March 2014 Mediation as a Dark Art: A Mediator’s Message ... · $30 billion case ConocoPhillips...

March 2014

• The Importance of Bilateral Investment Treaties (BITs) When Investing in Emerging Markets This article discusses what bilateral investment treaties (BITs) are, how investors can enforce claims under BITs, and why using a Dutch or Curaçao entity and the associated extensive BIT treaty network of the Netherlands and Curaçao may prove useful when investing in countries that are perceived to be politically unstable. This article will also briefly address BIT developments in the EU.

• Mediation as a Dark Art: A Mediator’s Message to Parties Seeking to Settle the Difficult Case Mediation is a powerful tool for resolving complex cases, but better mediation advocacy and preparation is needed for lawyers and mediation participants. There are articulable steps to be taken by attorneys in the weeks preceding mediation that will optimize the process and engender better mediation outcomes.

• Who Decides: The Court or the Arbitrator? Courts have concluded that, unless the parties have agreed otherwise, “procedural arbitrability” will be decided by the arbitrator and “substantive arbitrability” will be decided by the court.

Departments:

• Keeping Current: In Stanford-Related Cases, Supreme Court Allows State-Law Fraud Class Actions, Limiting the Extent of Federal Preclusion On February 26, 2014, the Supreme Court held that state-law fraud class actions brought against attorneys, insurance brokers, and others arising from Ponzi-scheme claims involving R. Allen Stanford could proceed. In Chadbourne & Parke LLP v. Troice, the Court held that such claims were not prevented by the Securities Litigation Uniform Standards Act (SLUSA). The Court’s decision narrows the extent of the preclusive effect of SLUSA on state-law fraud claims that bear some relationship to nationally traded securities.

• Keeping Current: Supreme Court Extends SOX Whistleblower Protection to Contractor Employees On March 4, 2014, the U.S. Supreme Court issued its opinion in Lawson v. FMR LLC, No. 12-3, ruling that Section 806 of the Sarbanes-Oxley Act (SOX), which bans retaliation against whistleblowers, applies not only to employees of public companies but also to employees of contractors and subcontractors who carry out work for public companies, significantly expanding the coverage of SOX.

• Delaware Insider: Great Hill: To the Survivor Goes the Privilege? In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, the Delaware Court of Chancery recently considered whether the attorney-client privilege over pre-merger communications between a target company and its counsel passes to the surviving corporation in a merger governed by Delaware law. The decision highlights the possibility that pre-merger communications made with the expectation that they would be privileged could wind up in the hands of an adverse party, and provides guidance on how to avoid this unintended consequence of a merger.

• Training for Tomorrow: Teaching the Expert Who is Leader of the Band Most lawyers are ineffective in presenting expert testimony. Business lawyers are often too dependent on experts to decide what testimony to present or how to present the expert testimony. The purpose of this article is to help trial lawyers recognize that only the trial lawyer can decide the most effective use of expert testimony and to show the best way to present it.

• Ethics Corner: Unauthorized Practice of Law and the Transplanted In-House Counsel George, an in-house lawyer employed by Acme Corporation, is licensed to practice law in New York. Fifteen years ago, George moved to Acme’s headquarters in Chicago, where he has worked ever since. He is not a member of the Illinois bar. Is George engaged in the unauthorized practice of law, and if so, what might be the consequences?

• Member Spotlight: Invocation to the ABA House of Delegates: February 10, 2014, by Maury B. Poscover Maury B. Poscover, Past Chair of the Business Law Section, delivered the invocation at the February 10, 2014, session of the ABA House of Delegates during the Midyear Meeting in Chicago. Just prior to the invocation, the ABA played host to a naturalization ceremony for 24 new U.S. citizens.

Inside Business Law Increasingly over the last few years, businesses and their lawyers have been grappling with the issue of businesses’ social responsibility and sustainability. Within that time period, numerous committees within the Business Law Section have undertaken initiatives and presented CLE programs aimed at keeping Section members at the heart of developments in this area of the law. This month's “Inside Business Law” highlights some of those efforts and introduces a new Corporate Social Responsibility Law Task Force, which has been formed to coordinate the Section's efforts.

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Published in Business Law Today, March 2014. © 2014 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

BUSINESS LAW TODAY

MARch 2014

Tax planning forms a natural part of any decision-making process regarding the optimal structure of foreign investments. Strangely enough, until recently, BIT-plan-ning (i.e., planning to protect the investor’s interests against unfair treatment by the host country’s government via bilateral in-vestment treaties), rarely received a seat at the table. Venezuela’s actions in the oil and gas industry have emphasized, however, that the value of bilateral investment trea-ties cannot be overestimated. The decision by Mobil Corporation and ConocoPhilips to structure (or restructure) their invest-ments in the Orinoco Oil Belt projects in Venezuela through a company incorporated under Netherlands law will probably save them billions of dollars. These investors invoked the protection of the Bilateral In-vestment Treaty entered into between the Kingdom of the Netherlands and Venezuela after the expropriation of their investments, and are currently involved in multibillion dollar arbitrations with Venezuela.

Foreign investors, especially those invest-ing in emerging markets, are well advised to analyze not only the tax efficiency of a particular investment vehicle, but also the existence and substance of BITs to which the host country is a signatory. Sometimes

the tax and BIT analyses point to the same optimal investment vehicle. If not, the solu-tion may be to use two investment vehicle layers so that optimal tax planning is com-bined with the best protection under BITs.

This article discusses what BITs are, how investors can enforce claims under BITs, and why using a Dutch or Curaçao entity and the associated extensive BIT treaty net-work of the Netherlands and Curaçao may prove useful when investing in countries that are perceived to be politically unstable. Finally, this article will also briefly address BIT developments in the EU.

What are BITS?BITs are agreements between two countries protecting investments made by investors from one contracting state in the territory of the other contracting state. The purpose of BITs is to stimulate foreign investments by reducing political risk. The number of BITs entered into has increased exponen-tially over the last two decades. The first BIT was entered into between Germany and Pakistan in 1959. At the end of the 1980s, there were approximately 385 BITs, whereas currently the number approaches 3,000. Most BITs include the following substantive obligations that each country

undertakes toward investors from the other country, with only narrow exceptions:

• Treating foreign investors’ investmentsfairly and equitably, i.e., not taking un-reasonable or discriminatory measuresand treating investments of foreign in-vestors at least as favorably as invest-ments from its own nationals and nation-als of third states;

• Not nationalizing or expropriating in-vestments from foreign investors, unlessthe measures taken are non-discriminato-ry, taken in the public interest, and whileobserving due process, are taken againstpayment of prompt, adequate, and faircompensation. Importantly, regulationssubstantially negatively affecting thevalue of an investment can qualify as anexpropriation for these purposes; and

• Allowing funds relating to investmentsto be freely transferred by foreign in-vestors without delay, which includesprotection against foreign exchange re-strictions. This protection was invokedseveral times under BITs entered into byArgentina.

In this article we only address bilateralinvestment treaties. Please note that there

The Importance of Bilateral Investment Treaties (BITs) When Investing in Emerging Markets

By Helena Sprenger and Bouke Boersma

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MARch 2014Click to view the latest Business Law TODAY

2Published in Business Law Today, March 2014. © 2014 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

are a few multinational treaties that also offer investment protection, the most im-portant ones of which are NAFTA and the Energy Charter.

Enforcement of BITsBITs are quite unique in that they provide a basis for claims by an individual person or company against a state. In an effort to avoid the need to turn to the national courts for a judicial remedy, BITs usually contain an arbitration clause submitting disputes to a neutral arbitration tribunal, normally the International Centre for Set-tlement of Investment Disputes (ICSID), the most frequently used alternative being arbitration under the rules of the United Nations Commission on International Trade Law (UNCITRAL). Awards ren-dered by the ICSID are binding on parties and not subject to any court or other ap-peal, provided that an award can be an-nulled by a second ICSID panel, but only on grounds that are significantly narrower than the grounds that can be found in the New York Arbitration Convention. The ICSID was established under the Con-vention on the Settlement of Investment Disputes between States and Nationals of other States on March 18, 1965 (the “Washington Convention”), as an initia-tive of the World Bank. The Washington Convention entered into force on Octo-ber 14, 1966, after having been ratified by 20 countries. Under Article 54 of the Washington Convention, each of the cur-rent 150 states that have ratified it must recognize an award rendered pursuant to the Washington Convention as binding and must enforce the monetary obliga-tions imposed by that award as if it were a final judgment of a court of that state. However, it should be noted that local law of the country in which enforcement is sought will ultimately determine whether particular sovereign assets can be seized.

There are currently 183 cases pending before the ICSID, including the $7 billion case Mobil Corporation, Venezuela Hold-ings B.V. and others v. Venezuela and the $30 billion case ConocoPhillips Petrozuata B.V. and others v. Venezuela, both based on

the BIT entered into between the Kingdom of the Netherlands and Venezuela. In the Mobil case, the arbitration panel confirmed, in accordance with existing case law from ICSID panels, that the fact that a Dutch intermediary holding company was added to the structure years after the original in-vestment and probably with a view to the political environment in Venezuela, did not negatively affect the rights of Mobil to seek protection under the Dutch BIT. In the Con-ocoPhillips case, the arbitral tribunal ruled on September 3, 2013, that Venezuela has unlawfully expropriated the investments of ConocoPhillips in three oil projects in Ven-ezuela by failing to offer just compensation for the taking of ConocoPhillips assets in the oil projects. The arbitration will contin-ue to determine the level of compensation. Venezuela (27) and Argentina (24) head the list of countries against which the most IC-SID cases are pending.

BIT Due DiligenceNot all BITs are created equal. If a host country has entered into multiple BITs, it is worthwhile to review the contents of those BITs in order to determine which BIT provides the best protection for a specific investment. Some BITs are worded more investor-friendly than others. We’ll explore below some of the issues to look for when doing due diligence on BITs:

• Which investments are protected? EachBIT will have a definition of “Invest-ments.” Some of these definitions areworded broadly, but it may also be thecase that BIT protection is only awardedto a narrow category of investments, orthat certain investments are expressly ex-cluded. It may, for example, be limited toprotection of equity interests.

• When does the BIT apply? It will be im-portant to see whether BIT protection isonly granted to citizens of, and compa-nies incorporated under the laws of, orhaving their head quarters in, the con-tracting state, or whether for example,companies in third countries owned and/or controlled by such citizens or corpora-tions also qualify for protection.

• Term of BIT protection. BITs are enteredinto for a specific term and may, or maynot, be extended for a certain period aftera termination notice has been given. Inaddition, it may be important to checkwhether the protection is also affordedto investments made before the BIT be-comes effective.

Use of Dutch or Curaçao Investment VehiclesDutch or Curaçao investment vehicles are already often used for tax reasons. Dutch policy aims at removing international double taxation, and the Netherlands has therefore entered into nearly 100 interna-tional tax treaties. In addition, Dutch tax law does not provide for withholding tax on outbound interest and royalties. Lastly, profits received by a Dutch parent com-pany from a foreign subsidiary or made through a permanent establishment situ-ated abroad are exempt from taxation in the Netherlands (often referred to as the “participation exemption”). The extensive BIT treaty network of the Netherlands and Curaçao provides another strong argument for using a Dutch or Curaçao investment vehicle when making foreign investments in countries which are perceived to be po-litically risky.

The Kingdom of the Netherlands entered into 97 BITs of which 89 are currently in effect. These BITs generally apply to The Netherlands, Curaçao, St. Maarten, and Aruba. Curaçao is probably the only well-known off-shore jurisdiction that provides the benefit of such an extensive BIT treaty network. The model treaty on which most are based is considered to be very investor-friendly. The issues referred to above are dealt with as follows:

Which Investments Are Protected?In virtually all BITs entered into by the Kingdom of the Netherlands, the defini-tion of “investments” is worded broadly and is open-ended. The definition gener-ally covers any kind of asset, including, but not limited to: (1) movable and immov-able property and security rights in rela-tion thereto; (2) rights derived from shares,





bonds, and other interests in corporations and joint ventures; (3) monetary claims; (4) intellectual property rights; and (5) rights to explore, extract, and win natural resources and other rights granted under public law.

To Which Investors Does the BIT Apply? The Dutch Kingdom’s BITs typically not only apply to citizens and corporations of the Netherlands, Aruba, Curaçao, and St. Maarten, but also to foreign corporations that are directly or indirectly controlled by such citizens or corporations. A significant number of BITs of other countries require qualifying investors to be both established in the contracting country and to have their head office there. These other BITs would therefore not provide protection on the basis of intermediary holding compa-nies located in the state that entered into the BIT with the host country. The Dutch Kingdom’s approach gives a lot of flexibil-ity to structure investments in a tax efficient manner, while allowing the investor at the same time to benefit from the rights granted to investors under the relevant BIT, since it is possible to use multiple layers of invest-ment vehicles. Almost all Dutch Kingdom BITs provide protection as long as there is a Dutch or Dutch Caribbean vehicle in the corporate structure.

