Your Year-End Checkup

BusinessWeek Online has a great article to help you review your business plans for the end of the year. It includes a lot of great advice for determining how well your plans for last year will serve you next year. The topics include your business structure, personal investment strategy, company retirement plan, tax considerations, insurance policies, and transition plan. A lot of these issues will require meeting with your attorney, accountant, or financial planner, so now is a good time to set up those appointments (you'll especially want to meet with your accountant before tax season kicks off!).

Not mentioned in the article is the need for a personal checkup as well - you should review any changes in your life or finances that occurred in 2006, and determine if your existing plan is still the best way to go. You may need to make changes to your investment portfolio, will or trust, and insurance coverage. And if you don't have all three of these, I can help.

If you're looking for an attorney to serve you, feel free to contact me at 952-544-0805, or emily@emilyfingerlaw.com.

Medtronic & the Supreme Court

A suit against Medtronic was heard by the Supreme Court this week. To jog your memory: Riegel v. Medtronic began when a balloon catheter manufactured by Medtronic burst, causing injury to Mr. Riegel. This may sound like a common product liability design-defect case - except that the catheter's design was FDA-approved. Thus, the issue in the case is whether FDA approval of a design may preempt state law product liability claims.

Medtronic argued that the FDA is charged with evaluating the safety and effectiveness of a medical device, and that puts the FDA scientists in a better position to make determinations about safety than a jury. To allow the plaintiffs claim would essentially allow juries to second-guess the FDA. Several justices appeared to agree, expressing concern that a jury could better assess safety than the FDA, and concern that the Food, Drug and Cosmetic Act expressly put such decisions in the hands of experts.

Attorneys for the plaintiff cited products that were recalled with design defects, and questioned whether Congress really intended to limit liability in those cases.

You can read the transcript of the oral arguments here.

The Battle over the Second Amendment

Unless you've been on a media fast for the last month, you know that the Supreme Court will be hearing a case that could put to rest the great debate over the meaning of the Second Amendment - namely, whether it allows individuals to own firearms, or whether that right is limited to those serving in a "militia." The case is District of Columbia v. Heller (07-290), and the question presented, as written by the Supreme Court, is:

"Whether the following provisions -- D.C. Code secs. 7-2502.02(a)(4), 22-4504(a), and 7-2507.02 -- violate the Second Amendment rights of individuals who are not affiliated with any state-regulated militia, but who wish to keep handguns and other firearms for private use in their homes?"
See the Supreme Court Docket.

You may not own a gun or you may be a member of the NRA. Regardless of your position, this could be a case that is studied in constitutional law cases for the rest of eternity. It certainly won't put the great "guns kill people" vs. "people kill people" debate to rest, but it could finally give some parameters for gun laws.

The case will probably be heard in March and decided in June. To get you in the mood for the showdown, here are some interesting articles on the case:

• A Question of Commas in the D.C. Gun Case. Period. - A fun little article on the grammar war over the Second Amendment.
• Supreme Court Agrees to Take D.C. Gun Case - A good summary of the case.
  

E-mails "Off the Record"

If you're tired of the gargantuan number of e-mails you get each day, particularly from colleagues who work a few steps away, here's another reason to encourage face-to-face conversations: "GCs to Employees: Think Before You Send."

The article highlights several examples of attempts to keep thoughts "off the record" when sent by e-mail. The problem, of course, stems from electronic discovery and the fact that even deleted e-mails are never truly gone. Those incriminating e-mails that were promptly deleted will often still turn up during the discovery process, and they can get your company into hot water.

A good rule of thumb is, if you wouldn't write it in a formal memo, don't write it in an e-mail or on your Blackberry. That includes bad language, poor grammar, personal insults, and anything you want to keep off the record. Pick up the phone, or make your pedometer happy and stroll down the hall.

When to Employ, When to Contract

The issue of whether to hire additional employees or independent contractors is an important one for small business owners. "The Road to Independents" on BusinessWeek online includes some issues to consider, as well as a brief discussion about the tax consequences of mis-classifying employees as independent contractors. If you work with a lot of independent contractors, you should speak with your attorney to ensure that they are properly classified as independents and that they have not crossed the boundary into employment. Making this mistake could cost you more than tax penalties - you could also run afoul of labor laws - and could be very expensive.

Entrepreneur School

Here's an interesting article from BusinessWeek online: "Can Entrepreneurship Be Taught?" The conclusion from the research is that while entrepreneurship really must be learned through practice, there are three elements that can be taught to enhance an entrepreneur's success: business knowledge, general entrepreneurship principles, and being alert to opportunities. Check out the article for more information.

Women in the Board Room

More from BusinessWeek -

A new report shows that women directors earn higher compensation than their male counterparts. The headline says "Surprise!", but anyone who understands supply and demand theory isn't surprised at all. Women corporate directors are a precious commodity, so it makes sense that their diverse viewpoints are well-appreciated.

If your board wants to diversify, there are several ways to find talented candidates. BoardRecruiting.com is one I personally recommend (yes, I am a member!).

Be a Good Boss

Because many people who read this blog are managers, I wanted to bring this to your attention: BusinessWeek Online has a slideshow called "Bosses We Love," highlighting the good traits that even not-so-good managers have. It wouldn't hurt to review these traits, pat yourself on the back for what you do well, and then decide how you can work on the areas in which you need to improve.

Happy Thanksgiving!

Advice for Companies Facing a Government Probe

An ex-federal prosecutor gave a talk to the Georgia Association of Corporate Counsel, asking all-important questions about how to avoid government probes, and how to avoid fallout if one is initiated. Don’t you wish you were there? Well, this article sums up his comments.

Some of the best advice:

• Have an effective compliance system in place.
• If you're in a large corporation, your compliance department should be separate from your legal department.
• Know the rules and law in advance - learning after you get a letter from the DOJ is too late.
• Don't consent and don't give up your right to counsel.
• But don't be too tough - be friendly and helpful to the investigators.
• Never, ever lie.
• Keep documents - they're the best witnesses.

As you can undoubtedly see from the advice above, this is solid reading for upper management and board members as well.

Business Strategy

What exactly is business strategy? I've been wondering as I read through courses offered in various MBA programs. I am wavering between picturing a chessboard and imagining a high-powered M&A deal.

