Category: Business Organizations

Now is a Good Time to Confirm Your S Corporation Status

On October 11, 2022, the IRS published Revenue Procedure 2022-19 providing taxpayers with liberalized procedures for resolving common S corporation issues. Previously, taxpayers would have needed costly IRS letter rulings for certainty on their S corporation status. The new procedures are simpler and less expensive.

The IRS has separately assured taxpayers that LLCs that are classified as S corporations may also qualify for this liberalized relief.

Inadvertent loss of S corporation status can have significant tax consequences and can make your business a less attractive acquisition target. For example, an S corporation that reverts to a C corporation may be subject to a double layer of tax going back several years. As a result, potential acquirers of any S corporation invariably request representations on the validity of the S corporation status.

The new Revenue Procedure describes common situations that the IRS has historically treated as not affecting the validity of S corporation status or qualified S corporation Qsub status, such as:

  1. One class of stock requirement in the governing provisions (including the concept that commercial contractual agreements are not treated as binding agreements unless a “principal purpose” of the agreement is to circumvent the one class of stock requirement);

  2. Disproportionate distributions inadvertently creating a second class of stock;

  3. Certain inadvertent errors or omissions on Form 2553 or Form 8869;

  4. Missing administrative acceptance letters for S corporation or Qsub elections;

  5. Federal income tax return filings inconsistent with an S election; or

  6. Governing provisions that allow for non-identical treatment of shareholders, such as differing liquidation rights (allowing for retroactive corrections).

For these common situations, there are now simpler and cheaper procedures to preserve S corporation status. For example, for certain small errors such as missing officer signatures, S corporations may follow the same simplified procedures as the late election relief procedures in Revenue Ruling 2013-30. Those procedures do not require a private letter ruling request, but only the original election form with a reasonable cause statement. As another example, if the issue is non-identical governing provisions and no disproportionate distributions were made, the S corporation may simply be retroactively treated as an S Corporation if it meets certain eligibility requirements and keeps a copy of a signed statement in its files.

Shareholders of uncertain S corporations should consider taking advantage of these new relaxed and cheaper procedures for curing S corporation mistakes. Each different type of error has a different cure with specific requirements.

Article By Christie R. Galinski and Samuel L. Parks of Miller Canfield

For more corporate law legal news, click here to visit the National Law Review.

© 2022 Miller, Canfield, Paddock and Stone PLC

Employers, It’s Time to Replace Your Mandatory EEOC Poster

On October 20, 2022, the U.S. Equal Employment Opportunity Commission (EEOC) released an updated version of its mandatory workplace poster that informs employees of their rights and protections.

Employers must post this new version of the poster in their office spaces as soon as practicable.

The latest “Know Your Rights” flyer, which replaces the previous “EEO is Law” poster, must be displayed in all workplaces covered by the agency’s jurisdiction. This includes private sector businesses with 15 or more employees, as well as state and local government agencies, educational institutions, unions, and staffing agencies.

What’s Changed?

The new poster includes several updates from the older version. Some of the main changes are:

  • Clarification that sex discrimination includes discrimination based on pregnancy and related conditions, sexual orientation, or gender identity;
  • Identifies harassment as a prohibited form of discrimination;
  • Provides information about equal pay discrimination for federal contractors; and
  • Uses more straightforward language and formatting.

The poster also includes a QR code for employees with a smartphone or other compatible devices to quickly access the EEOC’s website on how to file a charge of employment discrimination.

What’s Remained the Same?

While the poster has been updated, some of the information included remains the same. The bulletin still outlines the types of discrimination that are prohibited by federal law, such as:

  • Race, color, sex (including pregnancy and related conditions, sexual orientation, or gender identity), national origin, religion,
  • Age (40 and older),
  • Equal pay,
  • Disability,
  • Genetic information (including family medical history or genetic tests or services), and includes
  • Retaliation for filing a charge, reasonably opposing discrimination, or participating in a discrimination lawsuit, investigation, or proceeding.

Actions Employers Should Take

Employers who fail to post the new Know Your Rights poster could face noncompliance penalties from the EEOC. Therefore, businesses must take the time to update their posters as soon as possible.

On October 25, 2022, the EEOC distributed an FAQ stating that employers should remove the old poster and display the new one “within a reasonable amount of time” but did not provide a specific deadline.

The agency recommends that employers post the new flyer in a conspicuous place where employees will see it, such as in a break room or near the time clock.  Covered employers should also consider posting an online notice on their website for remote or hybrid workers.

You can download a copy of the poster here.

Article By Emily G. Massey and Ward and Smith, P.A.

For more labor and employment legal news, click here to visit the National Law Review.

© 2022 Ward and Smith, P.A.. All Rights Reserved.

Actual Malice in the Age of #fakenews

Public figures are fighting back against fake news.

In the most recent headline from the world of celebrity defamation cases, E. Jean Carroll is suing former President Trump for statements he made after she accused him of sexual assault. In a 2019 book and excerpt in New York magazine, Carroll, a longtime advice columnist for Elle magazine, accused Trump of sexual assault in the mid-1990s. Trump responded that Carroll was “totally lying” and not his “type.” Carroll sued Trump for defamation, claiming his statements had harmed her reputation. But Carroll—like all public figure defamation plaintiffs—has an uphill battle before her. To succeed, Carroll will have to prove that Trump’s statements were false, and—because Carroll is a public figure—she will also have to show that Trump acted with “actual malice.” The actual malice standard often proves to be too high a threshold for most public figures to cross, and most cases are lost on that prong—regardless of whether the statement was false. In fact, Johnny Depp was one of the few public figures in recent years to win a defamation suit.

So, what would it mean if the actual malice requirement was rescinded?

The seminal decision in New York Times Company v. Sullivan and its progeny are the backbone of defamation law in this country. These cases hold that public officials and public figures claiming defamation must prove that the allegedly defamatory statement was made, “with knowledge that it was false or with reckless disregard of whether it was false or not.” In other words, with “actual malice.” On the other hand, a private figure, or one who has not sought out the limelight, need only show the false statement was made negligently. Prior to Sullivan, all plaintiffs fell under the negligence standard.

Public figures who must meet this “actual malice” standard fall into two categories: (1) all-purpose public figures, with “pervasive fame or notoriety,” like Johnny Depp; and (2) limited-purpose public figures, like Carroll, who, in the words of Gertz v. Robert Welch, Inc., achieve their status by “thrust[ing] themselves to the forefront of particular public controversies in order to influence the resolution of the issues involved.” The Court rationalized that both categories of public figures have “invite[d] attention and comment.” Moreover, because “public figures enjoy “greater access to the channels of effective communication” than private individuals, they are better able to “contradict the lie or correct the error.”

In today’s age of social media, do these justifications still hold true? When Sullivan and its progeny came down, there was a clear delineation between public and private figures. Typically, public figures had media access, and private figures did not. Today’s social media landscape muddles that line. We are all just one post, tweet, or TikTok away from becoming public figures.