Term of BIT ProtectionThe BITs of the Dutch Kingdom are in most cases valid for an initial period of 15 years. They usually also apply to invest-ments that have been made before the date of entry into force. Unless a six-month ad-vance termination notice has been given by one of the contracting states before its expiry date, they will automatically be extended for 10 years. Importantly, in the case of a termination, the provisions of the BIT generally survive for a further period of 15 years for investments that were made before its termination. Consequently, the Dutch Kingdom-Venezuela BIT that has been terminated upon Venezuela’s request as of November 1, 2008, will for example, remain in force until November 1, 2023, for investments made before November 1, 2008.

BITS in Effect

Netherlands 89Curaçao 89Brazil 0China 100 (not including U.S.)India 65 (not including U.S.)U.S. 40Cayman Islands 0Bermuda 5Canada 27

BITs and BRICsBelow, we will briefly describe the BIT situation in the BRIC (Brazil, Russia, India and China) countries and provide, if ap-plicable, some details of the BITs entered into by the BRICs with the Kingdom of the Netherlands, which are among the most investor-friendly BITs entered into by the relevant countries.

BrazilBrazil executed 14 BITs, including one with the Kingdom of the Netherlands, but apparently had a change of heart and has not ratified any of them. It is not a party to the Washington Convention.

Russian FederationThe Russian Federation is a signatory to 44 BITs. The Russian Federation, or rather its predecessor, the Soviet Union, entered into a BIT with the United States in 1992, but never ratified it, so it is not effective. The BIT with the Kingdom of the Netherlands became effective in 1991. Russia has ex-ecuted the Washington Convention, but has not ratified it.

The Dutch-Russian BIT has the follow-ing features:

• The definition of investments is very broad and includes, for example, intel-lectual property rights and concessions to explore natural resources.

• It offers protection for the benefit of in-termediary holding companies.

• It offers direct access to ad hoc arbitra-tion with arbiters to be appointed by the president of the chamber of commerce in Stockholm.

IndiaIndia has 65 BITs in effect, with a few pending. There is no BIT with the United States. The BIT between India and the Kingdom of the Netherlands has the fol-lowing main features:

• The definition of investments is very broad and includes for example intellec-tual property rights and concessions.

• It offers protection for the benefit of in-termediary holding companies.

• It offers access to ICSID or UNCITRAL arbitration.

ChinaChina entered into about 100 BITs. The list does not include the United States. When investing in China, U.S. investors could therefore benefit from interposing an intermediary holding company from a ju-risdiction with an investor-friendly China BIT. Obviously, interposing the interme-diary holding company should not result in the payment of additional taxes, so the choice of jurisdiction will also depend on a thorough tax analysis. Interposing a Dutch intermediary holding company may fit the bill.

The Dutch-China BIT has the following features:

• The definition of investments is very broad and includes, for example, intel-lectual property rights.

• It also offers protection for the benefit of intermediary holding companies.

• It offers direct access to ICSID or UN-CITRAL arbitration (contrary to many other China BITs).

In the case of China, it is especially inter-esting that the BIT offers protection for the benefit of intermediary holding companies. Given that the Dutch-China Tax Treaty pro-vides for a 10 percent dividend withholding tax, whereas, for example, an investment by a Hong Kong entity would only trigger a 5 percent withholding tax burden, the invest-ment should not be directly made through a Dutch subsidiary. To add BIT protection, the Dutch subsidiary should be interposed





above, for example, such Hong Kong entity. Interposing the Dutch entity will not lead to additional taxes, given the Dutch participa-tion exemption for subsidiaries (income derived though qualifying subsidiaries are not subject to corporate income tax) and the fact that dividends paid by the Dutch entity to a U.S. parent can be made without dividend withholding tax, either by using the U.S.-Dutch Tax Treaty, or by structur-ing the Dutch entity as a “cooperative.”

Developments in the EUAs of December 1, 2009, the EU became exclusively authorized to enter into new BITs on behalf of its member states. How-ever, existing BITs entered into by an EU member state remain effective, unless and until the EU enters into a new BIT with the relevant other state.

ConclusionWhen contemplating foreign direct invest-ments, especially in emerging markets, BIT due diligence should be part of the work undertaken. Basing the decision on which investment vehicle to use solely on tax con-siderations may prove costly if a host gov-ernment takes hostile action.

Using a Dutch or Curaçao entity may not only make sense from a tax perspective, but also because of the extensive BIT network of the Netherlands and Curaçao.

Helena Sprenger is the resident partner of the Dutch law firm Houthoff Buruma in New York. Bouke Boersma is a senior associate at the firm’s New York office.



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BUSINESS LAW TODAY

MARch 2014

If, as many mediators will say, the media-tion session is the most important day in the life of the case short of trial, why is there not a whole lot more time and attention given to the art of mediation advocacy? How do we teach the mediation process when it is undertaken in a confidential and privileged setting where the attorneys and litigants are by rule or statute precluded from repeating, taping, or otherwise disclosing mediation communications? Finally how many cases resulting in bad outcomes might have been resolved on more favorable terms if a better mediation had been held? Given the pro-hibitive time, cost, and uncertainty of trial, all of these questions warrant discussion.

We need to rethink the way we approach and teach mediation. So we are clear on ter-minology, “mediation” as described here is a settlement conference attended by the par-ties and their attorneys and facilitated by a third-party neutral paid by the parties by the hour or day. Typically, there is an exchange of positions through statement of counsel in a group session with all in attendance, and then private “caucuses” are held at the mediator’s discretion through which the me-diator explores positions, wants, and needs, and from this creates or solicits offers and counter-offers. If a settlement is not reached

after exhausting discussions and there is no plan and perceived benefit in continuing dis-cussions, then an “impasse” is declared.

Part of the problem in becoming better mediation advocates is didactic. Mediation strategy is hard to teach. Mediation is a dark art. One can witness a stinging cross exami-nation, an eloquent closing argument, parrot language from a previously filed brief, and dazzle the jury with rehearsed audio-visual embellishments. No equivalent talent, skill, or transcript can be readily exported from a successful mediation session and offered up as an example of effective mediation ad-vocacy. Lessons learned in mediation pass only by word of mouth, and due to confi-dentiality concerns, have to be sanitized, generalized, and abstracted. Sterling exam-ples of mediation advocacy cannot be du-plicated or recorded. Mediation occurs in a black box where there is no public viewing.

Recognizing the didactic impediments to teaching mediation, we might also ask why the courts don’t demand more in the form of preparation. Why are there no mediation case management orders telling the parties and attorneys how to prepare for mediation? Why don’t more states follow the Florida model and send every state and federal civil case (save a select few) to mediation before

trial? See Florida’s Mediation Confidenti-ality and Privilege Act, Fla. Stat. 44.401, et seq., and Fla. R. Civ. Proc. 1.700–1.750. Why isn’t there a court ordered procedure and commonly implemented “to do” list for attorneys and clients to complete before the mediation session starts? Mediations do not come with attendant rules that com-pel preparation. Consequently, mediation preparation may well be lacking as lawyers focus on the calendar-driven and mandated requirements in the litigation.

Mediation preparation is left to idiosyn-crasies of litigators who may have little or no formal mediation training. Why are there no court orders or recognized and well known “best practices” guiding the attor-neys and litigants in their mediation prepa-ration? The answers are probably several. Perhaps because judges who set trial orders do not think they should dictate the circum-stances under which settlement discussions are had. Perhaps judges dislike mediation or they never considered a pre-mediation order as within their powers. To be sure, we do not want the court to conduct the mediation or enforce arbitrary standards like “good faith” that affect the unfettered right to self-deter-mination. Ideally, attorneys would develop a pre-mediation checklist, because there are

Mediation as a Dark Art: A Mediator’s Message to Parties Seeking to Settle the Difficult Case

By David W. Henry



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things to be done in advance of mediation that will make the mediation session more fruitful and avoid impasse. But short of that, a “pre-mediation” order might elevate the extent of preparedness and suggest in a helpful way how the parties should prepare themselves to mediate.

We do ourselves and clients a disservice by not effectively preparing ourselves for mediation and for not conducting mediation preparation with the same earnestness as trial preparation. Here the problem is likely one of traditional perception: we don’t take mediation as seriously as trial because it is not scripted or rule driven. In mediation, the art of lawyering in the traditional sense, the application of fact to law, and a lawyer’s knowledge of evidence and procedure is of little value. Mediation doesn’t require “liti-gation” skills. Plus mediation lacks the dra-ma, emotion, and public spectacle of a trial setting. The mediation is hidden from public view, not recorded in history, and not memo-rialized in literature or film. Reputations are not made or lost in mediation. The darkness of the art leads to the difficulty in teaching it and thwarts appreciation for its strength and purpose. Those who are the benefac-tors of great mediation advocacy and who achieve settlement have few ways to convey the greatness of the advocacy or creativity that led to the deal. The confidentiality and privilege attaching to mediation is a limiting factor in the appreciation of this process.

Part of the problem may stem from the inconsistent use of mediation in civil cases. This results in rather wide and disparate levels of experience in both mediators and mediation participants.

This author submits that for too many, mediation planning is minimal and mostly about the “who, when, and where.” Logistics are usually the chief concern, and to be sure, this is important, but there is a higher level of practice to be considered. There is also some skepticism about the process by late adopters that probably accounts for some lack of attention to the preparation process.

In jurisdictions where there is an evolved mediation practice and statistics are main-tained, a clear majority of the cases settle at the mediation conference or relatively soon

thereafter. Even a slight increase in the number of settlements at mediation would have a profound impact on our clients, the cost of litigation, the dockets, and the bur-den on the judiciary as a whole.

Some of the mediation sessions that have reached impasse might not have done so with better mediation preparation, and the cause of some failed mediations may have their origins in the inactivity of the attorney in the weeks before the mediation confer-ence. Mediation preparation is a meaning-ful (and also billable) activity that is too often ignored.

Create Your Own Mediation Countdown Litigators are calendar-driven animals, and so our plan for improving mediation prepara-tion is tied to the lawyer’s calendar. Each of the steps we suggest will be tied to a date pri-or to the mediation. The timing is, of course, subjective, and the time frame is malleable, but the key is to begin thinking in stages. When selecting a date for mediation, leave enough time following mediation to deal with unexpected twists and turns if the case does not settle. It is surprising how many at-torneys schedule mediation with little fore-thought and find themselves mediating on the eve of trial when there is little opportu-nity to react to new information or positions.

Do not set mediation at the very end of the discovery period. In a well-managed mediation, you almost always learn more about your case and the opposing position. You may also learn there is a corporate rep-resentative or attorney that has not properly evaluated the case or does not understand his or her own liability. There is no one-size-fits-all solution. Letting the court set the timetable for mediation may be a mis-take. In large cases, it is important to con-sider that while you may be ready to medi-ate at a particular time, others may not be for a host of reasons. In the sections below we discuss how to set up the mediation so as to achieve the best chance for settlement.

Selection of the Mediator While a magistrate judge conducting media-tion is expected to keep and maintain discus-sions as confidential, there is still some risk

to the client in mediating with a magistrate. For example, if the magistrate is also mak-ing pre-trial rulings, the client’s settlement position or an off-hand comment by some-one may annoy the magistrate. With private mediators, there is no risk of offending the court in the mediation session. The dynam-ics of the process suggest that private me-diators are preferable. And after the formal mediation conference has ended, a private mediator can bird-dog continued discus-sions in a way a magistrate cannot.

I almost always defer to opposing coun-sel’s choice of mediator regardless of what side I am on; my evaluation doesn’t depend on what others think, but opposing counsel and his or her client might be influenced by a friendly face. If I insist upon a mediator that the other side distrusts for any reason, the intellectual underpinning of the process is threatened. The mediator must be per-ceived as neutral or favorable by the other side to be the best communicator of your message. This is not unlike the “sponsor-ship” theory of evidence where the proba-tive weight of the evidence is positively or negatively affected by the proponent of the evidence. Your last offer may be more posi-tively received if it carries the imprimatur of approval of a trusted mediator.

Identify the “Right” ParticipantsIf you represent a corporation or other en-tity, the day-to-day representative for litiga-tion purposes is not always the best repre-sentative for mediation. Think about who should be present. Politely insist that key decision-makers, who initially promised to participate, participate in person. Waiting until a week prior to mediation to learn that your mediation representative is someone different than you planned is potentially ru-inous on several levels. Tell any reluctant senior manager that while the day-to-day litigation activity can be delegated, settle-ment decisions demand his or her personal attention, and that only with that participa-tion are creative solutions possible.

Step outside the four corners of the case. Is someone other than the day-to-day litiga-tion representative a better choice? Does he or she really speak for the collective will of





the company? Has the litigation represen-tative made a poor decision to litigate and is now hesitant to cut his or her losses for fear of repercussions by superiors? If so, you will need to diplomatically cut through to management while preserving your rela-tionship with the day-to-day litigation repre-sentative. If you bring someone to mediation who cannot sell a settlement to the company, or refuses to do so, you will have done your-self and the client a huge disservice.

