsin Right to Life v. FEC. Prohibited political parties and candidates from “coordination” to direct corporate contributions, narrowing the definition of what constitutes an independent expenditure.

2003: McConnell v. FEC. Upheld the electioneering ban for both express advocacy and its “functional equivalent.”


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Last Word: Trusts and Estates

An often overlooked aspect of estate planning is the distribution of tangible personal property. This includes items such as furnishings, jewelry, tools, and even automobiles but does not include real estate, bank accounts, cash or like items. Under the laws of many states, a separate writing can be used to designate who should receive specific pieces of tangible personal property.

Using such a list provides the flexibility to add, delete or change who will receive certain items without the need to visit an attorney each time and without the formalities involved in changing your will or other documents. It is also a great way to ensure that sentimental objects go to the people you most wish to have them and eliminate any controversy about your wishes.

In general, to be effective, the separate writing must be handwritten or signed by you. It must also be referenced in your testamentary documents. Traditionally, this meant your will, but your revocable trust can also be set up to include a provision for a separate writing. Combining these two estate planning devices may have the added benefit of removing personal property from your estate that might otherwise be subject to a court proceeding.

If you would like to incorporate these techniques into your estate plan, we recommend that you contact an attorney in our wealth management practice for assistance.

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