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NAWL's Annual Meeting and Awards Luncheon New York City July 21st

The National Law Review wants to remind you that the National Association of Women Lawyers 2011 Annual Meeting and Awards Luncheon is taking place Wednesday July 20th and Thrusday July 21st in New York City at the Waldorf Astoria. 

For a Detailed Schedule Click Here

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Attendees can register for guest rooms at the Waldorf=Astoria. A limited number of rooms are available for the rate of $319 per night . To reserve call 1-800-925-3673 and ask for the Women Lawyers’ Room Block.

FTC And DOJ Issue Proposed Statement Of Antitrust Policy Regarding Accountable Care Organizations Seeking To Participate In The Medicare Shared Savings Program

Recently posted at the National Law Review by Scott B. Murray of  Sills Cummis & Gross P.C.  information about the  Federal Trade Commission (“FTC”) and Department of Justice’s Antitrust Division (“DOJ”)  joint Proposed Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations:    

The Federal Trade Commission (“FTC”) and Department of Justice’s Antitrust Division (“DOJ”) recently issued a joint Proposed Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program (the “Policy Statement”). The Policy Statement details how the federal antitrust agencies will apply the nation’s antitrust laws to accountable care organizations (“ACOs”) created pursuant to the health care reform act, the Patient Protection and Affordable Care Act (the “Act”). Public comments were to be submitted by May 31, 2011.

The agencies identify the potential advantages and disadvantages of ACOs that they will examine under the antitrust laws. The agencies “recognize that ACOs may generate opportunities for health care providers to innovate in both the Medicare and commercial markets and achieve for many consumers the benefits Congress intended for Medicare beneficiaries through the Shared Savings Program.” Policy Statement, at p. 2. However, the agencies also understand that “not all such ACOs are likely to benefit consumers, and under certain conditions ACOs could reduce competition and harm consumers through higher prices or lower quality services.” Id.

ACOs Covered By Policy Statement

The Policy Statement applies to “collaborations among otherwise independent providers and provider groups, formed after March 23, 2010, that seek to participate, or have otherwise been approved to participate, in the Shared Savings Program.” Id. “[C]ollaboration” is defined to mean an agreement or set of agreements, other than merger agreements, thus, the Policy Statement does not apply to mergers among health care providers, which will still be analyzed under the Horizontal Merger Guidelines. Id.

The Rule of Reason Will Be Applied To ACOs

The agencies have previously stated that joint price agreements among competing health care providers are evaluated under the Rule of Reason, if the providers are financially or clinically integrated and the agreement is reasonably necessary to accomplish the pro-competitive benefits of the integration. The Rule of Reason “evaluates whether the collaboration is likely to have substantial anticompetitive effects and, if so, whether the collaboration’s potential pro-competitive efficiencies are likely to outweigh those effects.” Id., at p. 4. Thus, “the greater the likely anticompetitive effects, the greater the likely efficiencies must be to pass muster under the antitrust laws.” Id.

In prior pronouncements regarding health care provider collaborations, the agencies have stated that sufficient financial integration exists if the collaboration’s participants have agreed to share substantial financial risk, because such risk-sharing generally establishes both an overall efficiency goal for the venture and the incentives for the participants to meet that goal. The agencies have previously provided a number of examples of satisfactory financial risk-sharing arrangements, while noting that the examples did not represent an exhaustive list.

Regarding clinical integration, while not previously providing specific examples, the agencies have noted that such integration must be “sufficient to ensure that the venture is likely to produce significant efficiencies.” Id., at p. 4. The Act authorizes CMS to approve ACOs meeting certain eligibility criteria, and the Policy Statement indicates that “CMS’s proposed eligibility criteria are broadly consistent with the indicia of clinical integration that the Agencies previously set forth [and that] organizations meeting the CMS criteria for approval as an ACO are reasonably likely to be bona fide arrangements intended to improve quality, and reduce the costs, of providing medical and other health care services through their participants’ joint efforts.” Id., at p. 5. Because many health care providers will want to use the ACO structure in both the commercial market and the Medicare context, “if a CMS-approved ACO provides the same or essentially the same services in the commercial market the Agencies will provide rule of reason treatment to an ACO if, in the commercial market, the ACO uses the same governance and leadership structure and the same clinical and administrative processes as it uses to qualify for and participate in the Shared Savings Program.” Id., at p. 5. The Rule of Reason analysis applies to ACOs for the length of their participation in the Shared Savings Program.