Apparently I'm not the only one who isn't sure. Demystifying Strategy: The What, Who, How, and Why can be found on Business Week online from Harvard Business. This is a fascinating article for any corporate attorney, executive, or executive-in-the-making (like me!) on what business strategy is and is not.

Litigation Down against Major Companies

Good news! A survey commissioned by law firm Fulbright & Jaworski shows that litigation against major corporations has declined over the last year ending in June. Seventeen percent of in-house counsel reported ending the year without lawsuits, which is up from 11% the previous year. Why the decline? Fifty-five percent of respondents cited Sarbanes Oxley (and presumably the enhanced internal controls the law requires), 50% cited increased government enforcement, 44% cited the strong stock market, and 40% cited the indictment of plaintiffs' firm Milberg Weiss for paying kickbacks to plaintiffs to induce class action suits (I've been following this case here on The Brief Case).

For more information, read the article here.

Jerks Need Not Apply

I enjoyed this article on law.com, At Firms With 'No Jerks' Rules, Abusive Attorneys Need Not Apply. For obvious reasons, I'm a big fan of this philosophy, as I personally would not hire a jerk and certainly don't like working with or for them. But it goes beyond mere preference - research has shown that abusive employees and workplace bullying can be found in a lot of companies. And while the actual cost to employers of such behavior is difficult to measure, there is no doubt that employees who witness this feel less job satisfaction and loyalty. Based on my experience, those two factors are probably some of the best determinants of an employee's quality of work.

The article mentions a Seattle firm that attempts to avoid future problems by using their HR department to meet with staff who cause or are victims of negative incidents. This firm has also been named one of the Top 100 Best Places to Work for five years running. Coincidence? I doubt it.

We are living in an age where loyalty does not seem to mean much, and many people will change jobs every 2-3 years. Unfortunately that lack of loyalty does cost companies money in the long run, in training new employees, lower profits, and even employment litigation. One way to improve loyalty is to screen interviewees based on personality, and to put in place policies that allow problem employees to be dealt with in a way that will encourage harmony in the office. Call it enhancing your corporate culture, finding candidates that "fit", or whatever. Nobody likes to work with jerks.

Cert Granted

If you're like me, you often lay awake at night pondering the mysteries of the U.S. Supreme Court. (Please understand that was a joke - even I am not that big of a nerd.) Why is stare decisis so important - until the court decides to overrule itself? Why is a mandatory retirement age such a bad idea? Why do the justices choose to hear some cases but not others?

Well, I can help with that last one. Here is a link to a great article on law.com, "Demystifying the U.S. Supreme Court's Cert Granted Process." Interesting reading for anyone who would like to learn more about the #1 Court that shapes our jurisprudence.

The Law vs. Ethics

Business Week Online has a great column on corporate ethics called "Ask the Ethics Guy," written by Bruce Weinstein, PhD. His recent column, "If it's legal, it's ethical...Right?" caught my eye. This is an important point that everyone should know - just because it's legal, doesn't mean it's right. Read the column. It'll get you thinking.

A Review of the Stoneridge Oral Arguments

(Side note: I have tried to simplify this a little, because the arguments can be unbearably heavy on the law at times. Unfortunately, space constraints have made that difficult. So if you're having trouble understanding the case, fear not. I will have the space to give more detail and explanations in my article, which is in process. Keep checking back for more!)

The Justices were most concerned with the constitutional issue of whether Congress has taken over legislating private securities litigation rules, and if they have, whether the Court can make a decision that is seemingly in opposition to the legislation. Justice Scalia pointed out that statutes provide for action by the SEC against aiders and abettors and for action by the SEC and investors against primary actors in securities fraud. Thus, it appears as though Congress laid out the framework for liability, and the Petitioners were asking the Supreme Court to change that. Chief Justice Roberts seemed particularly troubled by this. He emphasized that Congress has "taken over" for the courts in private securities litigation, and the court cannot undo limits that Congress has imposed. He said that the Court must "get out of the business" of expanding private causes of action for investors when Congress has imposed legislation to govern those actions.

Hammering the point home further, Chief Justice Roberts said, "Why shouldn't we be guided by what Congress did in the action to the Central Bank case? There we said there's no aiding and abetting liability, Congress amended the statute in 20(e) to say yes, there is, but private plaintiffs can't sue on that basis. Why shouldn't that inform how we further develop the private action under 10b-5?"

Petitioner's counsel claimed that the scheme liability in this case turns not on Scientific-Atlanta and Motorola personally defrauding Charter's shareholders, but rather on recklessly participating in the scheme. Thus, he argued the Respondents must have intent to deceive, or knowledge of and a willingness to maintain indifference to fraud.

Justice Alito asked questions that indicate that he believes that "aiders and abettors" in securities fraud ought to be treated differently in the courts from the principal actors. He was concerned that Petitioners were blurring the lines between primary and secondary actors. For example, this exchange -

Justice Alito: "Is your theory dependent on the proposition that Scientific-Atlanta and Motorola deceived Arthur Andersen?"
Mr. Grossman: "That certainly is a large part of it. Yes, Your Honor."
Justice Alito: "But didn't you allege exactly the opposite in your complaint?"

Justice Kennedy also wanted confirmation whether Petitioners were alleging that aiders and abetters did not need fraudulent intent to be liable. Petitioner's counsel consistently agreed with the Justices that scienter (intent) was a requirement for 10b-5 liability, but also argued that Scientific-Atlanta and Motorola ought to be liable as aiders and abetters for their "reckless" actions. Justice Souter attempted to help clarify this inconsistency by clarifying that anyone who participates in fraud with a public company ought to know that the fraud will have an effect on share value. Unfortunately, this attempted clarification brought about another question: if we can attribute intent to all aiders and abetters, then wouldn't that make them primary actors? The Petitioner seemed to have a problem determining whether Scientific-Atlanta and Motorola were primary actors or secondary actors. The Petitioner's dilemma is in order to make them liable for fraud as aiders and abetters, they must have the intent to defraud that would actually make them primary actors under 10b-5.

When Respondents' counsel addressed the court, he focused on the fact that Congress has already tackled the issue and made a decision that scheme liability would be handled by the SEC only. He noted that, even assuming the worst of the Petitioner's factual arguments are true, at most the Respondents' acts amount to Section 20(e) liability for aiders and abetters.