Mediations that lack key and informed decision-makers are like team sports with the star player on the bench. Be polite but firm on attendance. If senior management is unwilling to attend mediation in a case you believe warrants their attention, you may have larger problems. There may be unre-solved internal disputes over how the litiga-tion should be handled, and those disputes may preclude a settlement at mediation.

Be Mindful of Who Else is Attending the MediationIn emotionally charged cases where there is great animosity between the parties or counsel, consider whether the parties should convene in a joint opening session. In rare cases you may wish to dispense with a joint session, but only if the parties cannot be trusted to behave. Yelling and shouting should never occur, but some-times lawyers lack the ability to control their clients. Think about the interpersonal dynamics before walking into mediation. Talk to the mediator who can explore this issue on your behalf. Some unpleasant-ness and hesitancy to meet the opponent is expected. Push past that. Face-to-face encounters are only a concern if there is a real and legitimate risk that the process will be derailed. Some dislike, resentment, or hostility is common and not to be avoided. Clients should feel some discomfort. This is a feeling that promotes settlement.

Make sure every other party has the right representative. Ask the other side who is at-tending, and if they are not known to you, ask opposing counsel to explain what they do and their position in the company. Be blunt. Tell them that you are committed to having informed decision-makers and you

expect the same of them. You need to make the inquiry several weeks prior to me-diation so that if you or opposing counsel needs to make a change in participants, it can be accomplished without necessarily moving the mediation date and creating a scheduling problem for others. If the other side appears content to send someone you perceive to be less than ideal, use the me-diator to diplomatically intercede. Recog-nize however, that your ability to effectuate a change in personnel is limited.

Don’t Confuse Business Savvy with Risk-Assessment CapabilityOnce the representative is chosen, you must begin an aggressive period of education 60 to 90 days or more before mediation ses-sion. The ramp-up time is proportional to the complexity of the case and the exposure presented. Educate the client on the case, the exposure, the parties likely to appear, and the potential range of demands. Do this in writing. One danger is assuming that the client or carrier representative really under-stands the case. That assumption is flawed on many levels. Many lay people, though otherwise sophisticated, simply do not un-derstand the summary judgment process, rules of evidence, limitations on testimony, Daubert motions, fee exposure, or the time needed to prepare for trial, and have no real experience in assessing litigation risk.

Even if you have written frequently to the client and carrier along the way, do not as-sume your letters were given great attention. Reading litigation summaries is not always a high priority for some managers. Psychol-ogists will tell you that most non-lawyer cli-ents filter out the bad news in letters.

If you wait until the week before media-tion to give a report, there may be a host of problems. You may have settlement author-ity issues because the projected settlement is greater than anticipated and senior man-agement must therefore be consulted. There may be external or internal business consid-erations posed by a settlement that you as an attorney have not considered (e.g., how would an injunction as part of settlement af-fect our distributors and customers?) This can lead to a host of questions and a client-

education process you will not have time to complete. Get your pre-suit mediation sum-mary with potential mediation outcomes into the client’s hands 30 days or more prior to the mediation conference.

Expectations may be unrealistic for any number of reasons. Make sure that you start managing the expectations early in the pro-cess and that your reporting is consistent with the expectations you have outlined. Some clients confuse their own personal success or expert knowledge with their abil-ity to evaluate their case. You are the only professional expert in this area. They are at best amateur evaluators. Evaluating the case is your job, and it is the hardest thing we do. Do not let the client’s optimistic per-ception of the case color your independent evaluation. If the client has been harboring wild ideas that are unrealistic, it is better to air the perceptions or misperceptions sev-eral weeks prior to mediation, as opposed to a few days beforehand. Overly optimis-tic summaries are a recipe for disaster at mediation. If the only pre-mediation report the client reads is the same one you send to the mediator in advance of the mediation session, you will do your client a huge dis-service. Give them the good, the bad, and the ugly in a separate report at least 30 days prior and a shorter report to the mediator or position statement for the other side.

Multi-party ConsiderationsMost defense attorneys do not prepare the other defendants for mediation. This is a chronic shortcoming. Co-defendants and their attorneys too often fail to work on the other parties likely to contribute. This is no doubt owing to customary col-legiality and “no-finger-pointing rule” be-tween defendants. That no-finger-pointing rule among defendants may make sense at trial, but this is mediation. Irrational, ill-prepared, or plainly clueless defendants whom you believe are not inclined to pay “their fare share” at mediation are not en-titled to the benefit of your silence. For whatever reason, too many defendants take a lackadaisical attitude toward the media-tion preparation being undertaken (or not) by co-defendants and their attorneys. This





may be the biggest single mistake we see in the realm of mediation preparation in com-plex cases.

There is only one good way to find out if the co-defendants share your views and ex-pectations. Ask them. Telephone calls 30–40 days prior to mediation (or more in big cases) are critical. Do the other attorneys really understand their exposure? What do they think of your client’s case? Do they have coverage you do not know about? Defamation, copyright, and trademark claims, for example, are notoriously under-reported to insurers by even experienced attorneys. Don’t be afraid to make the cov-erage argument for the co-defendant. Ask all parties who they are bringing to the me-diation. Suggest they bring someone equal in stature to your representative. From all of this, you will find you have consensus or divergent views. Either way, you will have advanced your understanding of what is likely to happen at mediation.

Flush out the unprepared or seemingly un-cooperative co-defendants well in advance of mediation by well-timed questions, forc-ing them to explore the merits and aimed at gaining consensus before the actual media-tion conference. Ask them to consider a pre-mediation joint defense offer. Whether they make an offer is unimportant. It provides a basis for discussing expectations. Discuss contribution percentages and probable ex-posure. Again, the discussion will reveal perceptions related to liability and damages. If one party seems intent on low-balling the money and wants a picnic at mediation, quietly encourage others to stick some fire ants in their basket. Many times the impedi-ment to settlement is in the defense camp, not with the plaintiff. Figure out who will be an impediment to settlement well before the mediation conference and apply behind-the-scenes pressure. Start the dialogue 30 or 40 days before mediation or more, so you will have time to shape or change impressions and thinking if necessary.

Concluding CommentsThe tasks to be performed 30, 60, or 90 days prior to a mediation session are not widely articulated in articles or CLE ma-

terials. Mediation is a far superior dispute resolution tool compared to trial. No one has to appeal from mediation. Mediation temporarily supplants the longer litigation process. Mediation is often described as a “break” from the litigation, and that mind-set (suggestive of a holiday) is not condu-cive to careful planning and analysis. Un-fortunately, because the mediation process itself has few formal rules, this may explain why there are few instructional guidelines for teaching preparation. Like a good day of fishing, the key to a good day at media-tion is preparation beforehand. The best fisherman cannot overcome the wrong bait, tackle, or water conditions. Make tele-phone calls to all of the attorneys two or three months prior to the mediation. At a minimum, give or get a demand. In multi-party cases, figure out where the obstacles to settlement lie. Identify the potential im-pediments to settlement and problem deci-sion-makers 30–60 days prior to mediation when you can still do something about it. Be a polite busy-body. Find insurance cov-erage for others early in the case. If you will be expecting settlement contributions from other defendants, use your good re-lationship with the plaintiff’s attorney to throw rocks at stubborn uncooperative co-defendants who do not seem willing to pay their fair share.

Try to “pre-mediate” with your client by proposing offers or demands. If you have a corporate client, make sure you have the true and best voice of the company. Find out beforehand if there are unresolved in-ternal debates. If you have worked hard prior to the mediation, there will be fewer surprises or at least anticipated obstacles, and thus you will have an increased chance for consensus leading to settlement.

Focusing on your client’s wants and needs is too simplistic. The truly effective mediation advocate and participant knows before mediation how the other parties are likely to react to one another and which party may be the most difficult player. If the mediation unfolds in a way that is close to the client’s expectations and the expec-tations of the other parties, everyone will have less anxiety and have more affinity for

a deal, because their experience is intellec-tually shared. A case should never impasse due to an informational deficit, a lack of au-thority, fear of the process, or internal po-litical or emotional barriers to settlement. Many of those problems can be overcome if identified in the days and weeks before mediation. Settlements at mediation have their start in the preparation that gets done by counsel in the weeks and months before the formal conference. Good preparation efforts before mediation are rightfully bill-able and meaningfully benefit the client by giving it and the other litigants the best op-portunity to settle the case if desired.

David W. Henry is a partner at Alvarez Sambol & Winthrop, P.A., in Orlando, Florida. He is a Florida Supreme Court Certified Civil and Appellate Mediator and a member of the National Academy of Distinguished Neutrals.

ADDITIONAL RESOURCESFor other materials on this topic,

please refer to the following.

Dispute Resolution CommitteeFind more information at the Dis-

pute Resolution Committee’s website, and be sure to check out the commit-tee’s Podcasts by clicking here.

Business Law Section 2014 Spring Meeting

Program: The Essential Components of a Successful Corporate Dispute Resolution Program, and How to En-sure an Efficient Arbitration Process Using the AAA’s New Commercial Rules

Thursday, April 10, 2014, 8:00 AM - 10:00 AMPresented by: Dispute Resolution

BLS Programs Material LibraryCross-Border Deals: State of the Art of International Negotiation, Media-tion and Arbitration (PDF) (Audio)

2013 Annual Meeting



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BUSINESS LAW TODAY

MARch 2014

As anyone who practices in the field of ar-bitration knows, the mere existence of an arbitration clause does not answer all the questions of what will happen in the arbi-tration. Indeed, often it will not even an-swer clearly the question of who will de-cide what with respect to the arbitration. Courts have concluded that, unless the parties have agreed otherwise, “procedural arbitrability” will be decided by the arbi-trator and “substantive arbitrability” will be decided by the court.

As the recent decisions discussed in this article illustrate, how courts have applied this distinction continues to depend on the specific facts and circumstances of each dis-pute and the particular contract language.

Who Decides the Timeliness of an Arbitration Demand?In United Steel, Paper & Forestry, Rubber, Mfg., Energy, Allied Indus. & Serv. Work-ers Int’l Union, Local 13-423 v. Valero Servs., Inc., No. 1:12-cv-113, 2013 U.S. Dist. LEXIS 19175, at *14-15 (E.D. Tex. 2013), the plaintiff union filed a grievance on behalf of a terminated employee of de-fendant Valero. After the grievance was denied, the union filed a demand for arbi-tration under a collective bargaining agree-

ment (CBA). The CBA required the union to file any demand for arbitration within a prescribed time. Neither party disputed the existence of a valid agreement to arbitrate or that an arbitrator should decide the mer-its of the dispute. The defendant conceded that arbitrators generally decide issues of procedural arbitrability, including timeli-ness of an arbitration demand, but argued that under the terms of the CBA, the par-ties had agreed to submit all questions of arbitrability to the court. In particular, the CBA provided that “[a]ny dispute as to the arbitrability of a given matter shall be re-solved by a court of competent jurisdiction and not by an arbitrator, unless the parties specifically agree otherwise in writing.” It also provided that “[a]ny question on any matter outside of this Agreement shall not be the subject of arbitration.”

To decide whether the issues of timing was one of “arbitrability,” or was otherwise “outside” the agreement and thus for a court, the district court looked at the entire language of the arbitration clause, which expressly excluded certain issues from ar-bitration, such as the use of contractors or the exercise of the company’s right to lay off after notice, both of which are issues of substantive arbitrability. Applying prin-

ciples of contract interpretation, it held that the CBA language applied only to substan-tive arbitrability and did not displace the general rule that procedural arbitrability is for the arbitrator to decide. Moreover, because the underlying dispute about the employee’s discharge was subject to arbi-tration, the related question of the timeli-ness of the arbitration demand was more appropriately before the arbitrator. The court acknowledged that a court may deny arbitration when the procedural provision in question operates to bar arbitration al-together, but there was nothing in the ar-bitration clause indicating that the timing provisions would completely preclude arbitration.

Who Decides Whether an Arbitration May Proceed on a Class or Consolidated Basis?In Planet Beach Franchising Corp. v. Zaroff, C.A., No. 13-438 Section: J:1, 2013 U.S. Dist. LEXIS 121908 (E.D. La. Aug. 27, 2013), the plaintiff franchisee filed a unitary demand for arbitration with the AAA for damages based on a franchisor’s alleged misrepresentations and omissions in sales materials used to induce the fran-chisee to enter into four separate franchise

Who Decides: The Court or the Arbitrator?

By Carolyn G. Nussbaum and Christopher M. Mason



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agreements. Each of the four relevant fran-chise agreements stated that “[n]either party shall pursue class claims and/or con-solidate the arbitration with any other pro-ceeding to which the franchisor is a party . . . .” The franchisor then sued to compel the franchisee to maintain separate arbitration proceedings under each of its four separate agreements. The franchisee replied that it had filed a single arbitration, not a “consol-idated” demand, and that an arbitrator must decide if the arbitration could proceed on a unitary basis.