In 2019, in a case strikingly similar to Carroll’s, the Supreme Court declined to review a defamation case filed by Kathrine McKee against Bill Cosby. In 2014, McKee publicly accused Cosby of forcibly raping her 40 years earlier. In response, Cosby’s attorney authored and subsequently leaked an allegedly defamatory letter. Excerpts of the letter were disseminated via the Internet and published by news outlets around the world. McKee argued that the letter deliberately distorted her personal background to “damage her reputation for truthfulness and honesty, and further to embarrass, harass, humiliate, intimidate, and shame” her. Applying Sullivan and its progeny, the Court concluded because McKee had “‘thrust’ herself to the ‘forefront’” of the public controversy over “sexual assault allegations implicating Cosby,” she was a “limited-purpose public figure” who needed to show actual malice—regardless of whether the statements about her were false.

In a lone dissent, Justice Clarence Thomas noted that “in an appropriate case, [the Court] should reconsider the precedents” requiring public figures to satisfy an actual-malice standard. Justice Thomas later double-downed on his proffer in his dissents in Berisha v. Lawson, and most recently in Coral Ridge Ministries Media, Inc. v. Southern Poverty Law Center. In Berisha, pointing to the shift in the media landscape since Sullivan, Justice Neil Gorsuch joined Justice Thomas in calling to review the Sullivan decision, noting our new media world “facilitates the spread of disinformation.”

According to these Justices, in recent years Sullivan has become less of a shield and more of a sword. The “actual malice” standard allows spreaders of conspiracy theories, false accusations, and fake news to be virtually untouchable. In an era where misinformation spreads like wildfire, has the actual malice standard allowed journalists to become sloppy and irresponsible? Under this legal standard a journalist is better off printing a story without fact-checking. In fact, failing to thoroughly investigate, standing alone, does not prove actual malice. If the Court abolished that standard, public figures would be like every other defamation plaintiff and would only need to show that the false statement was made carelessly. In other words, instead of the defendant knowingly printing misinformation, a plaintiff would only need to show that the defendant didn’t bother checking if the information was true or false before making it.

Under this precedent, for years reporters, and individuals alike have been shielded from consequences of publishing falsehoods about public figures. Removing the “actual malice” standard would have sweeping effects on journalists and news platforms, and would make reputable news organizations more vulnerable to attack and open to further scrutiny. But responsible journalists would still remain protected. Truth remains an absolute defense to a defamation claim.

Between 2018 and 2020 the number of defamation suits filed increased by 30%. With “fake news” on the rise, more individuals falling into the “public figure” category, and technology moving at warp speed, the Court may have no choice but to rethink Sullivan. While it is unlikely that that 50 years of settled precedent would be overturned, Sullivan just might, at the very least, be revisited.

Article By Melissa Sarsten Polito of Epstein Becker & Green, P.C.

For more litigation and legal news, click here to visit the National Law Review.

©2022 Epstein Becker & Green, P.C. All rights reserved.

California PFAS Legislation Will Dramatically Impact Businesses

We previously reported on three significant pieces of California PFAS legislation that were before California’s Governor Newsom for ratification. Two of the bills were passed, which means that several categories of products will have applicable PFAS bans. The third bill was not signed by the Governor, which would have required companies to report certain data to the state for goods  sold in or otherwise brought into California that contain PFAS.

With increasing attention being given to PFAS in consumer goods in the media, scientific community, and in state legislatures, the California PFAS bills underscore the importance of companies anywhere in the manufacturing or supply chain for consumer goods to immediately assess the impact of the proposed PFAS legislation on corporate practices, and make decisions regarding continued use of PFAS in products, as opposed to substituting for other substances.  At the same time, companies impacted by the PFAS legislation must be aware that the new laws pose risks to the companies involvement in PFAS litigation in both the short and long term.

California PFAS Bills

One of our prior reports was on the first significant PFAS bill that Governor Newsom was expected to sign into law – AB 2771 – and which was indeed passed into law. The bill prohibits the manufacture, sale, delivery, hold, or offer for sale any cosmetics product that contains any intentionally added PFAS. The law would go into effect on January 1, 2025. The bill defines a cosmetics products as “an article for retail sale or professional use intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body for cleansing, beautifying, promoting attractiveness, or altering the appearance.”

The second bill signed into law by the Governor is AB 1817, which bans the use of PFAS in textiles manufactured and sold in California. More specifically, the bill prohibits, beginning January 1, 2025, any person from “manufacturing, distributing, selling, or offering for sale in the state any new, not previously owned, textile articles that contain regulated PFAS” and requires a manufacturer to use the least toxic alternative when removing PFAS in textile articles to comply with these provisions. The bill requires a manufacturer of a textile article to provide persons that offer the product for sale or distribution in the state with a certificate of compliance stating that the textile article is in compliance with these provisions and does not contain any regulated PFAS. The bill specifically regulates three categories of textiles:

(1) “Textile articles” means textile goods of a type customarily and ordinarily used in households and businesses, and include, but are not limited to, apparel, accessories, handbags, backpacks, draperies, shower curtains, furnishings, upholstery, beddings, towels, napkins, and tablecloths;

(2) “Outdoor apparel” means clothing items intended primarily for outdoor activities, including, but not limited to, hiking, camping, skiing, climbing, bicycling, and fishing; and

(3) “Apparel”, defined as “clothing items intended for regular wear or formal occasions, including, but not limited to, undergarments, shirts, pants, skirts, dresses, overalls, bodysuits, costumes, vests, dancewear, suits, saris, scarves, tops, leggings, school uniforms, leisurewear, athletic wear, sports uniforms, everyday swimwear, formal wear, onesies, bibs, diapers, footwear, and everyday uniforms for workwear…outdoor apparel and outdoor apparel for severe wet conditions.

The bill that California’s Governor vetoed was AB 2247, which would have established reporting requirements for companies that utilize products or substances that contain PFAS and which are used in California in the stream of commerce. “The bill would [have] require[d], on or before July 1, 2026, and annually thereafter, a manufacturer, as defined, of PFAS or a product or a product component containing intentionally added PFAS that, during the prior calendar year, is sold, offered for sale, distributed, or offered for promotional purposes in, or imported into, the state to register the PFAS or the product or product component containing intentionally added PFAS, and specified other information, on the publicly accessible data collection interface.”

Impact of California PFAS Legislation On Businesses

California PFAS legislation places some of the most significant and widely used consumer products in the crosshairs with respect to PFAS. While other states have banned or otherwise regulated PFAS in certain specific consumer goods, California’s bills are noteworthy given the economic impact that it will have, considering that California is the fifth largest economy in the world.

It is of the utmost importance for businesses along the whole cosmetics supply chain to evaluate their PFAS risk. Public health and environmental groups urge legislators to regulate these compounds. One major point of contention among members of various industries is whether to regulate PFAS as a class or as individual compounds.  While each PFAS compound has a unique chemical makeup and impacts the environment and the human body in different ways, some groups argue PFAS should be regulated together as a class because they interact with each other in the body, thereby resulting in a collective impact. Other groups argue that the individual compounds are too diverse and that regulating them as a class would be over restrictive for some chemicals and not restrictive enough for others.