Respondents' counsel pointed out that the 10b-5 requirements include reliance on the statements by investors, and thus a statement must be made to investors for liability under a private action. Justice Ginsburg asked whether communication of the true nature of the advertising/box price scheme would have negated the scheme, and thus the Respondents' silence could be construed as a deceptive communication (or failure to communicate).

Justice Ginsburg also wanted the Respondents to clarify their apparent position that only the party whose stock price is affected can be the primary actor, and all other would be aiders and abetters. Mr. Shapiro continuously specified that only parties who communicated with shareholders or the market can be liable as primary actors under 10b-5. Mr. Shapiro also pointed out that Section 303 of Sarbanes-Oxley states that anyone who misleads an auditor is liable only to the SEC and not in private actions, which is apparently consistent with the 20(e) limitation of liability for aiders and abetters.

Obviously it can be difficult to make a prediction regarding Supreme Court decisions, but I can discuss the major issues. First, we have the idea that Respondents' actions amount to, at most, aiding and abetting securities fraud. If that is true, then Congress has already legislated that only the SEC can pursue criminal or civil actions against those secondary actors. When Congress has spoken, the Court can only interpret the law - and not rewrite it, as the Petitioners are asking the Court to do.

Second, there is a question of whether the Respondents' actions (again, assuming the Petitioner's allegations are true) made them primary actors instead of mere aiders and abetters. This may require the Court to clarify what constitutes a communication to shareholders, and then shareholders' reliance on the communication. This will bring in the question of whether the Respondents actions constituted intent to defraud or were merely reckless, whether reckless actions can be a "communication" under 10b-5, and what level of intent is required to constitute a communication.

Today's the Day!

It's here, folks - October 9th. Today is the day that the Stoneridge case (No. 06-43) will be heard in the Supreme Court. While you can't be a fly on the wall, you can still read the argument transcripts. The transcripts are posted same-day on the Supreme Court's website, so check that site later today. Stay tuned for the court's decision.

Stoneridge is an important case, which is why you've been hearing a lot about it lately. Two good articles to peruse:

"Enron Investors Banking on High Court," from the AP, focuses on the Enron case before the court which will be affected by the Stoneridge opinion. (The court has considered Enron but not issued a decision as to whether the case will be heard.) The article highlights an important consideration: who is responsible for reporting financial problems to shareholders. In other words, if a company's bank is aware of financial problems, are they responsible for alerting shareholders? When is inactivity equal to "deception"? This is a fascinating legal question. The Stoneridge decision should give more guidance to banks, lawyers, accountants, and others who regularly have detailed knowledge of corporations' financial states. Ultimately, the decision may affect the ability of Enron investors to recover from banks which advised Enron.

From Legal Times, "In 'Stoneridge,' the Supreme Court Should Focus on Who Really Gains" is an interesting viewpoint of how securities fraud laws should be structured based on the true winners in the fraud. The author demonstrates that it is ultimately the investors who lose in almost all securities fraud litigation, and often the only "winners" are the lawyers. His proposed solution is very thought-provoking: "The bottom line is that investors would gain if securities fraud litigation were limited to derivative actions on behalf of the securities issuer, with any damages recovered from the culprits to be paid only to the company. Of course, the SEC would still be free to pursue enforcement actions."

35W Bridge Collapse - The Fight Begins

The Associated Press has a great article about the sides gearing up for litigation after the 35W bridge collapse (http://www.law.com/jsp/article.jsp?id=1190624583024). This should be interesting to watch, especially since the attorneys and companies involved are local.

Online Networking

California attorney Steven Choi has started LawLink.com, a social networking site just for lawyers. The format appears to be similar to LinkedIn, a social networking site for professionals. Both are intended for professional networking, and so are a lot less intimidating than Facebook or Myspace for "older" professionals.

If you haven't gotten on the bandwagon yet, now may be the time. A lot of people may think this is all hype, but online networking has allowed me to reconnect with people I had lost touch with. And we all know that networking is the key to marketing and career success, right? So if you haven't signed up yet, you should really consider taking 10 minutes of your time and getting started. The sites are very user-friendly, and you never know what connections you will find!

By the way, you can find me here at LinkedIn, and here at LawLink. Let's link up, shall we?

Corporate Ethics

Law.com has a series of articles on "Penetrating the Private World of Corporate Monitoring," http://www.law.com/jsp/ihc/PubArticleIHC.jsp?id=1190192573192. The first, "Someone to Watch Over You," discusses the roles a monitor may take in an organization and offers suggestions on choosing a monitor, limiting the monitor's power, and how to use a monitor to better the company. The second article, "Bristol-Myers Takes Its Medicine," reveals an antitrust violation that the company engaged in while a monitor was working with the company.

The need for corporate monitors and the Bristol-Myers example show that all of this talk of corporate ethics seems to fall on many deaf ears. This is frustrating for companies who do walk the line (and myself, who supports and represents those companies). When news of Enron, Worldcomm, and Tyco was on the front page, it was "corporate America" that became the devil, not only those companies. And many companies who never did anything wrong have paid for it - thousands or millions of dollars spent to comply with Sarbanes-Oxley, loss of goodwill, and suspicious customers and regulators watching their movements with narrowed eyes. This is similar to the problems that the legal profession has when attorneys misuse their power, take advantage of clients, or simply break the law - it reflects poorly on all lawyers, and that is why the Board of Law Examiners screens applicants to the Bar to attempt to weed out future trouble-makers. (No comments on their lack of success - they can only see so far into the future!)

Alas, there really is no good solution for the business community. Forcing all executives or managers to go through some kind of screening process could be possible for public companies, but it has its limits just as with potential lawyers. Many business schools require corporate ethics courses, but teaching the rules of ethics is not the same as instilling values. Just because lawyers know the Rules of Professional Conduct does not ensure that they cannot willfully violate the rules.

I believe that the source of the problem goes much deeper. The source is the same that has made ours a culture of cheating, that credits Barry Bonds with breaking Aaron's recond, and that exhibits unbelievably high levels of marital infidelity. It is a culture of Me First, or dishonesty or cheating, or whatever label you like. I believe that only parents have the power to undo this, not Congress. Unfortunately, parents are often the problem. The best thing to do, then, is to ensure that there continue to be negative consequences for those who lie and cheat. When we begin to let things slide, huge ethical abuses are sure to follow.