The Eastern District of Louisiana first sought to decide “who should make the determination as to whether the [franchi-see] can pursue one arbitration proceed-ing against [franchisor] consisting of all of [its] claims that arise or relate to the four franchise agreements. . . .” (Emphasis in original.) It held that, contrary to the fran-chisor’s arguments, Stolt-Nielsen S.A. v. Animal Feeds Int’l Cor., 130 S. Ct. 1758 (2010), did not instruct courts to make the decision of whether an agreement prohib-its class arbitration. Instead, the court held, based on the general presumption in favor of arbitration and the broad nature of the arbitration clause, that an arbitrator must interpret whether the parties’ agreement permits consolidated arbitration. It there-fore denied the franchisor’s motion to com-pel four separate arbitrations.

In Parvataneni v. E*Trade Fin. Corp., No. C 13-02428 JSW, 2013 U.S. Dist. LEXIS 136950 (N.D. Cal. July 2, 2013), the plaintiff sued defendant E*Trade for violations of California state law related to unpaid overtime. E*Trade removed to federal court and moved to dismiss or com-pel arbitration pursuant to an arbitration provision in the plaintiff’s employment agreement. The arbitration clause, which was concededly broad, stated that “[i]n the event of any dispute or claim arising out of or relating to your employment . . . such Disputes shall be fully, finally, and exclu-sively resolved by binding arbitration . . . ” conducted by the AAA.

The plaintiff argued that this clause should be read to allow him to pursue col-lective arbitration, or, if not, that the arbi-

tration provision was void under state law. The district court held that the issue of class arbitration was a question for the court in the absence of “clear and unmistakable evi-dence” that the parties intended to arbitrate arbitrability. The court noted, for example, that the parties did not choose to incorpo-rate the rules of the AAA which would have constituted such “clear and unmistakable evidence” to permit an arbitrator to decide arbitrability. The court then proceeded to hold, however, that because the arbitration agreement was silent as to class arbitration, under Stolt-Nielsen, it could not construe the agreement to include class arbitration.

Who Decides the Validity of an Arbitration Agreement and Arbitrability?In Rent-A-Center, West, Inc. v. Jackson, 130 S. Ct. 2772 (2010), the Supreme Court held that parties may agree to arbitrate “thresh-old issues” regarding the arbitrability of their disputes. Since Jackson, courts have struggled to define the exact limits of this rule.

In Holzer v. Mondadori, No. 13-civ-5234(NRB), 2013 U.S. Dist. LEXIS 37168 (S.D.N.Y. Mar. 14, 2013), on remand and dismissed by Holzer v. Mondadori, 40 Misc. 3d 1233(A) (N.Y. Sup. Ct. 2013), for example, the defendants had marketed investments in a Dubai real estate venture to the plaintiffs. When the venture failed, the plaintiffs sued for damages in New York state court. One of the defendants pe-titioned for removal on the basis of Section 205 of the Federal Arbitration Act, 9 U.S.C. § 205 (implementing the New York Con-vention on Recognition and Enforcement of Foreign Arbitral Awards), which permits removal of an action “relating to” a foreign arbitration or arbitral award under the New York Convention, and sought to compel arbitration of the plaintiffs’ claims. This defendant was not a signatory to the un-derlying purchase agreements containing the arbitration clause. Furthermore, these agreements contained a Dubai choice of law provision. The court concluded, how-ever, based on precedent in other circuits, that United States law must govern the arbitrability question because determina-

tions of agreements governed by the New York Convention implicate the allocation of power between courts and arbitrators. It therefore held that, under federal common law, a party must provide “clear and unmis-takable evidence” of intent for an arbitrator to arbitrate arbitrability.

The purchase agreements expressly incor-porated by reference the Arbitration Rules of the Dubai International Arbitration Cen-tre (DIAC Rules). The district court found that this incorporation by reference could serve as “clear and unmistakable evidence” that the signatories intended to submit ques-tions of arbitrability to the DIAC arbitration tribunal. But the language of the arbitration clauses in the purchase agreements also provided that arbitration of “all disputes between the parties in relation to or arising from” the contract would be submitted to arbitration. Because the moving defendant was not a signatory to the agreements, nor had a sufficiently close relationship to signa-tory defendants, the district court concluded that it could not compel arbitration and re-manded to state court.

In contrast, in Oracle Am., Inc. v. Myriad Group A.G., 724 F.3d 1069 (9th Cir. 2013), the district court concluded that UNCIT-RAL rules did not provide such evidence that an arbitrator should decide arbitrabil-ity; a decision, however, that the Ninth Circuit promptly reversed. The defendant Myriad, a Swiss mobile software compa-ny, licensed Java, a computer programing language, from the plaintiff Oracle. Based on that license, Oracle sued Myriad in the Northern District of California, asserting claims for breach of contract, violation of the Lanham Act, copyright infringement, and unfair competition under California law. Myriad moved in response to compel arbitration based on an arbitration clause in the parties’ license agreement that called for arbitration in accordance with the UN-CITRAL rules.

The district court granted Myriad’s mo-tion to compel arbitration with respect to Oracle’s breach of contract claim, but de-nied Myriad’s motion with respect to all other claims. The court concluded that it had the authority to decide whether the





other claims were arbitrable because UN-CITRAL arbitration rules “did not consti-tute clear and unmistakable evidence that the parties intended to delegate questions of arbitrability to the arbitrator.”

On appeal, the Ninth Circuit reversed the district court’s decision. It held instead that “as long as an arbitration agreement is be-tween sophisticated parties to commercial contracts, those parties shall be expected to understand that incorporation of the UN-CITRAL rules delegates questions of arbi-trability to the arbitrator.”

Whether a Contract as a Whole is Void Remains an Issue for the ArbitratorAlmost half a century ago, the Supreme Court held that while challenges to an agree-ment to arbitrate contained in a contract may be decided by a court, challenges to the con-tract as a whole must be decided by an arbi-trator. See, e.g., Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). While litigants sometimes try to avoid the rule, it remains firmly planted in the judicial language.

In Damato v. Time Warner Cable, Inc., No. 13-cv-944(ARR)(RML), 2013 U.S. Dist. LEXIS 107117 (E.D.N.Y. July 30, 2013), the plaintiff subscribers filed a putative class action against defendant Time Warner Cable for violations of multiple states’ consumer protection laws. Time Warner Cable replied with a motion to stay or dismiss the action pending arbitration pursuant to an arbi-tration clause in the plaintiffs’ subscriber agreements. The arbitration clause provided for binding arbitration unless the subscribers elected to opt out. The plaintiffs nonetheless argued that the arbitration clause was invalid as illusory because the subscriber agree-ment gave Time Warner Cable the power to change its terms unilaterally and therefore the agreement to arbitrate was not supported by any mutual obligation. The court found that these arguments challenged the validity of the contract as a whole, rather than just the arbitration clause, because Time Warner Cable retained power to change the terms of the entire agreement. It rejected the plain-tiffs’ claims that the agreement to arbitrate was unconscionable, because the plaintiffs

relied on terms that affected the entirety of the subscriber agreement rather than solely the arbitration clause. The court there-fore concluded that plaintiffs’ arguments “chiefly attack the validity of the contract as a whole,” and must be determined by the arbitrator.

Who Decides Procedural Issues Related to Arbitration?In AFSCME, Council 4, Local 1303-325 v. Town of Westbrook, 75 A.3d 1 (Conn. 2013), the plaintiff union filed an action to vacate an arbitration award deciding that the defendant town’s decision not to re-appoint its assessor was outside the terms of a collective bargaining agreement. The trial court, limiting the scope of its review to only the arbitrators’ determination that the plaintiff’s claim was not arbitrable, af-firmed the arbitrators’ award. On appeal, the union claimed that the trial court im-properly limited its scope of review and had incorrectly concluded that the defendant’s reappointment decision was not arbitrable.

The union argued that the arbitrators had exceeded their authority by considering state and city laws and thus that the trial court should have applied a broad scope of review to the arbitration decision. The Connecticut Supreme Court disagreed. It affirmed, holding that the arbitration agree-ment gave the arbitrators “broad authority” to decide the question of arbitrability, and noting that the award clearly revealed that the arbitrators had decided only that ques-tion. The parties had committed the ques-tion of arbitrability to the authority of the arbitrators and fully expected to be bound by the arbitrators’ decision on that issue. As the court held, “[w]hen a party that has agreed to arbitrate the question of ar-bitrability wishes to challenge the arbitra-tors’ determination regarding that issue, the court’s review of that determination, like its review of any other issue that par-ties empowered the arbitrators to decide, is limited.”

In Duran v. The J. Hass Group, L.L.C., 531 Fed. Appx. 546 (2d Cir. 2013), plain-tiff Duran sued the defendants, various debt settlement companies located in Arizona,

under the Credit Repair Organizations Act and state law. The district court granted the defendants’ motion to dismiss the action and compel arbitration. On appeal to the Sec-ond Circuit, the plaintiff conceded that her claims were subject to arbitration, but con-tended that the forum selection clause con-tained in the arbitration agreement, which mandated arbitration in Arizona, was uncon-scionable. Because the plaintiff conceded that her claims were subject to arbitration, the Second Circuit agreed with the district court that it was for the arbitrator, rather than the court, to decide in the first instance whether the forum selection clause was un-conscionable. As the court of appeals held, “[w]hile ‘a gateway dispute about whether the parties are bound by a given arbitration clause raises a question of arbitrability for a court to decide,’ [. . .] an arbitrator presump-tively resolves issues of ‘contract interpre-tation and arbitration procedures.’” The Second Circuit noted that, had the plaintiff argued only that the arbitration agreement was itself unconscionable due to the forum selection clause, the court would have had to decide the matter. But because the plain-tiff conceded that her claims were arbitrable, the unconscionability of the forum selection clause was for the arbitrator to decide.

Who Decides Res Judicata in Arbitration?The decisions in Carlisle Power Transmis-sion Prods., Inc. v. United Steel, Paper & Forestry, Rubber, Mfg., Energy, Allied Indus. & Workers Int’l Union, 725 F.3d 864 (8th Cir. 2013), arose from a dispute between a union and an employer (Carlisle) over long-term disability benefits for a Carlisle em-ployee injured on the job. The union brought a grievance against Carlisle per the proce-dures listed in a 2001 collective bargaining agreement (CBA). A few days later, that CBA expired and was replaced by a 2006 CBA. The parties agreed to submit to an ar-bitrator the procedural issue of whether the union’s claim on behalf of the employee was arbitrable under the 2006 CBA. This arbitra-tor found that the grievance was arbitrable under the 2006 CBA even though the dis-pute arose while the 2001 CBA was in effect.





Carlisle and the union then picked a differ-ent arbitrator to hear the substantive claims and scheduled a hearing date. But Carlisle also sought a declaratory judgment in court that the union’s claims were not arbitrable under the 2006 CBA (chiefly because the union was seeking disability benefits gov-erned by a separate agreement).

The union moved for summary judgment in the disability benefit action. It argued that Carlisle’s claim was barred by res judicata. The district court found that the require-ments of res judicata were met, but that the union had waived its right to raise that de-fense by agreeing to limit the scope of the initial arbitrator’s decision to arbitrability of procedural issues. Proceeding to the mer-its, the district court then held that the 2006 CBA excluded disputes concerning long-term disability benefits and thus the union’s claims were not subject to arbitration.

On appeal, the Eighth Circuit reconsid-ered the res judicata issue. It viewed the initial arbitrator’s decision as a decision on the merits, and concluded that Carlisle’s declaratory judgment claim arose out of the same facts, even though it advanced different legal theories. The Eighth Cir-cuit agreed with the union that res judicata does not foreclose an action if the parties agree to allow a plaintiff to split its claim and proceed in two different actions. But it found that the union did not agree to al-low claim-splitting because it did not agree to defer the merits determination until af-ter the arbitrator decided the issue of arbi-trability under the 2006 CBA. Moreover, while Carlisle had not raised the argument that the long-term disability benefits claims were not arbitrable in its initial arbitration proceeding, it could have done so. The court of appeals therefore vacated the dis-trict court’s order, holding that the initial arbitrator’s award was final and precluded Carlisle’s argument as to nonarbitrability of long-term disability benefits.

In the case of In re: Yin-Ching Houng, 499 B.R. 751 (C.D. Cal. 2013), appellee Tatung initiated an arbitration proceeding against appellants Westinghouse Digital Electronics, LLC (WDE) and Houng for breach of contract. The arbitrator found

Houng to be liable as an alter ego of WDE and assessed damages, plus interest. Houng then filed for bankruptcy. Tatung sought re-lief from the automatic stay in bankruptcy to complete the arbitration proceedings and confirm the award, as well as an order from the bankruptcy court that Houng’s debt was nondischargeable.