Companies should remain informed so they do not get caught off guard. States are increasingly passing PFAS product bills that differ in scope. For any manufacturers, especially those who sell goods interstate, it is important to understand how those various standards will impact them, whether PFAS is regulated as individual compounds or as a class. Conducting regular self-audits for possible exposure to PFAS risk and potential regulatory violations can result in long term savings for companies and should be commonplace in their own risk assessment.

Article By John Gardella of CMBG3 Law

For more environmental legal news, click here to visit the National Law Review.

©2022 CMBG3 Law, LLC. All rights reserved.

The “Iron Curtain” has Fallen: A Radical Shift in Lawyers Representing Whistleblowers

Whistleblower Network News (WNN) recently revealed, for the first time, that major corporate law firms specializing in representing defendants before the U.S. Securities and Exchange Commission (SEC) have, in some cases, switched sides and are now representing whistleblowers who are turning in corporate fraudsters.  All but one of the firms identified by the SEC did not call public attention to their new-found client base – most likely because they did not want to upset their bread-and-butter corporate clients.  It appears that major corporate law firms now understand that the Dodd-Frank Act’s whistleblower reward provisions are incredibly effective in incentivizing corporate insiders to report fraud, even when those insiders are executives usually on the other side of a whistleblower issue.  Lawyers who traditionally represent whistleblowers understand that Dodd-Frank is well designed and is being professionally implemented by the SEC.  Corporate lawyers and their firms have apparently caught on to this new reality and are now representing whistleblowers.

That defense firms are now actively engaged in representing whistleblowers cannot be denied.  Lists of law firms that have prevailed in Dodd-Frank whistleblower cases, disclosed in response to Freedom of Information Act (FOIA) requests filed with the SEC, document that 9.3% of firms that have obtained rewards on behalf of whistleblowers were traditional defense firms.  These firms include some of the largest defense firms in the United States that represent numerous corporations subjected to SEC enforcement actions for violating securities laws as well as firms that have defended corporations against whistleblowers in retaliation cases.

If that statistic holds, it is clear hundreds of corporate defense firms or their attorneys are representing whistleblowers in confidential investigations.  Why are these cases still under review?  Dodd-Frank is still a young law, and the vast majority of cases have not yet resulted in formal reward determinations.  Cases often take five years or more to be finalized, and as of the end of Fiscal Year 2021 over 51,000 whistleblower cases had been filed with the SEC.  Furthermore, under the FOIA requests the SEC only released the names of law firms that prevailed in a whistleblower case.  The names of firms that did not prevail in a claim, or firms that represent whistleblowers in ongoing investigations, were not disclosed.

Time will tell whether defense firms’ representation of whistleblowers who accuse their employers (or other corporate wrongdoers) of fraud is a good or bad development.  But unique issues will arise whenever a firm that primarily generates its profits from representing corporations accused of wrongdoing switches sides and represents a whistleblower who has accused an executive of engaging in fraud.  Although such representations may be permitted under the attorney’s rules of ethics, this does not mean that such representations are always in the best interest of a lawyer’s clients.  There are inherent potential conflicts whenever a defense firm switches sides and decides to represent a whistleblower reporting major corporate crimes.

Regardless of where you stand on this issue, one thing is clear: the ethical, policy and legal implications of defense firms representing whistleblowers is a dramatic shift in legal practice and must be carefully evaluated.  Defense firms must understand that whenever they represent a whistleblower, they must zealously advocate on their behalf, even when the precedents set by their cases may be used against their corporate clients.  Likewise, whistleblowers need to be aware of the implications of choosing a lawyer whose primary practice is representing corporate crooks.  Conflicts of interest may not initially be visible but can unfold as a case progresses.

The Revelation

In August of 2022, Bloomberg Law and a draft non-peer-reviewed article published by University of Kansas Professor Alexander Platt raised the issue of which law firms represent whistleblowers.  Bloomberg and Platt obtained lists of law firms that prevailed in Dodd-Frank whistleblower cases.  They used the lists to identify a small number of firms, all of which could be classified as pro-whistleblower firms.  These firms’ practices are centered on fighting corporate fraud and speculated whether these firms were being given preferential treatment by the SEC. Neither publication offered proof of any wrongdoing.  But Platt and Bloomberg did not list all the law firms that prevailed in Dodd-Frank cases.  Significantly, neither even mentioned the fact that major defense law firms had already filed and won Dodd-Frank cases on behalf of whistleblowers.  Additionally, the two authors did not explore the special issues that could arise when firms dedicated to defending white-collar criminals quietly switch sides.

In response to Platt and Bloomberg, WNN filed its own Freedom of Information Act (FOIA) request to obtain access to the documents relied upon in the two articles.  The SEC released over 1000 pages of documents to WNN, including all its correspondence with Platt and all the records provided to Platt (and Bloomberg) that identified law firms that successfully represented whistleblowers.

On September 27, 2022, WNN revealed, for the first time, that the SEC had identified 64 law firms that successfully obtained a reward on behalf of a whistleblower.  Among those firms were six that primarily represent corporations and individuals accused of corporate crimes.  These defense firms included industry giants such as Winston & Strawn and Akin Gump.  Together, the defense firms have already obtained over $56 million in rewards on behalf of whistleblowers.  In response to the Platt, Bloomberg, and WNN FOIA requests, the SEC only identified firms that had already prevailed and obtained a reward on behalf of their clients. Approximately 50,000 cases are pending within the SEC’s reward program, and there is a long delay in processing whistleblower cases.  Therefore, one can assume that numerous other pending cases where these or other defense firms are actively representing whistleblowers that were not disclosed by the SEC.

It is important to note that the Dodd-Frank provisions only apply to large fraud cases.  No reward is available unless the SEC issues sanctions against the entity being investigated in excess of $1 million.  Thus, the cases previously targeted by the defense firms and currently under investigation by the SEC would implicate major frauds.

The defense firms identified by WNN as being listed in the SEC-released materials were:

Winston & Strawn, LLP:  Winston advertises itself as defending “companies and individuals in SEC enforcement and regulatory matters related to allegations involving securities fraud.”  But not mentioned on its webpage is that it also represented a securities law whistleblower who obtained a $2.2 million reward.

Akin Gump Strauss Hauer & Feld LLP: Akin Gump also describes its practice as representing “companies and individuals” under investigation by various regulatory agencies, including the SEC.  Akin’s attorneys obtained a Dodd-Frank reward of $800,000 award.

Haynes and Boone, LLP: This 600-lawyer defense firm’s website explained that it has “represented employers” in “whistle blowing.”  However, the SEC documents revealed the firm also represented a whistleblower who obtained a “20%” award against a corporate fraudster.