GMAT Update

Since I've been slow about posting on my blog because I've been studying for the GMAT, I thought it would be fair to let you know how I did. I scored 730, which is in the 96th percentile! Yay! So I don't know if the math fairy was smiling on me, or God really wants me to go to business school, but I am one happy test-taker. And I promise I'll get back to posting two posts per week.

Employment Litigation Gets Personal for Managers

A story at law.com (http://www.law.com/jsp/article.jsp?id=1187168523180) reveals that an increasing number of managers and executives are being sued personally for work-related decisions. For example, a hotel president was held personally liable for wage-hour violations because he was more than just a supervisor - he "had ultimate control over the business's day-to-day operations," and thus was instrumental in causing the violations. A court also held a supervisor liable for retaliation against an employee. And there is a suit pending against ex-EPA chief Christine Todd Whitman in her personal capacity for allegedly misleading New Yorkers about air quality after the September 11 attacks. The judge refused to dismiss the suit on summary judgment because the allegations, if true, "shock the conscience."

Several federal laws have been interpreted to hold managers personally responsible, such as the Fair Labor Standards Act, the Equal Pay Act, and the Family and Medical Leave Act. The notable federal exception is Title VII of the Civil Rights Act (prohibiting sex and race discrimination), which expressly state that a plaintiff may only sue an employer and not an individual. That does not, however, mean that an individual cannot be sued for discrimination under state laws.

Many corporations and LLCs believe incorrectly that they are shielded from any personal liability for actions they take in their business. Plaintiffs' attorneys are hoping that these lawsuits will make executives and managers think twice before engaging in illegal conduct.

These suits are especially problematic for small businesses, whose owners and managers cannot rely on large legal coffers to bail them out of trouble. Thus, even if the individual is ultimately vindicated, there is still substantial cost to the business, in legal fees, emotional distress, and time away from the business.

Ultimately, these lawsuits highlight the importance of having your attorney actively involved in your business's employment issues. It is vital that your attorney be involved from the beginning - not only after a complaint has arisen. Your attorney should be responsible for periodically reviewing your employment policies for compliance with state and federal laws, and your attorney should be involved, if not actively responsible for, investigations of employee complaints.

Small Business Financing - Part I

Small business financing is a tough issue, especially knowing how many businesses will never succeed. Starting your own business often means quitting your job and thus losing a regular salary and benefits. You will need capital for overhead expenditures, and initial expenses will often be significantly higher than your regular monthly overhead.


Ideally, of course, you will draw on your savings to get off the ground. And you will be able to do that without using up your six-month emergency fund, cashing in your retirement savings, or using the equity in your house. Those three are the most common sources for self-financing, and a bad idea.

You need your emergency fund. Starting a business does not qualify as an emergency, though losing a paycheck is. So you may need that money for living expenses while your business gets off the ground. (And if you have a savings account but no emergency fund, then that's just semantics - your savings account is your emergency fund.) Your retirement savings are for retirement - period. This is true especially if you're young - retirement may seem like a long way off, but you also need to save more than you think. Use an online calculator if you are having a hard time seeing the long-term picture. You do not want to be in the habit of using your IRA or 401(k) like a savings account. Finally, if you've paid attention to all the news about sub-prime loans, you already know the importance of having an equity cushion in your house. If that's not enough discouragement - are you willing to bet your house on your business? Do your spouse and children agree?

Hopefully I have convinced you that there are certain forms of "financing" that you just shouldn't touch. Unfortunately, the savings rate in the United States is abysmal, and only a small percentage of people have an adequate emergency fund. So there is a good chance that anyone starting a business will need some financial help.

The average small business owner - or, especially, the average start-up - will not be able to call on private equity. Your spouse may only put up with a single-paycheck lifestyle for a few months, if you can even afford that. (Or if you're single like me, you're on your own!) And the unfortunate reality is, you will not make a lot of money right away. It could take years to break even.

This series of articles will examine some options for financing available to small business owners, and discuss the pros and cons of each. Obviously, the right option for your business will depend on your special situation. You will need to think about each option in the constraints of your resources available, lifestyle, and type of business. And when you're ready to get more information, you can reach me at www.emilyfingerlaw.com.

Record-Keeping

"Electronic discovery" is the topic du jour among many litigators. Electronic discovery refers to the collection and production of electronically-stored documents to the opposing party during litigation. And while it may be considered a hot topic, the rules and problems are essentially the same as those applicable to paper documents.

One big issue, for example, is limited storage space. While it is certainly possible to store more data in less space when documents are electronic, it is also true that there seems to be much more data (e.g., e-mails, multiple edits of documents) that needs to be stored on expensive servers and drives. Thus, we presume that like paper documents, it is inefficient and unnecessary to store electronic documents forever. (Sidebar: Yes, there are plenty of IT professionals who will disagree. Nonetheless, the courts have officially given companies permission to delete data under the right circumstances. And some people, like me, just like to keep their storage organized and up-to-date.) Further, and more problematic, some servers can automatically over-write some data without an employee's knowledge. And then there's the scariest situation of all - losing data from a hard drive that is now caput.

The problem with deleting electronic data is the same problem as with shredding documents - when you get rid of "incriminating" documents, you can be fined a lot of money. But when no lawsuits have been filed, how can you know which documents may be relevant in the future? So, the question is, when can a company comfortably remove electronic data without fear of sanctions?

In short, the key to avoiding sanctions is to have a systematic and documented records management policy in place. First, review the location of all documents relating to the operation of the company, and then assess all legal, regulatory, and business requirements regarding the company's operations and the retention of such documents.

Next, the company should have a plan for if/when they are served with litigation. They will need to be able to identify, locate, and preserve all relevant documents. If possible, the documents should be preserved in their original format (electronic or paper).

With this policy in place, the company will know when it is able to delete/shred documents "in the normal course of business," and thus will be protected from sanctions. Such a policy will also enable a company to respond to discovery requests with minimal expense.

Oh yes, and as for data that has been lost through no fault of your own - don't worry, the law protects you. But you should get in the habit of regularly running back-ups. Your business is your livelihood, and you don't want your livelihood in the hands of your fussy computer.

The Elephant in the Room - Fees

I'm sure by now that you have seen the news story that some attorneys have now raised their hourly rates to $1000 and beyond. (I think one partner quoted in the WSJ article said it well when he called that the "vomit point" for most clients.) Makes my $900 rate seem like a bargain, eh? Just kidding.