Streamlined Approach For The Rule Of Reason Analysis Of ACOs

The Policy Statement provides a streamlined approach to determining market shares for the common services provided by an ACO’s participants. The first step is to list the common services provided by two or more of the ACOs’ participants. The list of services for the various types of health care providers ( i.e., physicians, inpatient facilities, and outpatient facilities) will be made available by CMS. The second step is to determine the Primary Service Area (“PSA”) for each common service of the ACO participants. “The PSA is defined as the lowest number of contiguous postal zip codes from which the participant draws at least 75 percent of its patients for that service.” Id., at pp. 7 & 12.

If the ACO participants do not provide any common services in any of the same PSAs, then the ACO needs to determine if any ACO participant is a “Dominant Provider,” meaning a participant with greater than 50 percent market share for a service in a PSA. If the ACO does include a Dominant Provider, such participant must be non-exclusive to ACO, and the ACO cannot require commercial payers to be exclusive to ACO or otherwise restricted in dealing with other ACOs or providers.

Safety Zone Applies If ACO Has Less Than 30 Percent Combined Market Share For All Common Services In All PSAs

If there are common services provided by two or more ACO participants in the same PSA, then the ACO must calculate its combined market share for each such common service in each PSA. CMS will make available Medicare fee-for-service data sufficient for physicians and outpatient facilities to calculate their market shares. For inpatient facilities, market shares should be calculated based on “inpatient discharges, using state-level all-payer hospital discharge data where available, for the most recent calendar year for which data are available.” Id., at p. 13. Where such data is not available, Medicare fee-for-service payment data should be used, or other available data if such Medicare data is insufficient.

If the combined market share for each common service in each PSA is less than 30 percent, then the ACO falls within the “safety zone,” meaning that there will be no agency challenge of the ACO absent extraordinary circumstances. If the combined share for even one common service is greater than 30 percent in a PSA, the safety zone does not apply.

In addition, for the safety zone to apply, any hospital or ambulatory surgery center participating in the ACO must be non-exclusive – i.e., allowed to contract or affiliate with other ACOs or commercial payers – regardless of its PSA market shares. If the ACO falls within the safety zone, but includes a Dominant Provider, then the same Dominant Provider requirements described above must be met.

An ACO may include one physician per specialty from each “rural county” (as defined by the U.S. Census Bureau), and a Rural Hospital, on a non-exclusive basis and still qualify for the safety zone even if the inclusion of the rural provider or Rural Hospital makes the ACO’s combined market share for a common service greater than 30 percent in a PSA.

Mandatory Review By The Agencies Applies If ACO Has Greater Than A 50 Percent Combined Market Share For Any Common Service In A PSA

If an ACO’s combined market share for any common service in any PSA is greater than 50 percent, the ACO must make a submission to the agencies for a mandatory initial review of the ACO’s potential competitive effects. Thus, if the combined share for even one of the ACO’s common services is greater than 50 percent in a PSA, review by the antitrust agencies is mandatory. The mandatory review requirement does not mean that the ACO is presumed to be anticompetitive, but only that an initial review is necessary.

The ACO must submit to the agencies a copy of its application and all supporting documents that the ACO plans to submit, or has submitted, to CMS or that CMS requires the ACO to retain as part of the Shared Savings Program application process. In addition, the ACO must submit other documents that will allow the agencies to analyze the ACO’s potential competitive effects. If the agencies receive all such documentation in a timely fashion, they have committed to completing the review in an expedited, 90-day time period. The additional documents that must be submitted include documents relating to the ability of the ACO’s participants to compete with the ACO, the ACO’s business strategies, competitive plans, and likely impact on prices, cost, or quality of any service the ACO provides, any other ACOs created by or affiliated with the proposed ACO or its participants, the ACO’s market share calculations, the identity of the ACO’s five largest payer customers, and the identity of any competing ACOs. Id., at pp. 9-10.