Levine Lee LLP:  Although this firm markets itself as successfully representing clients accused of violating anti-fraud laws, like the other defense firms, it has apparently started a whistleblower practice and obtained a reward of $10 million on behalf of a whistleblower.

Leader Berkon Colao & Silverstein LLP:  This defense firm prevailed in cases filed on behalf of two separate whistleblowers and had considerable success.  Their whistleblower clients obtained $15 million and $27 million in awards.

Sallah Astarita & Cox, LLC: Although this firm “regularly represents financial institutions” in “fraud” cases, the firm also represented a whistleblower who obtained a $1.8 million award.  Sallah Astarita was the only firm that listed its Dodd-Frank Act whistleblower case on its website as among the victories achieved by one of its partners.

The SEC’s Dodd-Frank Whistleblower Program

Professor Platt and Bloomberg Law criticized the SEC’s Dodd-Frank program as having a bias in favor of a small number of whistleblower-rights law firms that had employed former SEC lawyers.  However, the information revealed by WNN completely refuted this negative implication raised by Platt and Bloomberg.  Instead, the FOIA documents support a finding that the SEC program is a paradigm of fairness and openness.  The extensive correspondence between Platt and the SEC demonstrates that the Commission freely disclosed the names of the firms that had won cases while carefully balancing the confidentiality needs of the whistleblower clients.  These numbers illustrate a program open to law firms regardless of their reputation or whether they employ former government lawyers.  They also reveal a program open to working directly with whistleblowers and rewarding them even if they had no lawyer.  Not one document produced provided any evidence whatsoever of wrongdoing, bias, or unprofessionalism.  The numbers speak for themselves:

  • Over 50 pro se whistleblowers won cases on their own behalf.  This high percentage of unrepresented applicants who successfully navigated the SEC’s program is remarkable.  In other legal programs, pro se whistleblowers (and other unrepresented persons) lose the vast majority of their cases.  Not so under Dodd-Frank. This demonstrates a high level of commitment by the SEC to helping individual whistleblowers who could not afford or obtain lawyers.
  • Of the 64 law firms that prevailed in a Dodd-Frank reward claim, only 12 had hired former SEC lawyers to assist in the cases.  Thus, the vast majority of successful law firms (52 of the 64) had no “insider” connection to the SEC.   This fact demonstrates the Commission’s staff’s willingness to work closely with attorneys who had no “friends” in the agency and whose information was solely merit-based. Moreover, a significant percentage of the firms that did employ former SEC or Justice Department lawyers were the very defense firms that Bloomberg Law and Platt did not discuss or analyze.
  • The Commission’s staff demonstrated no bias against firms based on their practice areas.  The Commission’s enforcement staff and Whistleblower Office worked with law firms that were defense-based (6) and law firms that traditionally represent whistleblowers or employees in lawsuits against companies (many of the remaining 58).

The FOIA documents support a finding that the Commission’s staff is open to whistleblowers, regardless of whether they represent themselves or whether or not the firms raising the concerns have any “insider” connections.   Organizations such as the National Whistleblower Center, which regularly works with whistleblowers, have widely praised the program, as have the last three Chairs of the SEC, appointed by Presidents Obama, Trump, and Biden.  The Commission itself confirmed that as of September 2021, it returned over $1.3 billion to harmed investors based on whistleblower cases.

The Future Role of Defense Firms in Dodd-Frank Cases

The SEC cannot implement special rules that would be prejudicial to traditional defense firms that file whistleblower cases.   Likewise, whistleblowers have the right to hire counsel of their choice and, in most cases, can knowingly waive potential conflicts of interest.  But the mere fact that traditional defense firms can lawfully represent whistleblowers without violating any SEC or local Bar rules does not address the special problems that may exist when a defense firm represents a whistleblower.  For example, such representations can result in significant conflicts of interest that may not be apparent at the commencement of a case. This may result in the whistleblower’s attorneys not advocating for legal precedents that could harm their other corporate clients.

Traditional defense firms should implement internal procedures to guard against potential problems based on the obvious conflicts that can arise when they represent clients on both sides of whistleblower-disclosure cases.  More significantly, it is absolutely crucial that whistleblowers fully understand the potential for conflicts of interest when deciding on the best attorneys to hire.  Attorneys working for defense firms must clearly spell out these issues and ensure that when representing a whistleblower, their prospective client is fully aware of all the risks and limitations.

Among the rules, procedures, and practices that defense firms should implement or carefully consider are:

  1. At the very least, defense firms representing whistleblowers should identify this on their websites.  Corporate clients should know that the firm also represents whistleblowers and should be able to question counsel on these matters so they feel comfortable that no conflicts would arise.
  2. Whistleblower clients need full disclosure of how the defense firm’s primary practice may impact the representation.  This is particularly true whenever a case would require advocacy on behalf of a whistleblower that could expand legal interpretations benefiting whistleblowers.  It is hard to reconcile how a law firm defending some clients against whistleblowers can effectively argue before administrative agencies or courts of law legal precedents that could expand the rights of whistleblowers.  These expanded rights could and would ultimately not be to the advantage of corporate clients accused of wrongdoing.
  3. Similarly, defense firms need to reconcile how they can advocate for a whistleblower who engaged in tactics, such as removing documents or one-party tape recording, that their corporate clients may find offensive.  This is particularly true when the zealous representation of a whistleblower requires expanding the ability of whistleblowers to obtain evidence of wrongdoing, and the precedent this advocacy establishes may be used against the firm’s current or future corporate clients.
  4. The potential for a conflict of interest needs to be fully explored in every case.  One issue that firms and clients may not be fully aware of is how the “related action” provisions of the laws impact potential conflicts.  Once the SEC obtains a sanction of over $1 million in any case, all “related actions” become eligible for a reward.  Sanctions issued by other law enforcement or regulatory agencies based on “related” claims can form the basis of a reward.   When examining whether a conflict exists, law firms need to look beyond the SEC action and determine witnesses, parties, and issues that may be implicated in a “related action.” This determination is critical even if the related action is not based on any securities law violation.
  5. Defense firms can also explore ways to refer potential whistleblower clients to attorneys whose practices are based solely on representing whistleblowers.  These referrals would help ensure that the defense firm is not conflicted (either as a matter of ethics or marketing) and that the client can obtain the best counsel.

Conclusion: The Iron Curtain has Fallen

Whistleblower representation is entering a new world.  The “iron curtain” that formerly separated law firms that represent corporate crooks from those that represent whistleblowers has fallen. This new reality is not without serious risks to whistleblowers (and corporate clients).  Whistleblowers must be fully aware of the dangers of having a corporate law firm represent them.  Corporate law firms must institute procedures to guard against conflicts of interest and to ensure they can zealously represent whistleblowers.  Zealous representation is needed even when the precedents established in these cases may create trouble for their other client base.