The bankruptcy court held that the debt from the arbitration was nondischargeable, finding that the arbitration award had pre-clusive effect. Houng responded by appeal-ing this decision to the district court. The district court held that the bankruptcy court had erred in giving the arbitration award pre-clusive effect under California law before it was confirmed. However, because the arbi-tration award was later confirmed, the dis-trict court found that the error was harmless. It therefore affirmed the bankruptcy court’s decision that the debt was nondischargeable.

Who Decides Claims of Fraud in the Inducement?In Tower Ins. Co. of N.Y. v. Davis/Gilford, A JV, No. 13-0781 (RBW),2013 U.S. Dist. LEXIS 127121 (D.D.C. Sept. 6, 2013), plaintiff Tower, an insurance company, is-sued a performance bond to the defendant, a joint venture, guaranteeing work per-formed under a subcontract executed be-tween the defendant and a third party. The bond incorporated the subcontract by refer-ence. When the third party defaulted, Tower elected to continue performance and draft-ed a takeover agreement with the defendant that also referenced the subcontract.

When a dispute arose, the defendant moved to compel arbitration pursuant to the arbitration provision in the subcontract. Tower separately instituted suit in district court seeking a declaration that it was not required to arbitrate because it had been fraudulently induced to issue the perfor-mance bond. Tower conceded that its al-legations of fraud concerned the issuance of the performance bond in its entirety, and not the arbitration provision itself, but argued that submission of its fraudulent inducement claim to an arbitrator was “il-logical” because “if a bond is void ab initio, then it never existed, and never incorporat-

ed the subcontract or the arbitration clause by reference in the first place.” The district court rejected the argument, basically re-lying on the Supreme Court’s decision in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), which acknowledged that a party may be forced to arbitrate even pursuant to a contract that an arbitrator later finds to be void. The court concluded that Tower was therefore required to arbi-trate its fraudulent inducement claims.

As the discussion of the recent cases above reveals, questions of who decides cer-tain threshold issues of arbitrability, includ-ing issues of timeliness, unconscionability, and whether an arbitration may proceed on a collective basis, continue to provide fodder for numerous opinions. Modern Supreme Court cases provide some guidance, but the many different mixes of the parties’ circum-stances, arbitration clauses, and arbitration rules, continue to present unanswered issues, particularly where the clauses and rules cho-sen by the parties do not exactly match their particular circumstances. Parties who make an agreement to arbitrate simply by insert-ing what they think is a short and simple clause for a streamlined alternative dispute resolution mechanism, may, in the end, find that they have instead acquired a protracted and expensive dispute over threshold issues. This is why (despite the availability of boil-erplate provisions from many sources) arbi-tration clauses should be carefully crafted by experienced counsel, using language tai-lored to the specific forum selected and any anticipated issues.

Carolyn G. Nussbaum and Christopher M. Mason are each partners at the Rochester and New York offices, respectively, of Nixon Peabody LLP. This article was adapted from Recent Developments in Business and Corporate Litigation, 2014 Edition. This discussion may not include reference to certain decisions which were rendered in 2013 after the publishing deadline for Recent Developments. Those cases will be considered for inclusion in next year’s issue of Recent Developments.



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Business Law Section 2014 Spring Meeting

Program: The Nationwide Innovation of Specialized Business and Commercial

Courts for Effective Resolution of Business Disputes

Friday, April 11, 2014, 10:30 AM - 12:30 PM Presented by: Business and Corporate Litigation Co-sponsoring Committee: Judges Initiative

ABA Web StoreRecent Developments in Business

and Corporate LitigationThe 2014 edition of Recent Develop-ments in Business and Corporate Litigation contains two volumes plus a CD-ROM totaling 24 chapters span-ning a broad range of substantive areas within corporate litigation. Over 170 attorneys from across the country have contributed to this publication, with comments on key issues, detailed out-lines, and summaries of recent cases, legislation, trends, and developments during the past year.

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BUSINESS LAW TODAY

MARch 2014

Keeping Current In Stanford-Related cases, Supreme court Allows State-Law Fraud class Actions,

Limiting the Extent of Federal Preclusion

By Nicholas Even and Timothy Newman

On February 26, 2014, the U.S. Supreme Court held that state-law fraud class ac-tions brought against attorneys, insurance brokers, and others arising from Ponzi-scheme claims involving R. Allen Stanford could proceed. In a 7–2 decision in Chad-bourne & Parke LLP v. Troice, 571 U.S. ___ (2014), the Court held that such claims were not prevented by the Securities Liti-gation Uniform Standards Act (SLUSA), a federal law that precludes certain state-law securities class actions in which the alleged fraud was perpetrated “in connection with” the purchase or sale of covered securities. The Court’s decision narrows the extent of the preclusive effect of SLUSA on state-law fraud claims that bear some relation-ship to nationally traded securities.

BackgroundSLUSA was enacted in 1998 to stem a ris-ing tide of state-law class actions creatively constructed to avoid the heightened plead-ing requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA). SLUSA provides that “[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging a misrepre-sentation or omission of a material fact in connection with the purchase or sale of a covered security.” The question of whether an alleged fraud is “in connection with the purchase or sale of a covered security” has

been an unsettled one, leading to incon-sistent appellate court rulings and the Su-preme Court’s arguments in Chadbourne & Parke in October 2013.

The plaintiffs in Chadbourne & Parke al-leged that defendants participated in Stan-ford’s alleged Ponzi scheme through the sale of certificates of deposit (CDs) issued by Stanford International Bank (SIB) while misrepresenting that those CDs would be backed by investments in “highly market-able securities issued by stable govern-ments, strong multinational companies and major international banks.” In reality, the plaintiffs alleged, the CDs were backed by illiquid investments or no investments at all. The district court dismissed these claims as precluded by SLUSA, acknowledging that the CDs purchased by the plaintiffs were not themselves “covered securities” under SLUSA, but nevertheless finding SLUSA preclusion appropriate because the defen-dants allegedly induced the purchase of the CDs by misrepresenting that the CDs were backed by “covered securities” acquired by SIB. On appeal, the Fifth Circuit reversed, Roland v. Green, 675 F.3d 503, 521 (5th Cir. 2012), finding “the references to SIB’s portfolio being backed by ‘covered securi-ties’ to be merely tangentially related to the heart, crux, or gravamen of the defendants’ fraud.” (Emphasis added.)

During oral arguments before the Su-preme Court, the defendants urged that “[t]he simplest, narrowest way to decide this

case is to say that when there is a misrep-resentation and a false promise to purchase covered securities for the benefit of the plaintiffs, then the ‘in connection with’ standard is [satisfied].” Conversely, coun-sel for the plaintiffs urged the Court to hold that “a false promise to purchase securities for one’s self in which no other person will have an interest is not a material misrepre-sentation in connection with the purchase or sale of covered securities.” The plain-tiffs’ position prevailed in the 7–2 decision by the Supreme Court.

Supreme Court’s AnalysisThe majority opinion, written by Justice Breyer, cited several factors supporting the conclusion that SLUSA’s language – “mis-representation or omission of material fact in connection with the purchase or sale of a covered security” – does not extend beyond statements material to the decision of a per-son (“other than the fraudster”) to purchase or sell a covered security.

First, the Court noted that its holding was consistent with SLUSA’s focus on “trans-actions in covered securities.” The plain-tiffs in Chadbourne & Parke purchased uncovered securities (CDs not traded on any national exchange). Second, the Court found that SLUSA’s language suggested a “connection that matters” – meaning the alleged misrepresentation “makes a signifi-cant difference to someone’s decision to purchase or to sell a covered security, not



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to purchase or to sell an uncovered security, something about which [SLUSA] express-es no concern.” Third, the Court noted that its prior interpretations of the “in connec-tion with” language (which appears in both SLUSA and the Securities Exchange Act of 1934) involved “victims’” “ownership interest in financial instruments that fall within the relevant statutory definition,” as contrasted with plaintiffs in Chadbourne & Parke, whose direct ownership was of securities outside SLUSA’s scope. Fourth, the Court found that SLUSA and its un-derlying regulatory statutes (the Securities Act of 1933 and the 1934 Exchange Act) were intended to protect persons who ac-tually “buy” or “sell” “statutorily relevant securities,” not persons with a “more re-mote” connection to such securities. Fifth, the Court expressed concern that a broader interpretation of the “in connection with” requirement would “interfere with state efforts to provide remedies for victims of ordinary state law frauds,” such as a suit by creditors against a small business that had claimed credit-worthiness due to its stock investments. The Court noted that “[l]eaving aside whether this would work a significant expansion of the scope of li-ability under the federal securities laws, it unquestionably would limit the scope of protection under state laws that seek to provide remedies to victims of garden-va-riety fraud.” The Court found that SLUSA reflected “congressional care to avoid such results.”

The United States had sided with the de-fendants in Chadbourne & Parke, express-ing concern that a narrow interpretation of the “in connection with” requirement in SLUSA risked a similar narrow construc-tion of the phrase in Section 10(b) of the 1934 Exchange Act. The Court dismissed this concern, noting that the enforcement powers of the Securities and Exchange Commission and the Department of Jus-tice extend to all types of securities under Section 10(b) – “a wide range of financial products beyond those traded on national exchanges, apparently including [SIB’s CDs] at issue in these cases.” The Court stated: “[W]e have cast no doubt on the

SEC’s ability to bring enforcement actions against Stanford and [SIB]. The SEC has already done so successfully . . . . No one here denies that, for §10(b) purposes, the ‘material’ misrepresentations by Stanford and his associates were made ‘in connec-tion with’ the ‘purchases’ of those [CDs].” “[T]he basic consequence of our holding,” Justice Breyer stated, “is that, without lim-iting the Federal Government’s prosecution power in any significant way, it will permit victims of this (and similar) frauds to re-cover damages under state law.”

In a dissenting opinion, joined by Justice Alito, Justice Kennedy expressed concern that the “narrow interpretation of [SLU-SA’s] language will inhibit the SEC and litigants from using federal law to police frauds and abuses that undermine confi-dence in the national securities markets.” Focusing on the attorneys and insurance brokers who were defendants in Chad-bourne & Parke, the dissent predicted that the majority opinion “will subject many persons and entities whose profession it is to give advice, counsel, and assistance in investing in the securities markets to com-plex and costly state-law litigation based on allegations of aiding or participating in transactions that are in fact regulated by the federal securities laws.” Justice Breyer, in the majority opinion, offered a rejoinder to this concern, highlighting “the irony of the dissent’s position [where] federal law would have precluded private recovery in these very suits, because §10(b) does not create a private right of action for investors vis-à-vis ‘secondary actors’ or ‘aiders and abettors’ of securities fraud.”

ImpactThe decision in Chadbourne & Parke re-solves inconsistencies in the lower courts with respect to interpretation of the “in connection with” requirement. It also rep-resents a “win” for the shareholder plain-tiffs’ bar which could lead to an increase in creative class action filings under state laws against third parties involved indi-rectly, peripherally, or tangentially in se-curities transactions. Such state law claims remain attractive to plaintiffs’ attorneys be-

cause they are not subjected to the height-ened pleading requirements of the PSLRA. However, the effect of Chadbourne & Parke should be limited to cases involving so-called “uncovered securities” not traded on a national exchange. For “covered se-curities,” state law claims against third parties should remain subject to SLUSA’s preclusive effect. The full decision may be found here: http://www.supremecourt.gov/opinions/13pdf/12-79_h3ci.pdf.

Nicholas Even is a partner and Timothy Newman is an associate at Haynes and Boone, LLP, in Dallas, Texas.



http://www.supremecourt.gov/opinions/13pdf/12-79_h3ci.pdf

http://www.supremecourt.gov/opinions/13pdf/12-79_h3ci.pdf

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1



BUSINESS LAW TODAY

MARch 2014

Keeping Current Supreme court Extends SOX Whistleblower Protection

to contractor Employees

By Stanley J. Brown and Barbara M. Roth

On March 4, 2014, the U.S. Supreme Court issued its opinion in Lawson v. FMR LLC, No. 12-3 (Mar. 4, 2014). The decision came in an unusual 6–3 split for the Court, with Justice Ginsberg’s majority opinion joined by Justices Breyer, Kagan, and Chief Justice Roberts, with Justices Scalia and Thomas concurring in principal part and concurring in the judgment, and Justice Sotomayor, along with Justices Kennedy and Alito, dis-senting. The Court ruled that Section 806 of the Sarbanes-Oxley Act (SOX), which bans retaliation against whistleblowers, applies not only to employees of public companies, but also to employees of contractors and subcontractors who carry out work for pub-lic companies, significantly expanding the coverage of SOX.