I imagine there is a time for a lawyer who charges $1000+ per hour - the bet-the-company scenario, and probably then only for the Fortune500. And, granted, that is generally what these attorneys do. Nonetheless, there has been a lot of upset over the last decade from general counsels who feel that their outside legal bills are being padded to pay the astronomical salaries of new associates (and the marble floors, skyline views, flatscreen TVs unwatched in the lobby, etc.).

I think the press given to this issue lately will be a good thing. I think law firms need to look at skyrocketing overhead and perhaps realize that they could be a lot more economical. I think clients need to insist that their attorneys work with them in setting a budget for the matter, while certainly understanding that some things can be difficult to anticipate. And I think that more clients - and legal departments - need to give more consideration to solo and small firm lawyers, who have the expertise to handle almost anything, and the overhead to handle it without billing a year's worth of revenue.

Update on Whole Foods/Wild Oats

The district court judge sided with Whole Foods and Wild Oats against the FTC in the FTC's attempt to block their merger. The court found that Whole Foods and Wild Oats are competing with most other supermarkets, rather than just with each other. But not so fast… The FTC filed an appeal, and the Court of Appeals issued a temporary injunction blocking the merger until the appeal can be heard.

Non-Compete Agreements for Existing Employees

Any small business owner who is thinking of hiring employees should consult with an attorney about the employment law issues he/she may face. It is a lot simpler - and cheaper - to advise a client on the correct steps to take than to deal with a problem after it has arisen. One such issue is a non-compete agreement. I recently faced the issue of a client who wanted to impose non-compete agreements on his existing employees.

The first question is, when does an employer need a non-compete agreement? Non-compete agreements are generally not favored by the courts and they should be used sparingly. The marketplace for highly skilled employees is extremely competitive, but that does not mean that non-compete agreements are the only - or even optimal - strategy for protecting trade secrets or holding onto valued employees. Remember that trade secret and confidentiality agreements may give an employer what he/she needs without the hassle of non-competes.

But let us assume that a business owner would benefit from a non-compete agreement. The next issue will be structuring the agreement for the "mid-stream employee" who is currently employed by the business. For these employees, a non-compete agreement will only be enforceable if it is supported by independent consideration. Indeed, Minnesota courts have also required independent consideration where the employee has accepted an offer of employment but not yet begun work, and where the employee knew he would have to sign a non-compete agreement but did not know the terms until it was presented two him two weeks after he began work.

Independent consideration must consist of "real benefits" which are bargained for between employer and employee. They must be benefits beyond anything the employee is already entitled to receive, either by virtue of his employment or by a separate agreement. Some examples include a cash payment, promotion, a stock option or grant, or participation in a bonus plan. When choosing consideration for a non-compete agreement, it is important to remember that the courts require the consideration to be unique to employees who sign the non-compete agreement. In other words, if an employer offers the same benefit to other employees who do not sign a non-compete agreement, then the consideration is illusory and will not be sufficient.

Sarbanes-Oxley Turns 5

(Sorry for the brief hiatus, folks. I'm taking the GMAT in a month and I need to re-learn all the math from K-12 that I have forced out of my brain. As Bart would say, ay caramba.)

Sarbanes-Oxley celebrated its fifth anniversary last week - July 30th, to be precise. No business law blog would be complete without a comment on this momentous legislation. On the other hand, I have been struggling all week with how to give the law proper treatment (without treading on the WSJ's phenomenal report, "Critics See Some Good in Sarbanes-Oxley," http://online.wsj.com/article/SB118575565116581776.html?mod=politics_primary_hs).

So, I'll begin by rehashing the article. Sarbanes-Oxley, which was passed overwhelmingly by Congress, demands rigorous internal controls, requires executives to certify the accuracy of financial reports, requires companies to investigate whistleblower complaints, and created a watchdog for auditing firms. In the boardroom, it expands the role of audit committees and requires regular private sessions of independent directors.

AMR Research estimates that, by the end of 2007, public companies in the US will have spent more than $26 billion to comply with SOX. This is certainly more than executives would like to spend, but it has not all been in vain. Many companies are reporting that SOX has prompted changes that are ultimately making them better-run businesses. Some examples from California company Invitrogen: "Directors meet more often without executives present. Multiple ombudsmen field employee complaints. Ethics training is more rigorous. And Chief Executive Greg Lucier requires his lieutenants to take more responsibility for their results." There is also more accountability in the boardroom. "More boards resolve potential problems 'before they fester and explode.'"

SEC Chairman Christopher Cox believes that SOX has helped restore confidence in the financial markets and helps to ensure that financial reports are reliable. He also points out that compliance costs are falling (which makes sense because many of these costs were incurred when companies designed and instituted the necessary review processes).

In the first few years after SOX, hundreds of companies disclosed "material weaknesses" in their accounting and were forced to restate previous financial results. As companies fix problems and avoid new issues, less and less of them are doing this.

So there you have it - opinions from those in the know. But the policy question is, will the costs saved from preventing fraud and the increased confidence in the financial markets outweigh the expenses of instituting SOX reforms? This is a difficult question, because confidence in the financial markets cannot be quantified. And costs saved from potential securities litigation can only be estimated - after all, while Enron et al. were abominations, they were indeed incredibly rare. It also worth bearing in mind that the least costs were incurred by companies who already had excellent accountability practices in place. Further, many companies are reporting better business practices arising from SOX changes, which can ultimately help them perform better.

To best answer the question, I suggest looking at SOX another way. Let's compare the expenses companies incurred as a result of SOX to the expenses society incurs in maintaining a police force. Both are intended to stop problems before they start. After all, if the police were only supposed to catch criminals and investigate after a crime occurred, then they are grossly overstaffed. Both are also intended to give a certain peace of mind that cannot be valued or quantified. And in both cases, the costs are borne by those seeking the benefits – local citizens pay for police, and companies seeking funding from investors pay for SOX safeguards. Looking at SOX in this light, I hope you would agree that it’s worth the expense.

The Whole Foods Saga

With all the talk about Whole Foods CEO John Mackey's, er, unprofessional behavior, it's easy to gloss over the legal issues. Whole Foods is seeking to buy Wild Oats Markets, Inc., another nationwide organic grocery retailer. Or more specifically, the only other nationwide organic grocery retailer. The FTC is arguing that the two retailers operate in a distinct market, thus creating an anti-trust issue with the possibility of blocking competition and raising prices.