At the end of the day, the fact that defense law firms are now representing whistleblowers affirms the success of Dodd-Frank.  It is an affirmation of the critical nature of the information whistleblowers provide to the government and the role of this insider information in stopping otherwise hard to detect corporate crimes.  The “iron curtain” has fallen, but it has fallen in the direction that helps whistleblowers.  It has fallen in the direction that affirms the quality of their disclosures. It refutes the often-repeated slander that whistleblowers are somehow simply disgruntled employees.

Whistleblowers are essential to ensuring fairness in the markets, holding wrongdoers accountable, and deterring future wrongdoing.  The SEC has publicly recognized this, and now leading corporate defense attorneys have quietly recognized it. Defense firms like Akin Gump, Winston and Strawn, and Hayes and Boone got it right when they advocated for paying whistleblowers substantial rewards.  Whistleblowers whose information holds corporate criminals accountable deserve large rewards. These rewards are in the public interest, and the SEC Dodd-Frank whistleblower program must be protected, enhanced and expanded.

Sources:

  1. Whistleblower Network News, “WNN Exclusive: SEC FOIA Documents Reveal Big Law Defense Firms are Confidentially Representing Dodd-Frank Whistleblowers,” (September 27, 2022)
  2. List of Law Firms that Obtained Rewards in Whistleblower Cases as of 2021
  3. List of Awards Obtained by the Six Defense Law Firms
  4. List of pro se Cases where Whistleblowers Obtained a Reward
  5. FAQ on the SEC’s Dodd-Frank Act program
  6. FAQ on Confidentiality of Dodd-Frank Act claims

Article By Stephen M. Kohn of Kohn, Kohn & Colapinto

For more criminal law and business crimes legal news, click here to visit the National Law Review.

Copyright Kohn, Kohn & Colapinto, LLP 2022. All Rights Reserved.

California Enacts Legal Protections for Cannabis Insurance Providers

Several cannabis-related bills were signed by California Governor Gavin Newsom on September 18, 2022, including Assembly Bill 2568 (AB 2568), which clarifies that it is not a crime for individuals and firms licensed by the California Department of Insurance (CDI) to provide insurance or related services to persons licensed to engage in commercial cannabis activities. Though the California Civil Code was amended in 2018 to clarify that cannabis is the legal object of a contract, and it has been tacitly understood that insurance contracts are legal in California, the intent of this new law is to remove any uncertainty and to encourage further growth of admitted insurance products for California cannabis businesses.

AB 2568 adds section 26261 to the California Business and Professions Code, which states in relevant part: “An individual or firm that is licensed by the Department of Insurance does not commit a crime under California law solely for providing insurance or related services to persons licensed to engage in commercial cannabis activity pursuant to this division.”

Intent of the Law

The California Assembly’s Committee on Insurance explained the intent behind AB 2568 in a report issued earlier this year:

“The hesitancy of insurance providers to provide insurance for commercial cannabis is attributed to risk, since cannabis is classified as a Schedule I substance under the Federal Controlled Substances Act. Therefore, much of the insurance available in California is from surplus lines. This does not align with the federal government’s longstanding determination that it is in the public’s interest for states to regulate their own insurance marketplaces. Further, the argument has been refuted in federal case law brought about in Green Earth Wellness Center v. Attain Specialty Insurance Company (2016), which established that federal classification of cannabis is not relevant in an insurance provider’s determination to write an insurance policy.

It is important that commercial cannabis businesses have multiple options for insurance as they pursue licensure. AB 2568 clarifies that writing insurance for commercial cannabis does not constitute a crime, since cannabis is part of a legal, regulated market in California. This clarity will provide assurances to admitted insurers that they will not be in violation of any regulations and encourage them to provide an insurance product.”

In addition, AB 2568 was strongly supported by CDI, which argued that “we must provide commercial cannabis businesses with multiple, affordable options for insurance as they pursue and maintain state licensure.” CDI supports AB 2568 in part to “promote reliable insurance coverage for all aspects of these cannabis businesses to ensure that these businesses can continue to flourish just like any other business in this state.”

In a separate analysis, the California Senate Committee on Insurance inquired as to whether the bill would achieve the intended result of expanding insurance options for cannabis businesses. It concluded:

“This bill expressly states a protection under California Law for CDI licensees. This protection has been implied since the legalization of recreational cannabis in 2016, and in that same year a federal court gave a nod to insurers that writing cannabis [insurance] is permissible, but only one admitted company has fully waded into the market. On the one hand, insurers are famously risk averse, so this express statement of state law may go a long way for some to take the risk to sell cannabis coverage. But, federal illegality of cannabis could always be the larger barrier to entry for some companies than what the state laws say.”

The Senate report concludes that more study is needed to “consider additional efforts to effectuate the stated goal of growing the domestic market for cannabis insurance.”

Analysis

AB 2568 does not materially change existing California law since providing insurance services to properly licensed California businesses has been legal under state law since at least 2018. The bill, however, is meant to remove any lingering doubt on the topic and to encourage more insurance service providers to enter the market.

As we have previously reported, it is reasonable to conclude that the risk-benefit calculus has adequately shifted to justify entrance into the cannabis market without an unreasonable fear of prosecution. This certainly is true for the insurance industry.

Congress continues to prohibit the Department of Justice and other federal agencies from spending money to prosecute conduct that complies with state medical marijuana laws. Federal law enforcement, meanwhile, has not initiated any prosecution against a plant-touching or ancillary business involved in either adult-use cannabis or medical marijuana where the underlying marijuana business activity was compliant with state law and there was no other independent violation of law.

Despite this favorable outlook, it must be acknowledged that, without a change to the status quo, some degree of theoretical legal risk remains present for any plant-touching or ancillary business in the marijuana industry. Any decision to provide insurance-related services to the cannabis industry must be based on a well-informed understanding of the legal risks and the very challenging operating environment for state-licensed cannabis companies.

For more Food and Drug Legal news, click here to visit the National Law Review.

© 2022 Wilson Elser

NAVEX Report Reveals Increase in Whistleblower Retaliation and Reporting of Misconduct

NAVEX’s 2022 Risk & Compliance Hotline & Incident Management Benchmark Report reveals an increase in internal reporting about misconduct and an increase in allegations of retaliation.  The analysis of data from 3,470 organizations that received more than 1.37 million individual reports identified the following trends (see the full report for a discussion of additional trends and analysis of the data):

  • “More actual allegations of misconduct, rather than inquiries about policies or possible misconduct. Ninety percent of all reports in 2021 were allegations of misconduct, up from 86 percent last year and hitting an all-time high since our first benchmark report more than ten years ago.”

  • “Reports about retaliation, harassment and discrimination jumped – especially retaliation. In 2021, reports of retaliation nearly doubled . . . Taken altogether, these findings suggest employees are more attuned to workplace civility issues. That would fit with external trends such as more talk about systemic racism, income inequality and political divisions; as well as increasing protection for whistleblowers and employees’ awareness of  those protections.”

  • “Substantiation rates continue to edge upward. Overall substantiation rates rose from 42 percent in 2020 to 43 percent in 2021, and up from 36 percent a decade ago. The reports substantiated most often were data privacy concerns (63 percent), environmental issues (59 percent), and confidential and proprietary information (54 percent). The reports substantiated least often were about retaliation (24 percent).”