SOX provides that “[n]o public company . . . , or any officer, employee, contractor, subcontractor, or agent of such company” may retaliate against an employee because of whistleblowing activity. Sarbanes-Oxley Act of 2002 § 806, 18 U.S.C. § 1514A(a) (emphasis added). Employees are protected from retaliation for “any lawful act . . . to provide information, cause information to be provided, or otherwise assist in an inves-tigation regarding any conduct which the employee reasonably believes constitutes a violation of . . . [federal criminal laws prohibiting mail, wire, radio, TV, bank, or securities fraud,] . . . any rule or regula-tion of the Securities and Exchange Com-mission [(SEC)], . . . [or] any provision of

Federal law relating to fraud against share-holders. . . .” Protected acts include filing an administrative action, testifying or other-wise assisting in an investigation and, per-haps most important, reporting an alleged violation to a supervisor.

Under SOX, unlawful retaliation may include any form of adverse action against whistleblowers in the terms and conditions of their employment, including discharge, demotion, suspension, threats, or harass-ment. An employee who believes he or she has suffered retaliation in violation of SOX may commence a private action to remedy the alleged violation by filing a complaint with the federal Occupational Safety and Health Administration (OSHA) within 180 days of either the violation or the date on which the employee became aware of the violation. A complainant whose claim is not addressed within 180 days of filing with OSHA can bring the complaint for ad-judication in federal court. Notably, SOX has been expansively interpreted, particu-larly by the Administrative Review Board (ARB) of the Department of Labor, the agency responsible for enforcing SOX.

Before the Lawson ruling, it was unclear whether SOX prohibited public company contractors from retaliating only against employees of the public company or also prohibited the contractor from retaliating against its own employees. In administra-tive proceedings, OSHA and the ARB had taken the position that SOX’s anti-retalia-

tion protection extended to the employees of private contractors performing work for publicly traded companies.

In Lawson, the plaintiffs were employees of private companies that advised publicly traded mutual funds; as is common for such mutual funds, the funds themselves had no employees. Instead, the funds retained pri-vate contractors to advise them. The em-ployees of the contractor claimed they had suffered retaliation, including discharge, when they raised concerns about the mu-tual fund’s cost accounting methodologies. The First Circuit had embraced a narrow reading of the anti-retaliation ban of SOX, holding that it applied only to retaliation against the employees of public companies, as was suggested by the statutory caption. Under this interpretation, the First Circuit held that the Lawson plaintiffs, as employ-ees of a private contractor, could not bring a claim under the whistleblower anti-retali-ation provision of SOX.

The Supreme Court took a broader view of the anti-retaliation provision of SOX, holding that an employee of a private con-tractor that provided services to a public company could bring a claim under SOX alleging that he had suffered retaliation at the hands of his employer for engaging in protected conduct. The Court analyzed the legislative history of Section 806 – includ-ing the fact that the law arose out of the Enron scandal, when both employees of Enron and of its outside accounting firm,



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Arthur Anderson, faced retaliation when they attempted to report corporate miscon-duct. Analyzing the statutory language in light of that history, the Court found that an interpretation of the law that covered re-taliation by a private contractor only if it was committed against the employees of the public employer for whom the contrac-tor was providing services “would shrink to insignificance the provision’s ban on re-taliation by contractors.” The Court stated that under such a construction, contractors’ employees would be vulnerable to retali-ation by their employers for blowing the whistle on a scheme to defraud the public company’s investors – resulting in denial of protection not only to mutual fund advisers and managers but also to “legions” of ac-countants and lawyers. The majority stated that “[i]nstead of indulging in fanciful vi-sions of whistleblowing babysitters and the like, the dissent might pause to consider whether a Congress prompted by the En-ron debacle would exclude from whistle-blower protection countless professionals equipped to bring fraud to a halt.”

This ruling dramatically expands the potential for whistleblower lawsuits. The Court’s opinion specifically notes that law firms, investment advisers, and accounting firms may be among the contractors and subcontractors whose employees are cov-ered by SOX, but the ruling sets no limits on the types of contractors who may be cov-ered by the expanded interpretation of the anti-retaliation provision. (Notably, the law protects not just employees who detect cor-porate misconduct, but also those who have a reasonable – even if erroneous – belief that such conduct occurred.) Despite the major-ity’s forceful rejection of Justice Sotomay-or’s concerns about SOX actions brought by landscapers and babysitters, the outer limits of SOX anti-retaliation coverage remain to be explored and will likely lead to litiga-tion. Suffice it to say at this point that any contractors who render services to a public company and whose employees will be in a position to raise concerns about the public company’s actions may well be covered.

The Supreme Court’s decision means that law firms, accounting firms, and other con-

tractors to publicly traded companies whose employees could raise issues relating to public company corporate misconduct must carefully evaluate their whistleblower poli-cies and adopt procedures to protect their in-terests. It is imperative that such employers have effective procedures in place for receiv-ing, processing, and investigating internal whistleblower claims, including claims of retaliation. Clear and understandable mecha-nisms for lodging complaints are especially important because while SOX does not re-quire internal reporting, a large percentage of whistleblower claims hinge on whether the employee- plaintiff made protected internal complaints. Employers have a significant ad-vantage if they can point to robust and acces-sible complaint procedures that the whistle-blower failed to utilize.

Whistleblower policies and procedures must also be coupled with intensive train-ing of management, including training in handling the delicate situations that neces-sitate disciplinary action against alleged whistleblowers – for instance, in cases of poor performance or misconduct. Proper training of management and personnel re-sponsible for intake, investigation, and res-olution of whistleblower complaints could avoid costly litigation.

Although whistleblowing claims are nothing new, the law governing such claims is in flux, and enforcement and private claims are on the rise. Contractors need to be prepared and vigilant to avoid becom-ing involved in costly litigation, which can severely damage a company’s reputation.

Stanley J. Brown and Barbara M. Roth are partners at Hogan Lovells in New York City.



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BUSINESS LAW TODAY

MARch 2014

In a matter of first impression, the Dela-ware Court of Chancery recently consid-ered whether the attorney-client privilege over pre-merger communications between a target company and its counsel passes to the surviving corporation in a merger gov-erned by Delaware law. In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), the court concluded that, absent language in the merger agreement to the contrary, the privilege does in fact pass to the survivor as a matter of law pursuant to Section 259 of the General Corporation Law of the State of Delaware (the “DGCL”). The court’s decision in Great Hill highlights the pos-sibility that pre-merger communications made with the expectation that they would be privileged could wind up in the hands of an adverse party, and provides guidance on how to avoid this unintended consequence of a merger.

The Great Hill DecisionIn September 2011, a group led by Great Hill Equity Partners IV, LP (collectively, the “Buyer”) acquired Plimus, Inc. (Plimus) pursuant to a merger in which Plimus was the surviving corporation. One year later, the Buyer brought suit against the former shareholders and representatives of Plimus (collectively, the “Seller”), alleging that the Seller fraudulently induced the Buyer to acquire Plimus. In connection with that claim, the Buyer notified the Seller that it

had discovered communications between the Seller and Plimus’s then-legal coun-sel regarding the transaction. Before the merger, the Seller had not undertaken any steps to extract these communications, and likewise failed to retrieve them from Pli-mus following the merger. Upon learning that the Buyer had located these commu-nications, the Seller asserted the attorney-client privilege over such communications on the grounds that the Seller, and not the surviving corporation, retained control of the attorney-client privilege with respect to pre-merger communications relating to the negotiation of the merger agreement.

The court’s decision arose out of the Buyer’s motion seeking to resolve the privilege dispute and to determine whether the surviving corporation owned the pre-merger privileges of Plimus or, in the al-ternative, whether the Seller waived the privilege otherwise attaching to the com-munications in question. The question before the court was an issue of statutory interpretation. Although Plimus was a Cali-fornia corporation, the acquiring entity was a Delaware corporation and the merger agreement provided that the merger would have the effects set forth in the applicable provisions of the DGCL and the California General Corporation Law. Section 259 of the DGCL provides, in pertinent part, that “all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the proper-

ty of the surviving or resulting corporation. . . .” 8 Del. C. § 259.

The Seller contended that the phrase “all . . . privileges” was not intended to encom-pass the attorney-client privilege, and as a result, the Seller retained control over com-munications subject to such privilege. The Seller was not, however, able to point to any legislative history supporting its interpreta-tion of Section 259, and the Court of Chan-cery likewise was unable to locate evidence supporting that interpretation. The court concluded that the Seller’s interpretation of Section 259 was not a plausible reading of the statute’s plain language and held that the only reasonable interpretation was that “all means all . . . and that this includes all privileges, including the attorney-client privilege.” (Emphasis in original.)

The court also rejected the Seller’s asser-tion that the New York Court of Appeals’ decision in Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996), and the Court of Chancery’s prior decision in Postorivo v. AG Paintball Holdings, Inc., 2008 WL 343856 (Del. Ch. Feb. 7, 2008), stood for the proposition that the former stockholders of a selling corporation re-tain privileges attaching to attorney-client communications pertaining to the negotia-tion of the merger agreement. Although the court of appeals ultimately concluded that the attorney-client privilege with respect to pre-merger communications did not pass to the surviving corporation, it did so with-

Delaware Insider: Great Hill: To the Survivor

Goes the Privilege?

By Roxanne L. Houtman



http://www.potteranderson.com/attorney/houtman-roxanne



out citing to Section 259 of the DGCL and based its holding on policy reasons relating to its analysis of New York law regarding the attorney-client privilege. See Tekni-Plex, 674 N.E.2d at 670-72. In Postorivo, the Court of Chancery applied Tekni-Plex, but did not determine whether the New York decision would be correct under Delaware law. The Court of Chancery also distinguished its decision in Postorivo by noting that in that case, the Court of Chan-cery was applying New York law to an asset purchase agreement and not a merger trans-action governed by Delaware law.

The court concluded its analysis by not-ing that the parties could have negotiated a provision within the merger agreement spe-cifically excluding the transfer of the attor-ney-client privilege to the surviving corpo-ration. In support of its position, the Buyer had submitted excerpts from private com-pany merger agreements wherein the par-ties carved out pre-merger attorney- client communications regarding the negotiation of the transaction from the assets being transferred to the surviving corporation and acknowledged that the privilege over such documents would belong exclusively to the seller following the merger. The court also observed that the asset purchase agreement in Postorivo – the very case cited by the Seller in support of its arguments – included within the definition of “excluded assets” “all rights of the [selling parties] under [the asset purchase agreement] and all agree-ments and other documentation relating to the transactions contemplated [t]hereby.” Having determined that the attorney-client privilege over pre-merger communications passed to the surviving corporation upon the consummation of the merger as a mat-ter of law, the Court of Chancery did not address whether the Seller had waived the privilege through its failure to ensure that the Buyer would not have access to the al-legedly privileged communications. Nota-bly, however, the court referred to the pos-sible waiver of the privilege resulting from the Seller’s “lengthy failure to take any rea-sonable steps” to preclude the Buyer from accessing the privileged communications as a “substantial issue.”

ConclusionIn light of the Great Hill decision, where a merger transaction involves a Delaware corporation, practitioners should consider whether it would be prudent to include in the merger agreement language that ex-cludes pre-merger attorney client commu-nications from the assets being transferred to the surviving corporation. Moreover, counsel for the target company in a merger also should consider incorporating an ex-press acknowledgement of the parties that the target company’s pre-merger stock-holders retain the attorney-client privilege over these documents.

Merely including such protective provi-sions in the merger agreement likely will not, however, be sufficient to ensure that the target company stockholders retain the attorney-client privilege. Selling parties must also consider the affirmative steps nec-essary to avoid an inadvertent waiver of the privilege. Although the court did not address whether the selling parties in Great Hill had waived the attorney-client privilege, it was critical of the Seller’s failure to either segre-gate the privileged communications before the merger or retrieve those communica-tions after the merger. As a result, practitio-ners should consider whether to include in the transaction agreements provisions that affirmatively permit the target company to remove communications and other docu-ments subject to the attorney-client privilege (whether tangible or stored electronically) prior to the merger, including any necessary carveouts from covenants obligating the target company to operate in the ordinary course of business pending the consumma-tion of the merger. In addition, at the out-set of a transaction, the target company and its representatives should consider the best practices for the segregation of privileged communications to facilitate removal of the same, including whether to establish sepa-rate folders or servers for storing privileged communications.

Roxanne L. Houtman is a partner in the Corporate Group of Potter Anderson & Corroon LLP. The views expressed in this article are solely

those of the author, and are not necessarily shared or endorsed by Potter Anderson & Corroon LLP or its clients.



Private Equity and Venture Capital Committee:

Webinars

Great Hill Equity Partners and the Attorney-Client Privilege in M&A:

You Mean We Sold That Too? (January 27, 2014)

• Presentation Slides• Full Webinar



http://www.potteranderson.com/attorney/houtman-roxanne

http://www.americanbar.org/content/dam/aba/multimedia/business_law/webinars/great-hill-equity-201401.pdf

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1



BUSINESS LAW TODAY

MARch 2014

An orchestra must have a single conduc-tor. Unfortunately, in many business cases, experts believe they should hold the baton. Surprisingly, many lawyers are happy to pass the baton to the financial experts – of-ten leading to disaster. The purpose of this article is to encourage business trial law-yers to make sure they alone conduct the trial, not the expert.