Mr. Mackey has not helped his company's case. (And no, I'm not talking about his negative remarks about Wild Oats on investing boards.) Mackey has said that, "Safeway and other conventional retailers will keep doing their thing -- trying to be all things to all people. They can't really effectively focus on Whole Foods' [clientele]." Of course, Mr. Mackey has also said that his company faces competition from other supermarkets who are now offering more organic foods. So which of these conflicting statements, no doubt CEO puffery, is true?

This case will ultimately come down to how the judge defines the organic food market. The case will be heard tomorrow, and we should have a ruling in a few weeks. This is an interesting marketing problem. In order to convince the judge that there is no limited market, Whole Foods will need to argue that they are, essentially, just another supermarket.

On the other hand, the FTC has said, "Whole Foods and Wild Oats are the only two nationwide operators of premium natural and organic supermarkets in the United States." But when one considers that most organic markets are locally-owned, Whole Foods and Wild Oats are indeed the only players in that limited market as defined by the FTC. Thus the question of how narrowly the FTC may define a market for anti-trust purposes - the age-old quandry. I'm not a big fan of Mr. Mackey, but I do hope that the judge dismisses the anti-trust suit.

Watch for September's Hennepin Lawyer

My article, "Will this lead to another Enron?", is scheduled to be published in September's Hennepin Lawyer. It was also accepted for publication by Michigan State's Journal of Business and Securities Law.

Good News for Boards

An article at law.com (http://www.law.com/jsp/ihc/PubArticleIHC.jsp?id=1184749593213) is reporting that more and more lawyers are sitting on corporate boards again. Many declined to be involved with boards after Sarbanes-Oxley in 2002. The Sarbanes-Oxley Act expanded liability for board members with conflicting interests. Thus, many attorneys were worried about liability exposure if sitting on the board of their firm's client. (This would be particularly troublesome for attorneys in some of the nation's largest firms which also have long client lists.)

So why is this a good thing? Lawyers on boards can add wisdom to corporate governance and internal investigation issues that non-lawyers may not have. Boards of directors can help lawyers gain better understanding of business acumen, thus making them more effective in helping their clients. (Indeed, for this reason, it makes sense for lawyers to sit on the boards of their clients.)

There are, of course, still risks for attorneys who want to sit on client's boards. Many attorneys are concerned about their ability to provide unbiased advice to these companies, or even just the appearance of unbiased advice. The article gives an example of a board member/attorney who supported a takeover of the company. Another board member accused him of having a conflict of interest because the firm would earn extra fees during the takeover. It is also likely that insurance premiums (either for directors' and officers' liability insurance or malpractice insurance) will rise.

While the advantage of having an attorney on a company's board is clear, attorneys still need to be cautious when deciding whether to serve on a client's board. I would definitely argue that the benefits outweigh the risks.

The Lost Art of English

An article on Law.com (http://www.law.com/jsp/llf/PubArticleLLF.jsp?id=1184663193394) reported on a 6th Circuit case, In Re Rodriguez, in which the court decided that a negative comment about an employee's accent could be evidence of discrimination. In the case, Jose Rodriguez was not promoted to a supervisory position at FedEx because of his accent and speech characteristics (as demonstrated by statements of managers). The lower court granted Summary Judgment to FedEx, believing that he did not satisfy two requirements of the McDonnell Douglas test. Under McDonnell Douglas (see McDonnell Douglas Corp. v. Green, 411 U.S. 792, 802 (1973)), the employee must prove that he was a member of a protected class, he was qualified for the position for which he applied, he was denied the position, and that similarly situated employees who were not members of a protected class were treated more favorably. Once the employee establishes his prima facie case, the company can argue a legitimate non-discriminatory reason for its action. If the company does that, then the burden shifts back to the employee to show that the employer's reason was merely a pretext for actual discrimination. However, the scales can be strongly tipped in the employee's favor if the employee can show direct evidence of discrimination.

The lower court believed that Mr. Rodriguez failed to show that he was qualified for the position and that a non-member of a protected class was treated differently. The court also thought that the managers' comments were mere circumstantial evidence of discrimination.
The Sixth Circuit reversed, believing that the comments were in fact direct evidence of discrimination. The Equal Employment Opportunity Commission (EEOC) states that discrimination on the basis of accent is considered to be national origin discrimination. EEOC regulations state that the denial of employment based on accent can be evidence of discrimination. The EEOC also scrutinizes job selection procedures that screen for foreign accents and the inability to communicate in English.

Unfortunately, many industries and positions require employees who can communicate effectively with customers and colleagues. So what to do? Companies should carefully determine whether an accent is legitimately related to an employee's ability to perform their job. If it is, then job postings will need to indicate the importance of clear communication skills. By clearly specifying communication ability as a job requirement, a company may be able to argue that the employee with a strong accent or other speech problem did not meet the position's qualifications. This is not a complete shield from liability, but it can help communication flow smoothly throughout a company while limiting possible discrimination claims.

A Rise in Consumer Class Actions

A story from law.com (found at http://www.law.com/jsp/article.jsp?id=1184058395924) says that plaintiffs lawyers are filing more consumer class action lawsuits and less personal injury class actions. In many personal injury class action suits, the judges are refusing to certifying the class because the circumstances of each plaintiff's injury are too dissimilar to warrant treatment as a class. In most of these consumer cases, the members of the class are people who claim they would not have purchased the product if they knew of the potential harm. Thus, the suits are ultimately about economic, rather than personal, injury.

An attorney who represents GlaxoSmithKline (the maker of Paxil and a target of many consumer class action suits) said, "[p]laintiffs lawyers are crafty enough to realize that very few people are actually injured by any of these products . . . . Instead, what they look for are people who purchased the products." There are currently suits against the makers of pharmaceuticals, contact lens solution, soft drinks, Teflon cookware, and iPods.

There are a lot of things that trouble me about these suits. First, this is essentially an attempt by plaintiffs lawyers to get around the pesky "injury" requirement in a personal injury suit. Second, if there truly is an injury, then a class action is probably not the best means for an injured party to seek retribution. Lawyers prefer class action suits because the lawyers make a lot more money and do a lot less work than if they brought individual personal injury suits. And ultimately, the plaintiffs themselves recover a lot less. (Note that the ethics rules require lawyers to serve their clients' interests and not their own.)