  • “The substantiation rate for reports of retaliation also went up slightly, from 23 percent in 2020 to  24 percent in 2021 – the highest substantiation rate seen since 2016. While steady, this substantiation rate is significantly below the overall median case substantiation rate of 43 percent in 2021. These cases, though difficult to prove, warrant attention.”

  • “Reports of harassment exceeded levels from the height of the #MeToo movement.”

Corporate Whistleblower Protections

Whistleblower retaliation remains all too prevalent.  A September 14, 2022 Bloomberg article titled Whistleblower retaliation remains all too prevalent discusses how “choosing to be a whistle-blower can also be a lonely, risky road” and identifies many deterrents to speaking up – “[t]hey may be afraid of litigation, ruining their reputations, losing security clearances or facing jail time.”

Fortunately, federal and state laws afford corporate whistleblowers remedies to combat retaliation, and whistleblower reward laws incentivize whistleblowers to take the considerable risks entailed in reporting fraud and other wrongdoing to the government.  For example, the

SEC Whistleblower Program offers awards to eligible whistleblowers who provide original information that leads to successful SEC enforcement actions with total monetary sanctions exceeding $1 million. A whistleblower may receive an award of between 10% and 30% of the total monetary sanctions collected in actions brought by the SEC and in related actions brought by other regulatory or law enforcement authorities. The SEC Whistleblower Program allows whistleblowers to submit tips anonymously if represented by an attorney in connection with their tip.

What is Whistleblower Retaliation?

Whistleblower retaliation laws prohibit a broad range of retaliatory actions against whistleblowers, including any act that would dissuade a worker from engaging in protected whistleblowing.  Examples of actionable whistleblower retaliation include:

  • Terminating a whistleblower;

  • Constructively discharging a whistleblower;

  • Demoting a whistleblower;

  • Suspending a whistleblower;

  • Harassing a whistleblower or subjecting the whistleblower to a hostile work environment;

  • Reassigning a whistleblower to a position with significantly different responsibilities;

  • Issuing a performance evaluation or performance improvement plan that supplies the necessary foundation for the eventual termination of the whistleblower’s employment, or a written warning or counseling session that is considered discipline by policy or practice and is routinely used as the first step in a progressive discipline policy;

  • Placing the whistleblower on administrative leave;

  • Threatening to take an adverse action against a whistleblower;

  • Subjecting a whistleblower to a retaliatory investigation or retaliatory surveillance;

  • Suing a whistleblower for the purpose of retaliating against the whistleblower;

  • Outing a whistleblower;

  • Intimidating a whistleblower;

  • Initiating a law enforcement investigation or facilitating an employee’s detention by U.S. ICE after the employee reported a serious injury; or

  • Discriminating against a whistleblower in the terms and conditions of employment because of whistleblowing.

The DOL Administrative Review Board has emphasized that statutory language prohibiting discrimination “in any way” must be broadly construed and therefore a whistleblower need not prove that a retaliatory act had a tangible impact on an employee’s terms and conditions of employment.

What Damages Can a Whistleblower Recover in a Whistleblower Retaliation Case?

Whistleblower retaliation can exact a serious toll, including lost pay and benefits, reputational harm, and emotional distress.  Indeed, whistleblower retaliation can derail a career and deprive the whistleblower of millions of dollars in lost future earnings.

Whistleblowers should be rewarded for doing the right thing, but all too often they suffer retaliation and find themselves marginalized and ostracized.  Federal and state whistleblower laws provide several remedies to compensate whistleblowers that have suffered retaliation, including:

  • back pay (lost wages and benefits);

  • emotional distress damages;

  • damages for reputational harm;

  • reinstatement or front pay in lieu thereof;

  • lost future earnings; and

  • punitive damages.

Combating Whistleblower Retaliation: How to Maximize Your Recovery

Whistleblower protection laws can provide a potent remedy, but before bringing a retaliation claim, it is crucial to assess the options under federal and state law and develop a strategy to achieve the optimal recovery.  Key issues to consider include the scope of protected whistleblowing, the burden of proof, the damages that a prevailing whistleblower can recover, the forum where the claim would be litigated, and the impact of the retaliation claim on a whistleblower rewards claim.

Scope of Protected Whistleblowing

There is no federal statute that provides general protection to corporate whistleblowers.  Instead, federal whistleblower protection laws protect specific types of disclosures, such as disclosures of securities fraud, tax fraud, procurement fraud, or consumer financial protection fraud.  The main sources of federal protection for corporate whistleblowers include the whistleblower protection provisions of the following:

  • The False Claims Act (FCA) — protecting disclosures about fraud directed toward the government, including actions taken in furtherance of a qui tam action and efforts to stop a violation of the FCA;

  • The Defense Contractor Whistleblower Protection Act (DCWPA) — protecting whistleblowing about gross mismanagement of a federal contract or grant; a gross waste of federal funds; an abuse of authority relating to a federal contract or grant or a substantial and specific danger to public health or safety, or a violation of law, rule, or regulation related to a federal contract;

  • The Sarbanes-Oxley Act (SOX) — protecting disclosures about mail fraud, wire fraud, bank fraud, securities fraud, a violation of any SEC rule, or shareholder fraud;

  • The Dodd-Frank Act (DFA) — protecting whistleblowing to the SEC about potential violations of federal securities laws;

  • The Taxpayer First Act (TFA) — protecting disclosures about tax fraud or tax underpayment;

  • The Consumer Financial Protection Act (CFPA) — protecting disclosures concerning violations of Consumer Financial Protection Bureau rules or federal laws regulating unfair, deceptive, or abusive practices in the provision of consumer financial products or services; and

  • The Anti-Money Laundering Act (AMLA) — protecting disclosures about violations of the Bank Secrecy Act.

While most of these anti-retaliation laws protect internal disclosures (e.g., reporting to a supervisor), whistleblower protection under the DFA is predicated on a showing that the whistleblower disclosed a potential violation of federal securities law to the SEC prior to suffering an adverse action.

State law may also provide a remedy, including the anti-retaliation provisions in state FCAs.  And approximately 42 states recognize a common law wrongful discharge tort action (a public policy exception to at-will employment), which generally protects refusal to engage in illegal activity and the exercise of a statutory right.

Burden of Proof

To maximize the likelihood of winning a case (or at least getting the case before a jury), it is useful to select a remedy with a favorable causation standard (the level of proof required to link the protected whistleblowing to the adverse employment action).  SOX has a favorable “contributing factor” causation standard, i.e., the whistleblower prevails by proving that their protected whistleblowing affected in any way the employer’s decision to take an adverse action.  In contrast, the FCA and DFA require the whistleblower to prove “but for” causation, i.e., the adverse action would not have happened “but for” the protected whistleblowing (albeit there is no need to prove that it was the sole factor).