The Importance of Experts in Business CasesAs the world becomes more complex, ex-perts have become increasingly important in trials. Most jurors in business cases can-not balance checkbooks. Asking jurors to understand financial documents such as balance sheets, profit and loss statements, and other transactional business documents is too much to expect. Experts are essential at trial to help jurors make sense of compli-cated financial transactions. In some cases, admissible expert testimony is required to avoid a directed verdict.

The Role of the ExpertAs noted above, there can only be one con-ductor of an orchestra and the conductor at trial must be the trial attorney. Only the trial attorney understands every aspect of the case and how the various “instruments” play together. While the expert may be the first violin in your evidentiary orchestra, experts often have myopic views of a case. They tend to overemphasize the importance

of their testimony and fail to recognize how other evidentiary pieces fit together. It is, therefore, essential for the trial attorney to harmonize expert testimony with the rest of the trial presentation. Experts who cannot agree to this approach should not be hired. An expert cannot play one tune when the rest of the orchestra plays another.

Selecting an Appropriate ExpertYour choice of expert can be one of the most important decisions you make before trial. In some cases, even the best experts will not be able to explain sophisticated, scientific, or economic evidence to a jury in a way jurors can understand it. In such cases, jurors will choose to believe the ex-pert they find most credible – and just trust his or her testimony.

In presenting a credible expert, there are tradeoffs to consider. For example, profes-sional experts who testify for a living un-derstand the legal system and what is re-quired to comply with discovery and handle cross-examination. But as professional wit-nesses and perceived “hired guns,” experts are seen by jurors as having biased views.

Experts who do not testify for a living are often recognized as more credible, as they are testifying about something they do for a living. For example, in a tire defect case, jurors may find the testimony of someone who has worked at a tire store for 30 years and has been called in as a consultant by one of the leading automakers more per-

suasive than a mechanical engineer testing a particular tire.

In selecting an expert, a trial lawyer must look for skeletons in the expert’s closet. A financial expert testifying about the standard of care for securities dealers will have zero credibility if that person had his or her se-curities license suspended. Likewise, trial lawyers are often surprised when an expert’s website discloses facts the expert never mentioned at the time of being hired. Before retaining an expert, a trial lawyer must do everything reasonably possible to investi-gate the expert and make certain there is no baggage that will open the expert up to self-destruction during cross-examination. If you do not perform this background check, you will be surprised when your adversary does.

Managing CostsFor the most part, experts have one price: expensive. It is surprising how many fi-nancial experts have no clue of how many hours they are spending until they send the final bill. Clients expect their lawyers to manage expert costs. Moreover, the more an expert charges, the more suspicious ju-rors will believe the expert’s testimony was “bought and paid for.”

At the same time, lawyers must be care-ful to make certain experts have sufficient time to develop a credible opinion. Experts who prepare reports on the plane from Dal-las to Los Angeles will be viciously ridi-culed at trial. An opinion is only as good as

Training for Tomorrow: Teaching the Expert Who is Leader of the Band

By Gerald A. Klein



http://www.kleinandwilson.com/Attorneys/Gerald-A-Klein.shtml



the work that goes into it. Give your expert enough time to prepare a thoughtful analy-sis, but not an unlimited budget. A thor-ough analysis costs money but should not give license to six figure billings – except in the rare case.

Be Involved in the Formulation of the OpinionMany lawyers went to law school because they are not good with numbers or could not stand the sight of blood. Such lawyers become squeamish working with financial or technical experts and feel they have little or nothing to add to an expert opinion. They do not want to do the math. These lawyers let the expert run amuck at trial. This is a big mistake on several levels.

As noted above, an expert’s testimony is just one component of a trial presentation. It is the trial attorney’s job to decide where the testimony fits into the trial. At some point, the trial lawyer must understand what the expert is saying and make sure that testimo-ny is consistent with the case theme. If the attorney does not understand what the expert is saying, there is no chance jurors will. It is critical for competent trial lawyers to make certain they are involved in developing ex-pert testimony from the beginning. The trial lawyer must make certain not only that the testimony help the case, but must also make certain the testimony is understandable to ordinary people. Even professional experts sometimes bog down in technical jargon that no one but the lawyers and opposing experts understand. Incredibly, even after a great deal of money has been spent on an expert, he or she may run in the wrong direction be-cause of having misunderstood facts or is-sues. The lawyer who does not get involved in expert testimony from the beginning has no one but himself or herself to blame for exorbitant bills and poor testimony.

Presenting Expert TestimonyIt is not uncommon for trial lawyers to allow experts to outline their own testi-mony. Trial lawyers who allow experts to control their own testimony are not doing their jobs. Assuming the trial attorney has worked with the expert from the beginning

of the case in developing opinions, that at-torney should understand the testimony and know how to present it. Experts are highly qualified in their chosen fields of expertise – but they are not trial lawyers. Only a trial lawyer is competent to present a case.

In most cases, expert testimony should begin with a short introduction indicating to the jury that the expert is a hired witness who will testify about certain technical is-sues requiring expertise. Once this brief explanation has been presented, a trial at-torney should present the expert’s creden-tials without boring people to death. As to witnesses such as economists, accountants, and bankers, spend time on the expert’s academic credentials and professional dis-tinctions. If the expert has particular awards or areas of specialization, emphasize those points. For example, if your expert was one of the scientists who invented the atomic bomb, this is something impressive to the average juror. If the witness received a No-bel Prize for the subject of his or her testi-mony, not a lot of time needs to be spent on any other credentials.

But most experts will not have such stellar backgrounds. Nevertheless, if you spend time with your experts, you will identify credentials they may not have even recognized were important for your case. Pick and choose the important credentials which build the expert’s credibility.

Spend time in direct examination re-viewing how the expert formulated the opinion. The more documents reviewed and the more time spent on a project, the more likely that the appropriate amount of work was done to formulate a reliable opinion. To the extent your expert rejected approaches you recommended or opinions that would have been helpful to your case, emphasize that your expert rejected such points to demonstrate objectivity. The fact that a highly-paid expert refuses to adopt all opinions requested has a great tendency to build credibility.

Make certain your expert testifies as a teacher, not a technician. A good rule of thumb is to have the expert explain things as he or she would to a 12-year-old. This can be done in a way that is not condescending to

a jury. In that regard, virtually any business case will require experts to rely upon charts, graphs, PowerPoints, and the like. These demonstrative exhibits keep jurors engaged and help to explain complex concepts.

Finally, make certain the opinions are summarized, especially in cases where the testimony has been lengthy and complicat-ed. Some trial judges will not permit such a summary, but most will.

ConclusionWhile experts in business cases will always be important, they should never become the “leader of the band.” Only a trial lawyer who understands his or her case knows the best way to present expert testimony. Treat your expert as a valuable ally in the case presenta-tion, but do not let your expert run the show. Effective presentation of expert testimony at trial only occurs when the expert and the tri-al lawyer have jointly developed the expert’s testimony for maximum effect.

Gerald A. Klein is a partner at Klein & Wilson in Newport Beach, California.



BLS Programs Material Library

Examination of the Financial Expert Witness at Trial (PDF)

2013 Fall Section MeetingPresented by: Business and Corporate Litigation, Federal Regulation of Securities

Making the Case: Tips for Using (or Being) a UCC Expert Witness

(PDF) (Audio)2013 Annual MeetingPresented by: Uniform Commercial Code, Business and Corporate Litigation, Commercial Finance, Dispute Resolution



http://www.kleinandwilson.com/Attorneys/Gerald-A-Klein.shtml



http://www.americanbar.org/content/dam/aba/events/business_law/2013/11/fall/exam-financial-expert-201311.pdf

http://www.americanbar.org/content/dam/aba/events/business_law/2013/08/annual/making-the-case-201308.pdf

http://www.americanbar.org/content/dam/aba/events/business_law/2013/08/annual/making-the-case-201308.mp3

1



BUSINESS LAW TODAY

MARch 2014

Ethics Corner Unauthorized Practice of Law and the

Transplanted In-house counsel

By Michael J. Sweeney

George, an in-house lawyer employed by Acme Corporation, is licensed to practice law in New York. Fifteen years ago, George moved to Acme’s headquarters in Chicago, where he has worked ever since. He is not a member of the Illinois bar. Is George engaged in the unauthorized practice of law (UPL), and if so, what might be the consequences?

In-House Lawyers and Unauthorized PracticeLawyers move – including, frequently, both across state lines and from private law firm practice to in-house legal departments. For decades prior to the adoption of Rule 5.5(d) of the American Bar Association’s Model Rules of Professional Conduct, an in-house lawyer licensed only in a state other than where he or she worked rarely attracted scrutiny with respect to UPL, from bar au-thorities or otherwise. To the extent that is-sues arose, it was often when the lawyer left the in-house position to return to private firm practice and applied for local bar admission; at that point some state bar regulators might pose pointed questions about what the law-yer did during his or her in-house tenure.

The Model Rule 5.5(d)-(e) Safe Harbor for In-House LawyersModel Rule 5.5(d)-(e) (see sidebar), ad-opted by the ABA House of Delegates in 2002, was meant to create a safe harbor for in-house lawyers admitted in a U.S. juris-

diction, but not where they work. This was one of several multijurisdictional practice safe harbors added to Rule 5.5. In general, it is relatively easy for an in-house lawyer to comply with subsections (d) and (e) of Model Rule 5.5, which reflect a policy judgment that such an in-house role “does not create an unreasonable risk to the client and others because the employer is well sit-uated to assess the lawyer’s qualifications and the qualities of the lawyer’s work.” Model Rule 5.5, Comment 16.

New In-House Registration and Limited Admission RulesIllinois adopted a modified version of Mod-el Rule 5.5(d). If that had been the only step taken on this topic in Illinois and else-where, George and other in-house lawyers licensed only in other states would have little to worry about with respect to UPL (as long as they kept their licenses current and confined their practices to representa-tion of their employers). In tandem with the adoption of versions of Model Rule 5.5(d)-(e), however, many states (includ-ing Illinois, where George works) also ad-opted rules requiring in-house lawyers who are only admitted elsewhere in the United States to register with or obtain limited admission from the state bar regulatory authority. While the safe harbor in Illinois Rule of Professional Conduct 5.5(d) cov-ers George, Comment 17 to the Illinois rule (based on Comment 17 to Model Rule

5.5) also contains a cross-reference to an-other Illinois rule on limited admission of in-house counsel in George’s position. The 2014 edition of the Comprehensive Guide to Bar Admission Requirements, compiled by the National Conference of Bar Examin-ers and the American Bar Association Sec-tion of Legal Education and Admission to the Bar, states that 33 states now have li-cense, registration, or certification require-ments for corporate counsel not otherwise admitted in-state, with application fees ranging from zero to $1,300.

The ABA has adopted a Model Rule for Registration of In-House Counsel, but state rules on this topic vary on a number of sub-jects, including whether:

• The rule is framed in terms of “registra-tion” or “limited admission” of in-houselawyers;

• Representation is also permitted of orga-nization personnel on matters relating totheir organizational roles;

• Court appearances on behalf of the orga-nization are allowed;

• Pro bono work for clients other than theorganizational employer is authorized;

• Time worked under the rule can later beused to “waive in” for general bar admis-sion purposes;

• The in-house lawyer must satisfy continu-ing legal education requirements; and

• A one-time fee, annual payments, orboth are required.



http://www.sidley.com/michael-sweeney/

http://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_5_5_unauthorized_practice_of_law_multijurisdictional_practice_of_law.html



Some states have no such in-house coun-sel rules. For that matter, not all states have yet even adopted a version of Model Rule 5.5(d)-(e); a number of states simply retain a vague prohibition on engaging in or as-sisting the unauthorized practice of law.

A New Risk SpectrumWhereas UPL by in-house lawyers was once a relatively low-risk subject nation-wide, if only because of a relative lack of scrutiny, the UPL risk spectrum for in-house lawyers has broadened consid-erably. At one end of the spectrum, juris-dictions in which versions of Model Rule 5.5(d)-(e) have been adopted without any supplemental rules relating to registra-tion of out-of-state in-house lawyers are even lower-risk from a UPL perspective than they once were. On the other hand, lawyers like George working in jurisdic-tions that have adopted registration or lim-ited admission rules for in-house lawyers who are only licensed elsewhere now face greater risks than they did before Model Rule 5.5(d)-(e) – at least if they fail to comply. An initiative that was intended to help house counsel like George who are not locally admitted seems to have focused added local bar attention on in-house lawyers.