Of course, if a consumer hasn't been injured by a product but regrets the purchase for a legitimate reason, then they should have no problem getting a refund. There's also the Better Business Bureau, or even conciliation court for a particularly stubborn company. But companies don't want the negative PR, so they will generally bend over backwards to satisfy the consumer (the airlines are a notable exception). If nothing seems to work, then enter the consumer protection laws.

But here's where it gets funny. Because of the allegations in the consumer class action suits, the attorneys can really only sue for a refund of the purchase price. (So, if there really was something wrong with your contact lens solution, then you'd only be getting a refund, minus the 33%-or-so for attorneys fees.) So what could be the possible advantage to consumers? All they have to do is hop on board and claim that they probably wouldn't have bought their iPod if they knew it could affect their hearing, and they get a portion of a refund, and they get to keep their iPod that will eventually damage their hearing.

So, basically, the plaintiffs lawyers are making a lawsuit out of the possibility of a physical risk, without any evidence that the risk will ever actually be realized. Isn't this the very definition of "frivolous lawsuits"?

So fraud isn't just a corporate thing...

I wrote an article last month arguing that the PSLRA (Private Securities Litigation Reform Act) is still necessary legislation. The PSLRA was designed to curb abusive lawsuits by plaintiffs law firms. One of the practices included hiring "professional plaintiffs" to act as lead plaintiffs in their securities class action suits. Well, if you believed that businesses were exxagerating the problem, read this: http://online.wsj.com/article/SB118400043730461025.html?mod=home_whats_news_us.

Milberg Weiss & Bershad LLP is a national plaintiffs law firm that has filed countless securities class action suits. Now a lead partner, David Bershad, has pled guilty to paying kickbacks to encourage clients to serve as lead plaintiffs. More partners are under investigation. The Wall Street journal lays out the scheme:

"The allegations, according to the indictment:
• Before filing often lucrative securities-fraud class-action suits, Milberg Weiss arranged for individuals to serve as 'named plaintiffs' to represent absent class members.
• The individuals would purchase securities of a company whose stock was expected to drop in order to position themselves as named plaintiffs in a to-be-filed suit.
• In exchange for their services, Milberg Weiss would agree to pay the named plaintiffs a portion of the recovered attorneys' fee.
• The scheme violates federal and state law. The payments allegedly set up a conflict of interest between the named plaintiffs and other class plaintiffs.
• Milberg Weiss went to great lengths to hide such arrangements.
• From 1984 through 2005, Milberg Weiss paid more than $11.3 million in kickbacks."

Other facts from the WSJ article of 6/4/07:

"According to the indictment, Mr. Bershad allegedly directed kickbacks to plaintiffs by writing checks to "intermediaries" who then disbursed funds to clients. Mr. Bershad also allegedly kept cash in a safe in his office -- to which access "was strictly limited" -- to pay kickbacks, according to the indictment." (This behavior smacks of the corporate fraud that the plaintiffs lawyers are trying to fight against.)

"Lawyers say Mr. Bershad used a detailed knowledge of corporate finance to figure out how much could be demanded of Milberg's targets. Mr. Bershad, who had a Bloomberg terminal in his office, would suggest creative financial solutions to settling cases if, for example, a company didn't have a lot of cash, says a former partner."

So, Congress wasn't way off base in their concerns about class action lawsuit abuse by the plaintiffs' bar. Also note that the criminal indictments include a period of a decade (1995-2005) after the passage of the PSLRA.

Here, Here (or, The Supreme Court Review)

This won't surprise anyone, but I am very pro-business. My parents had their own small accounting practice, so as I was growing up I became familiar with the struggles of the small business owner. I also love seeing Minnesota businesses make good. I remember falling in love with Target before people in other states knew what Target was. I felt a swell of pride when Medtronic opened its colassal campus in Fridley (as though I had anything to do with it!). Ameriprise Financial has become one of the largest financial planning companies in the country, with about $8 billion in revenues last year. The work I have done for Seagate these last few months has given me a great deal of appreciation for high-tech companies. And then, of course, the darling of Minnesota business: 3M. These companies are a big reason why people are discovering that the Twin Cities area is great for jobs, and they really have enhanced our quality of life.

So with all this in mind, it will also come as no surprise that I am very happy with the Roberts Court this term. The Court heard four anti-trust cases this term, and in all four cases the anti-trust Plaintiff lost. (Summaries of these cases and discussion will come later.) The securities fraud suit, the Tellabs decision about which I wrote a previous entry, also ended badly for Plaintiffs. Ledbetter v. Good Year was an employment discrimination suit that limited the statute of limitations on those suits. Philip Morris v. Williams limited punitive damages. Leegin Creative Leather Products v. PSKS Inc. got rid of the rule that minimum retail price requirements set by manufacturers were a per se violation of the Sherman Antitrust Act. (The full text of the opinions can be found at http://www.supremecourtus.gov/opinions/06slipopinion.html.)

The 2008 term will have some interesting cases. Stoneridge Investments v. Scientific-Atlanta (case no. 06-43) will be the one to watch. Stoneridge is about "scheme liability," and presents the question of whether third parties (e.g., lawyers, accountants, bankers) can be liable for playing a role in a company's alleged fraud, even when they did not perpetrate the fraud themselves. Congress has had the opportunity to legislate scheme liability twice and has failed to do so. The Plaintiffs bar is hoping the Court will do what Congress has not. Because a conservative court is highly unlikely to step in when Congress has refused to create a law, it looks like this could be a victory for the defendants.

For Minnesota businesses, Riegel v. Medtronic (case no. 06-179) will be a big decision. The case will ask whether FDA approval is enough to protect manufacturers from liability. The FDA has an extremely rigorous pre-marketing approval process, and many federal courts have decided that they can't do any better. Furthermore, once a medical device is on the market, the company cannot change its design without FDA approval. The paradox is, the FDA could rule that a product is safe, a jury could find that a product is unsafe, and this leaves a manufacturer unable to satisfy both the FDA and jury decisions.

The next term begins in October. I'll keep you updated.