Damages and Remedies in Whistleblower Retaliation Cases

Variations in the remedies available to whistleblowers under federal anti-retaliation laws may warrant bringing more than one claim.  For example, the DCWPA authorizes an award of back pay (the value of lost pay and benefits), and the FCA authorizes an award of double back pay.  If the whistleblower’s disclosures are protected under both statutes, then the whistleblower should bring both claims.

While a prevailing whistleblower can recover back pay under both the DFA and SOX (double back pay under the former and single back pay under the latter), the DFA does not authorize special damages, i.e., damages for emotional distress and reputational harm.  In contrast, SOX authorizes uncapped compensatory damages.  Therefore, a whistleblower protected under both statutes should bring the SOX claim within the much shorter SOX statute of limitations (180 days) to recover both double back pay and special damages.

State law may also provide a remedy, and if the whistleblower can pursue both a statutory remedy and a wrongful discharge tort, the latter may offer the opportunity to seek punitive damages.

Forum Selection and Administrative Exhaustion

When selecting the optimal remedy to combat retaliation, a whistleblower should consider the forum where the claim would be tried and determine whether the claim must initially be investigated by a federal agency before the whistleblower can litigate the claim.  SOX provides an unequivocal exemption from mandatory arbitration, but Dodd-Frank claims are subject to arbitration.  Accordingly, a whistleblower protected both by SOX and Dodd-Frank should file a SOX claim within the 180-day statute of limitations to preserve the option to try the case before a jury.

Several of the corporate whistleblower protection laws require that the whistleblower file the claim initially at a federal agency and permit the agency to investigate the claim before the whistleblower can litigate the claim.  This is called administrative exhaustion, and failure to comply with that requirement can waive the claim.  In contrast, the FCA and DFA do not require administrative exhaustion.

Impact of Whistleblower Retaliation Claim on Whistleblower Rewards Claim

Another important consideration is the potential impact of a retaliation case on a qui tam or whistleblower rewards case.  Filing an FCA retaliation claim while a qui tam suit is under seal poses some risk of violating the seal, which could bar the whistleblower from recovering a relator share.  Therefore, counsel should consider filing the FCA retaliation claim under seal along with the qui tam suit.

Further, whistleblowers pursuing rewards claims at federal agencies (e.g., SEC or IRS whistleblower claims) while simultaneously pursuing related retaliation claims (e.g., a SOX or TFA claim) should assess the potential impact of the retaliation claim and the potential discoverability of submissions to the SEC or IRS on the rewards claim(s).

Although the patchwork of whistleblower protection laws fails to protect disclosures about certain forms of fraud, there are important pockets of protection.  To effectively combat retaliation, whistleblowers should avail themselves of all appropriate remedies.

Article By Jason Zuckerman and Matthew Stock of Zuckerman Law

For more criminal law / business crimes legal news, click here to visit the National Law Review.

© 2022 Zuckerman Law

Transforming Business: Exploring Pathways for Women to Join and Impact Corporate Boards

Womble Bond Dickinson hosted a “Transforming Business: Exploring Pathways for Women to Join and Impact Corporate Boards” panel discussion at the Post Oak Hotel in Houston. WBD Chair & CEO Betty Temple joined 50/50 Women on Boards Houston Founder & Chair Susan Knight (moderator), TechnipFMC Executive VP, Chief Legal Officer & Secretary Victoria Lazar and Duy-Loan Le, a Board of Directors member for Wolfspeed, National Instruments, Ballard Power Systems and Atomera and a retired Senior Fellow at Texas Instruments. The panelists also offered insights into how women can make a lasting impact on corporate boards, and this article is based on that discussion.

The issue of women on corporate boards is a classic glass-half-full/glass-half-empty conundrum.

On one hand, the percentage of women on corporate boards reached an all-time high in 2021, and female board representation has grown substantially in the past decade alone. On the other hand, women still make up only 27 percent of Russell 3000 company boards of directors, according to a recent report by 50/50 Women on Boards. Only nine percent of those companies have gender-balanced boards.

Women Representation on Corporate Boards

Percentage of Female Directors on S&P 500 Boards

2021: 30 percent
2020: 28 percent
2011: 16 percent

Percentage of Boards with Two or More Women Directors

2021: 96 percent
2011: 58 percent

Source: 2021 U.S. Spencer Stuart Board Index

Le said, “In the field of technology, especially in the boardroom, often I’m the only woman.” This was particularly true when she joined her first public board 20 years ago, she said, and while Le sees more women in corporate leadership today, she still feels as if she is in a predominantly male world.

Getting appointed to a corporate board—or even a civic or non-profit board—isn’t easy, particularly for women. But the pathway to board membership is clearer than ever for women, thanks in large part to the work of women who have blazed that trail.

Self-Assessment Key to Finding the Right Board

To those outside the boardroom, a board of directors may seem like a closed, secret society. But the panelists said that joining a corporate board actually is much more akin to applying for a job, albeit a job that isn’t publicly advertised.

“The first step on a board journey is to show interest in leadership,” Lazar said.

“It is a journey – it’s not something you can do overnight,” Temple said. Looking back, she said she would have changed her initial approach to board service, even though she was actively counseling public company boards as an attorney at the time.

“I would try to build a resume for a board with the strengths I have to be a fiduciary to a company. They want you to be strategic—to think about the business and where it is going. So you need to be thoughtful about how you can help,” Temple said. For example, if candidates have proven experience in finance, legal, human resources, communications or policy matters, they should showcase those skills.

Temple said, “Boards are looking for specific skillsets so you can be an asset on day one. It’s difficult to be a director-in-training.”

But first, she recommends candidates do a self-assessment of their areas of strength and experience, so they can find corporate boards that are the best fit.

“The key is not to spread the net too wide but focus on where you can have a real impact,” Temple said.

“The key is not to spread the net too wide but focus on where you can have a real impact.”

BETTY TEMPLE, CHAIR & CEO OF WOMBLE BOND DICKINSON

Knight said that board opportunities can include non-profit, advisory, private equity and private company boards, too. “The common thread is that you have a fiduciary responsibility,” she said.

While board members come from a variety of professional backgrounds, many are attorneys or have legal experience.

“There is a large population of potentially qualified board members who are attorneys. It’s a good time to be an attorney looking to serve on a board,” Lazar said. However, she cautioned that companies neither want nor need a “Second General Counsel” on the board. Attorneys have the skills and background to guide companies strategically and help them spot potential problems before they arise. This background is particularly valuable during a corporate restructuring, Lazar said. But lawyers on the board shouldn’t try to micromanage or second-guess the company’s in-house legal team.

She also said attorneys need to bring more than legal experience to the board room. Other skills and experiences are invaluable to board service and should not be ignored.

Finally, Le said building strong relationships is critical to being considered for board service. Candidates who demonstrate a selfless desire to help others are best positioned to earn the type of trust necessary to be selected.

“In all of my experiences, boards came to me – not because I’m better than anyone else, but because they know me,” she said. “Reach out, spread your wings and help other people without expecting anything in return. That’s how people come to know you and want you to be part of their team.”