Privilege Loss?Another possible issue, on which there does not yet seem to be any case law, is whether George’s failure to comply with the Illinois house counsel rule could be used as a basis for claiming that Acme’s communications with George are not covered by the attorney-client privilege. A similar argument in analogous circum-stances was rejected in Gucci America, Inc. v. Guess?, Inc., 2011 U.S. Dist. LEX-IS 15 (S.D.N.Y. January 3, 2011). In that case, the in-house lawyer had been admit-ted in a state other than where he worked in-house, but had then gone on inactive status. The court concluded that a law-yer on inactive status was nonetheless a lawyer for purposes of the attorney-client privilege, and that the corporate employer was not under any obligation to check on the active bar status of its in-house lawyer. The case, however, did not address any in-house lawyer admission or registra-tion rules, and it is unclear whether courts would take the Gucci approach in cases involving such rules.

Illinois AmnestyResponding to a perception that a signifi-cant number of in-house lawyers who are subject to the Illinois rule on this subject may not yet have obtained the required lim-ited in-house licenses, the Illinois Supreme Court declared an amnesty for lawyers who apply for such licenses during 2014. In addition to the $1,250 registration fee provided for under the Illinois rules, an in-house lawyer taking advantage of the am-nesty must also pay an additional $1,250 penalty, but is not expected to make up back payments or continuing legal educa-tion requirements. The court stated that the prior failure of such lawyers to apply under the rule would not be a basis for prosecu-tion for having engaged in the unauthorized practice of law, that it would not be grounds for denying a license or discipline, and that such applicants would not be investigated by the Illinois Attorney Registration and Disciplinary Commission. Presumably im-plicit in those statements is the possibility that a lawyer such as George who is cov-ered by the house counsel rule (Illinois Su-preme Court Rule 716) and who does not take advantage of the amnesty could be subject to those actions thereafter.

ConclusionIf unauthorized practice rules exist primar-ily to protect clients and others against un-qualified lawyers, it is difficult to find many situations in which such problems have been experienced by corporations or other orga-nizations employing in-house lawyers. To some, state rules regarding registration or limited admission of in-house lawyers like George are solutions in search of a problem. As a practical matter, these rules are prob-ably designed, not to solve systemic prob-lems relating to the performance quality of George or other in-house lawyers, but rather to (a) require such in-house lawyers to con-tribute financially to funding the state bar, and (b) ensure that such in-house lawyers are subject to local state bar jurisdiction. In-house lawyers such as George who have not complied with such rules should consider addressing the situation, and Acme and oth-

Rule 5.5(d)-(e) of the Model Rules of

Professional Conduct

(d) A lawyer admitted in another United States jurisdiction or in a for-eign jurisdiction, and not disbarred or suspended from practice in any juris-diction or the equivalent thereof, may provide legal services through an of-fice or other systematic and continuous presence in this jurisdiction that:

(1) are provided to the lawyer’s em-ployer or its organizational affili-ates; are not services for which the forum requires pro hac vice admis-sion; and, when performed by a for-eign lawyer and requires advice on the law of this or another U.S. juris-diction or of the United States, such advice shall be based upon the ad-vice of a lawyer who is duly licensed and authorized by the jurisdiction to provide such advice; or(2) are services that the lawyer is au-thorized by federal or other law or rule to provide in this jurisdiction.

(e) For purposes of paragraph (d), the foreign lawyer must be a member in good standing of a recognized legal profession in a foreign jurisdiction, the members of which are admitted to practice as lawyers or counselors at law or the equivalent, and are subject to effective regulation and discipline by a duly constituted professional body or a public authority.





er employers of such lawyers may want to help or require them to do so.

Michael J. Sweeney is a senior counsel at Sidley Austin LLP in Chicago. “Ethics Corner” is sponsored by the Professional Responsibility Committee, and is edited by Robert Evans III, a partner at Shearman & Sterling LLP.

Did you major in psychology, or are you otherwise interested in the in-terface between psychology and the law? If so, consider joining the Be-havioral Ethics Subcommittee of the Professional Responsibility Commit-tee. We have already presented a well-received program on cognitive biases as ethical “blinders,” and are plan-ning further programs on what social/group/organizational psychology has to teach us about the human context of ethical decisions and compliance. A link to join can be found on the “Join Us” section of the Behavioral Ethics Subcommittee page, and is as simple as checking a box.



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http://www.shearman.com/en/people/e/evans-robert

http://www.shearman.com/en/people/e/evans-robert





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BUSINESS LAW TODAY

MARch 2014

Member Spotlight:Invocation to the ABA house of Delegates: February 10, 2014,

by Maury B. Poscover

On February 10, 2014, the ABA House of Del-egates, the 565-mem-ber, principal policy-making body of the ABA, played host to a naturalization ceremo-ny during the associa-tion’s Midyear Meeting in Chicago. This was

the first-ever-in-House naturalization cer-emony, and was presided over by the Hon-orable Marvin Aspen (United States District Court, Northern District of Illinois). At its conclusion, the entire membership of the House joined Judge Aspen, ABA President Jim Silkenat, and ABA Chair of the House Bob Carlson in welcoming the 24 new U.S. citizens, and joined together in reciting the Pledge of Allegiance.

Immediately following that ceremony, the invocation to open the House of Del-egates session was delivered by Maury B. Poscover, Past Chair of the Business Law Section and one of the Section Delegates to the House. Mr. Poscover has also served on the ABA Standing Committee on the Feder-al Judiciary, the ABA Board of Governors, the ABA Nominating Committee, and as Chair of the ABA Standing Committee on Membership and Marketing. He is former Editor-in-Chief of the Business Lawyer and Business Law Today, and is a former Chair of the Business Law Section’s Commercial Financial Services Committee.

The text of his invocation is chronicled below.

* * *Having been a member of this august body for many years and an interested observer of its actions for even longer, it is an honor and a privilege to be in front of you not to advocate for a position, but to offer the in-vocation at this meeting.

We just attended the moving natural-ization ceremony. My grandparents on my father’s side in 1906 emigrated from Ukraine, and in 1921 my mother, at age 12, emigrated from Poland.

In my faith tradition, Judaism, we study the Torah. Then we study it some more. We interpret it and reinterpret it. We study the interpretations of Torah in the Talmud and the entire body of Jewish law and tradition comprising the laws of the Bible, the oral law as transcribed in the legal portion of the Tal-mud, and subsequent legal codes amending or modifying traditional precepts to conform to contemporary conditions in Halakhah.

There is a story in the Talmud that is often told when someone is asked to sum-marize the essence of Judaism. During the first century B.C.E., a great rabbi named Hillel was asked to sum up Judaism while standing on one foot. He replied: “Cer-tainly! What is hateful to you, do not do to your neighbor. That is the Torah. The rest is commentary. Now go and study.” The par-ticulars of every individual belief system are the commentary.

We are gathered here today to develop a part of that commentary.

In the fifth of the five books of the Torah, Deuteronomy, we are implored to seek Tze-dek, Tzedek Tirdof, “Justice, Justice, Shall thou Pursue.”

The rabbis and sages suggest that the word “Justice” is doubled because it is not merely enough to pursue justice. One must pursue Justice justly. It is not merely enough to ob-tain the correct verdict or end. The means by which we reach those just ends must them-selves be able to withstand the highest level of ethical scrutiny.

Let us strive to have the wisdom obtained by listening carefully to our fellow delegates.

Let us strive to use wisely the fact that God gave us two ears and one mouth and that we use them proportionally.

May we take this one day to leave our clients, firms, corporations, or other em-ployers as well as our e-mails, iPads, An-droids, and N.Y. Times crossword puzzles at the door and focus our entire efforts and the significant brainpower assembled here today on the needs of our profession, our nation, and the best interest of humankind.

Let us strive to be a beacon to our profes-sion, our country, and our world. To be fair, kind and considerate, giving and compas-sionate, so that those we serve will be proud of and benefit from the work we are about to do.

Grant peace unto us and to all God’s creatures, and let us say Amen.



1



BUSINESS LAW TODAY

MARch 2014

Businesses increasingly have embraced the goal of merging profitability and social re-sponsibility. In turn, business lawyers have grappled with the resulting questions, in-cluding how to enable stakeholders to for-mally establish social responsibility as a cor-porate policy, how to balance a company’s goals for profit and sustainability, and how to mandate socially responsible business practices in the face of a complex global economy.

In the last two years, committees within the Business Law Section have held several CLE programs addressing social responsi-bility for businesses. As ABA policy, the ABA House of Delegates recently adopted model business and supplier principles di-rected to labor trafficking and child labor. The Corporate Governance Committee has formed two subcommittees addressing is-sues of social responsibility, and the Sec-tion has formed a Section-wide task force on the topic: The Corporate Social Respon-sibility Task Force.

Committee Work Product Addressing Corporate Social Responsibility IssuesIn the past few years, several committees within the Section have presented CLE pro-grams on topics related to corporate social responsibility. The materials from those programs, often including a recording, are available to ABA members through the Sec-tion’s website. Available programs include:

Drafting LLC Agreements for Nonprofit and Social Enterprise LLCsAt the 2012 LLC Institute, presented by the LLCs, Partnerships and Unincorporated Entities Committee, J. William Callison chaired a panel consisting of Carter G. Bish-op, Cassady V. Brewer, and J. Haskell Mur-ray, titled “Drafting LLC Agreements for Nonprofit and Social Enterprise LLCs.” The program discussed the various forms that a business with a social as well as a business goal might take, and provided an overview for organizing a social enterprise in the form of an LLC rather than a benefit corporation.

Shareholder Values, Benefit Corporations, and the Model Business Corporation ActAt the 2013 Spring Section Meeting, James H. Cheek, III, chaired a panel, moderated by Frederick H. Alexander and including Ste-phen L. Brown, William H. Clark, Jr., Don-na M. Nagy, and then-Chancellor Leo E. Strine, Jr., titled “Shareholder Values, Ben-efit Corporations, and the Model Business Corporation Act.” The panel, presented by the Corporate Laws Committee, discussed the genesis of benefit corporations and the various forms of benefit corporations estab-lished under the Model Benefit Corporation Act, Delaware law, and other state law.

Governance Meets SustainabilityAt the 2013 Fall Section Meeting, Nancy S. Cleveland and Katayun I. Jaffari co-

moderated a panel that included Brad A. Molotsky, Leah Seligmann, and John Walen discussing how “Governance Meets Sus-tainability,” presented by the Sustainability Initiatives and Related Governance Matters Subcommittee of the Corporate Governance Committee and the Federal Regulation of Securities Committee. The panel addressed the evolving understanding of sustainabil-ity, which includes both environmental and economic longevity. The panel went on to discuss the role that a board of directors has in the governance and oversight of a corpo-ration’s efforts with respect to sustainability.

Section Initiative: ABA Model Business and Supplier Principles on Labor Trafficking and Child LaborAt the 2014 ABA House of Delegates Mid-year Meeting, the Business Law Section ob-tained approval of Resolution 102B, adop-tion of the black letter ABA Model Business and Supplier Policies on Labor Trafficking and Child Labor. (Read the Final Resolu-tion.) This “black letter” consists of model business and supplier principles for busi-nesses to adopt and implement in guarding against labor trafficking and child labor and effectively addressing labor trafficking and child labor when they occur. The Resolu-tion was co-sponsored by the ABA Task Force on Human Trafficking, the Section of Individual Rights and Responsibilities, the Section of Criminal Justice, the Section of Environment, Energy and Resources, the

Inside Business Law: A Section-wide Response to Emerging Issues





http://www.americanbar.org/content/dam/aba/events/business_law/2012/10/llcs/drafting-llc-agreements-201210.authcheckdam.pdf

http://www.americanbar.org/content/dam/aba/events/business_law/2012/10/llcs/drafting-llc-agreements-201210.authcheckdam.pdf

http://www.americanbar.org/content/dam/aba/events/business_law/2013/04/spring/shareholder-values-201304.pdf




http://www.americanbar.org/content/dam/aba/events/business_law/2013/11/fall/gov-meets-sustainability-201311.pdf

http://www.americanbar.org/content/dam/aba/events/business_law/2013/11/fall/gov-meets-sustainability-201311.pdf



http://www.americanbar.org/content/dam/aba/images/abanews/2014mym_hodres/102b.pdf

http://www.americanbar.org/content/dam/aba/images/abanews/2014mym_hodres/102b.pdf



Section of Public Contract Law, the Dela-ware State Bar Association, and the ABA Commission on Youth at Risk.

The Corporate Social Responsibility Task ForceThe Corporate Social Responsibility Law Task Force, chaired by Ashley Conrad Wal-ter, was formed to advance, support, and fa-cilitate the development of the knowledge, skills, and expertise required to provide informed, insightful, and effective counsel with respect to corporate social responsi-bility-related legal requirements and busi-ness issues.

Corporate Governance SubcommitteesIn addition to the Section-wide task force addressing the topic, the Corporate Gover-nance Committee has formed the Gover-nance of Social Benefit Entities Subcom-mittee, led by Kimberly A. Lowe and Allen Sparkman, and the Sustainability Initiatives and Related Governance Matters Subcom-mittee, led by Nancy S. Cleveland and Ka-tayun Iris Jaffari, to address issues related to benefit corporations and sustainability.











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