Re-interpreting Rule 4.2

Overhauling Rule 4.2

Today's post was inspired by "3rd Circuit Panel Reverses Lawyer's Disqualification in Employment Case," which can be found at http://www.law.com/jsp/article.jsp?id=1183453580756&pos=ataglance. The decision exonerated the plaintiff's attorney in a sexual harassment suit for potential violations of Rules 4.2. The attorney, Ms. Barnett, allegedly manipulated a secretary employed by the defendant company, and through that manipulation was able to obtain evidence relevant to her case. The Third Circuit reversed her penalty, largely pursuant to Rule 4.2's comments.

Now, the law. (I will use the text of Minnesota's rule, but it is generally the same in each state.) Minnesota Rules of Professional Conduct rule 4.2 prohibits an attorney from contacting a party whom that attorney knows is represented by counsel. In comment 7, this is limited, in an organization, to communication with an employee who consults with the organization's lawyer, or who has the power to bind the organization through his actions. That would generally include all directors, executives, and managers.

Thus, the Third Circuit's decision is in line with the rules and comments. But I'm sure that I am not the only corporate lawyer troubled by this comment. It's time that the Court reviews the purpose and spirit of Rule 4.2 and does away with comment 7.

Comment 1 states that the purpose of Rule 4.2 is to protect parties from manipulation by opposing counsel. This protection extends to organizations: "Just as an adversary's attorney may take advantage of an individual party either by extracting damaging statements from him, by dissuading him from pursuing his claim, or by negatively influencing his expectations of succeeding on the merits, the same may occur in the case of an institutional or corporate party." University Patents, Inc. v. Kligman, 737 F. Supp. 325, 327-28 (E.D.Pa. 1990). I think this is an important point, because often it is assumed that corporations and their "constituents" (employees) are presumed to have sophisticated legal knowledge. This certainly is untrue. Ms. Barnett chose to target a secretary who may not have knowledge of the potential suit or sexual harassment complaints, and her choice was deliberate. She was able to glean information from this secretary that she would not have gotten from an executive.

But Rule 4.2 goes beyond just protecting parties - it protects the attorneys as well. "The focus of MRPC 4.2 is on the obligation of attorneys to respect the relationship of the adverse party and the party's attorney. See United States v. Lopez, 4 F.3d 1455, 1462 (9th Cir. 1993). The right belongs to the party's attorney, not the party, and the party cannot waive the application of the no-contact rule – only the party's attorney can approve the direct contact and only the party's attorney can waive the attorney's right to be present during a communication between the attorney's client and opposing counsel. See id." State v. Miller, 600 N.W.2d 457 (Minn. 1999). In theory, then, only an attorney can waive Rule 4.2's prohibition against communication with opposing counsel. This is in direct conflict with comment 7, which would allow opposing counsel to contact an employee without first conferring with the company's counsel.

Finally, for what it's worth, the Third Circuit consistently stated that Ms. Barnett should not be disciplined because the documents relinquished by the secretary were later obtained during (legal) discovery, and thus no harm was done. The court clearly misunderstands the nature of professional discipline. The Rules of Professional Conduct do not require actual damage. Comment 1 of Rule 8.4 states, "Lawyers are subject to discipline when they violate or attempt to violate the Rules of Professional Conduct. . . ." Therefore, even if information gained through illegal means is later uncovered in normal discovery, that fact is irrelevant to professional discipline.

Liability Protection for Importers and Distributors

Recently we have seen several filings and settlements of lawsuits against U.S. companies who imported faulty products from China. Many companies who do business in other struggling countries may not be fully protected. Indemnification laws and insurance practices may be different (or, occasionally, non-existent) and companies in poorer countries may not have the funds or value to indemnify large judgments that are awarded in American dollars. And even if the laws are on your client's side, your client will still face the expense of collecting a judgment in a foreign country. (See Vesna Jaksic, "Faulty Chinese Goods May Import Lawsuits," National Law Journal, July 3, 2007, http://www.law.com/jsp/ihc/PubArticleIHC.jsp?id=1183107995726&pos=ataglance.) The countries that many American companies do business with do have quality standards and laws in place, but they may not be consistent with U.S. standards, thus exposing your client to potential liability.

The basis of these suits is strict liability or breach of warranty. A purchaser can recover from a seller under a theory of strict liability if (1) the seller is engaged in the business of selling such a product, and (2) it is expected to and does reach the user without substantial change in the condition in which it is sold. McCormack v. Hankscraft Co., 278 Minn. 322, 338 n.15, 154 N.W.2d 488, 499 n.15 (1967) (quoting Restatement (Second) Torts § 402A (1965)). The Restatement Second of Torts section 402A gives the reasoning: "[T]he seller, by marketing his product for use and consumption, has undertaken and assumed a special responsibility toward any member of the consuming public who may be injured by it; [and] ... the public has the right to and does expect ... that reputable sellers will stand behind their goods." Furthermore, under the UCC sections 2-314 and 2-315 (Minnesota Statutes sections 336.2-314 and 336.2-315), the seller can be liable under an implied warranty of merchantability. UCC section 2-314(2)(c) requires that an item be fit for the ordinary purposes for which that item will be used. If the item is unfit (especially if it causes injury!), then the implied warranty of merchantability has been breached.

There are two ways that your client can protect itself from these suits. The first way is to have quality standards in line with U.S. law clearly drafted into the contract with the foreign company. Consider which laws you wish to include in your contract, and be specific when drafting. Including such standards in the contract will require your client to ensure that the foreign company is complying with the contract, but as they say, the best defense is a good offense.

Second, many large insurers (including Minnesota's own St. Paul Travelers) offer insurance policies specifically designed for companies importing foreign products. Many of these insurers also have risk management resources designed to assist companies with quality control overseas. Your client should talk to its insurer to determine whether it will need to update its insurance to manage the risks associated with its overseas operations or partnerships.

Will this lead to another Enron?

I recently wrote an article entitled, "Will this lead to another Enron?: The Supreme Court's Decision in Tellabs v. Makor." The full article is far too long to post here, but I'll give you a teaser:

"The Supreme Court’s holding in Tellabs v. Makor struck a blow to the fight against securities fraud. Many thought that securities law should – and could – be changed forever after Enron. Instead, it appears as though we have forgotten the lessons of Enron. If Sarbanes-Oxley was the step forward, then Tellabs must be the two steps back. Or is it? Before investors begin to fret and plaintiffs’ lawyers cry foul, a critical review of the case would be worthwhile."

For the full text of the article, e-mail me at elfesq@hotmail.com.