“There is a large population of potentially qualified board members who are attorneys. It’s a good time to be an attorney looking to serve on a board.”

VICTORIA LAZAR, EXECUTIVE VP, CHIEF LEGAL OFFICER & SECRETARY OF TECHNIPFMC

Finding the Board that Fits

Women absolutely need to assess their personal skills, strengths and experience when they decide to pursue board membership. They also need to pay close attention to the companies they wish to serve and the other board members they would be serving with. The panelists said the first opportunity for board service may not always be the right opportunity.

“I needed to meet the people I was going to be serving with in person. Do we share the same values? Can I collaborate with them? The chemistry was very important,” Le said.

Lazar said networking is a great way to build the types of relationships that lead to board service.

“There are hundreds of ways to meet people who are in position to recommend you for a board,” she said. These include professional organizations, community and civic groups, economic development organizations, bar associations (for attorneys) and more. Getting involved in such organizations can offer valuable leadership opportunities, as well as the chance to get to know corporate board members.

“Work your network and work your resume, so when you have the opportunity, you have demonstrated leadership. Be ready when they tap you on the shoulder,” Temple said.

“Work your network and work your resume, so when you have the opportunity, you have demonstrated leadership. Be ready when they tap you on the shoulder.”

BETTY TEMPLE

What to Know about Board Service

Finding the right fit and getting on a corporate, civic or non-profit board is just the beginning. The panelists all have extensive experience with board service and shared some of their recommendations for finding success as a board member.

For example, Le said board members need to protect themselves from legal liability when they agree to become a board member.

“I’d never serve on a public board without directors and officers (D&O) insurance,” she said, noting that if board members exercise their best judgment and put the company’s interests first, they generally have nothing to worry about.

Temple also noted that board members need to be prepared to serve on committees. Public companies are required to have Audit, Compensation, and Corporate Governance/Nominating & Governance committees. Women who want to serve on boards should consider how their skillsets and experience can benefit those committees. For example, having a background in human resources or corporate compensation is great experience for serving on a compensation committee. Likewise, candidates with experience in ESG or diversity, equity and inclusion (DEI) may be a good fit for a corporate governance committee.

“Committees are a big part of board service, and it is a lot of work – and it’s not just the meetings. Before the meetings, we get hundreds of pages to review,” Le said. “The decisions you make are consequential. Your decisions impact individuals and their lives.”

Lazar also noted that private company boards can be far different from those at public companies. At public companies, the separation between the board of directors and corporate leadership is established by federal law. But at a privately held company, the barriers between board members and corporate leadership may be blurred. Board candidates at a private company need to investigate the boardroom dynamic up front before they agree to join.

Hiring a CEO

Hiring (and firing) a CEO is perhaps the most basic, fundamental role of a governing board. At the very least, it is one of the three core functions of the board, along with strategy and compliance.

Leadership transition can be smooth—such as when a well-liked CEO decides to retire, and the board has ample time to find a replacement and no shortage of good candidates.  But there are instances where the board and CEO part ways on contentious terms—Carly Fiorina’s 2005 ouster from Hewlett-Packard is one high-profile example of when a board and its corporate leader were completely unable to co-exist.

No matter the circumstances, board members must be prepared to deal with leadership transition at any time.

When somebody says, ‘We need to make a move,’ you have to be ready to voice an opinion and be an active participant in the process. It’s one of the most important and difficult decisions a board can make,” Lazar said.

“Sometimes, leadership isn’t about expertise—it’s about dealing with people.”

DUY-LOAN LE, BOARD OF DIRECTORS MEMBER FOR WOLFSPEED, NATIONAL INSTRUMENTS, BALLARD POWER SYSTEMS AND ATOMERA

Le has been in the boardroom during those difficult meetings. She said she experienced a situation where the board had to replace the CEO, who also was the company’s founder and largest shareholder and who initially did not want to leave.

This situation required interpersonal skills, not cold business logic. The CEO/Founder had given so much to the company, and he needed an exit strategy that wouldn’t humiliate him. Le was able to navigate that difficult path during their long, emotional phone call.

“It can be intense. If that situation hadn’t been navigated properly, it would’ve blown up in our face,” she said. “Sometimes, leadership isn’t about expertise—it’s about dealing with people.”

Whether women are looking to serve or are already in the boardroom, the panelists encouraged them to believe in themselves.

“Why wouldn’t you be qualified? Everyone has to do it for the first time,” Lazar said. “Focus on what you have and what you bring.”

“If you’ve been appointed to a public company board, then you’re there – you’ve got it. Just be a great board member and keep doing the right things,” Temple said.

“I remember the feeling the first time I walked into a board room. It was all white men, a generation older than me. But I thought, ‘I have an advantage.’ Because none of these men have lived the life I’ve lived. And what’s the worst that can happen – that they kick me off the board?” Le said. “From there, just do what Betty said and carry yourself with confidence. You are just as good as anyone in that room.”

For additional research and resources, go to the 50/50 Women on Boards website. 50/50 Women on Boards is dedicated to promoting gender balance and diversity on corporate boards.

Article By Elizabeth O. Temple of Womble Bond Dickinson (US) LLP

For more corporate and business legal news, click here to visit the National Law Review.

Copyright © 2022 Womble Bond Dickinson (US) LLP All Rights Reserved.

Children’s Advertising Rules Apply in the Metaverse Too, CARU Says

CARU, the Children’s Advertising Review Unit of BBB National programs, issued a compliance warning last week reminding industry that the self-regulating body on children’s advertising and privacy intends to enforce its advertising guidelines in the metaverse, just like in the real world.

CARU’s August 23 compliance warning puts companies on notice of what perhaps should have been obvious: its guidelines for advertising to children apply in the metaverse, too. The warning heavily analogizes the metaverse, augmented reality (AR) and virtual reality (VR) worlds to other digital spaces like smartphone apps and online videos. CARU emphasizes the need to:

  • avoid blurring the lines between advertising and non-advertising content;
  • clearly disclose the use of brand-sponsored avatar influencers;
  • avoid manipulative tactics that induce children to view or interact with ads or to make in-game purchases; and
  • use clear, understandable, easily noticeable and prominent disclosures, repeated if necessary to ensure children notice and understand them.

The metaverse is a new area of focus for CARU and BBB National Programs: two recent posts, Know the Rules: How to Be Age Appropriate in the Metaverse and Advertising And Privacy: The Rules Of The Road For The Metaverse, emphasize the need to make sure advertising is truthful, non-deceptive and clearly identifiable as advertising, especially in brand-sponsored worlds. CARU recommends that advertisers and operators anticipate and stay aware of how their child audiences interact with the metaverse experience, including how, when and where ads will be shown to them and how influencers will engage in the space.

Article By Phyllis H. Marcus and Samuel J. Thomas of Hunton Andrews Kurth

For more communications, media, and internet legal news, click here to visit the National Law Review.

Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.