After receiving this documentation, the reviewing agency will advise the ACO within 90 days of whether it has no intent to challenge the ACO or is likely to challenge it. CMS will not approve an ACO that has received a letter of likely challenge.

No Man’s Land If > 30 Percent, But << 50 Percent Combined Share

Given the safety zone and mandatory review thresholds, there is a no man’s land for ACOs with market shares for common services that fall between these two thresholds – i.e., if the ACO has a combined market share for any common service in any PSA greater than 30 percent, but no combined market share greater than 50 percent in any PSA. While there is no presumption that ACOs falling in this no man’s land will have anticompetitive effects, the agencies have identified certain conduct that such ACOs should avoid to reduce the risk of challenge by the antitrust agencies:

1. Steering or incentivizing commercial payers away from providers outside the ACO.

2. Tying sales of the ACO’s services to the purchase of non-ACO services (and vice versa).

3. Contracting with ACO participants on an exclusive basis (except for primary care physicians, who can be exclusive to an ACO).

4. Prohibiting commercial payers from providing health plan participants with the ACO’s cost, quality or other performance information.

5. Sharing price or other competitive information among the ACO’s participants that can be used to collude regarding non-ACO services.

ACOs with market shares requiring mandatory review should also avoid such conduct to reduce the risk of antitrust challenge.

If an ACO falling within the no man’s land desires to obtain further certainty regarding whether it will face an antitrust challenge, it can request expedited antitrust review by the agencies similar to the mandatory review process.

Likely Concerns Regarding The Proposed Policy Statement

Potential public comments to the Policy Statement include:

1. Whether non-exclusivity should be required for a hospital or ambulatory surgery center if the ACO still falls within the safety zone for all common services and does not include a Dominant Provider for any service.

2. Whether the 30 percent and 50 percent market share thresholds are appropriate.

3. Are PSAs an appropriate proxy for the relevant antitrust geographic market?

4. Will the Medicare and other publicly available data allow for accurate market share calculations?

5. Will the mandatory review process represent an unreasonable time and cost burden to be incurred by proposed ACOs?

6. Should the Policy Statement include additional examples of market share calculations for hypothetical ACOs?

The Policy Statement represents a substantial and welcome effort on the part of the agencies to provide guidance to the health care industry regarding the antitrust analysis to be applied to ACOs seeking to participate in the Shared Savings Program; however, it is likely that some procedural and substantive modifications will be necessary to help health care providers fully achieve the goals of the Act through the formation of ACOs.  

This article appeared in the June 2011 issue of The Metropolitan Corporate Counsel. 

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis & Gross P.C.  

Copyright © 2011 Sills Cummis & Gross P.C. All rights reserved.

 

 

Federal Authorities Warn of Terrorism: Three Steps Toward Comprehensive Risk Management for the Hotel Industry

Recently posted at the National Law Review by Richard J. Fildes of Lowndes, Drosdick, Doster, Kantor & Reed, P.A. – news about a recent federal government terror alert involving hotels and resort properties: 

Quality service, prime amenities, ideal locations and excellent accommodations are the repertoire of successful hotels. In light of a recent warning issued by federal authorities to the U.S. hotel industry, that checklist may need to expand, according to the American Hotel & Lodging Educational Institute. Though Mumbai-style attacks have thankfully not come to fruition on American soil in recent years, the need for vigilance is ever-present. Based on intelligence reports gathered by the U.S. government, terror plots on the hotel industry are a looming threat;however, a panic-free plan for potentially devastating crises can easily be developed.

Attacks of terrorism and natural disasters can often share the same elements of surprise, chaos, structural destruction and health-related concerns. Just as hotels should plan for before, during, and after a storm (more details), there should be a similarly structured program for staff and guests when dealing with terrorist attacks. Combining the consideration of both events can streamline the process of training employees and increasing familiarity with risk management in the aftermath of such events. Some considerations are as follows:

• Lobbies tend to be the most dangerous part of hotels because they are typically unsecured open areas where guests congregate. If finances permit, have plain clothed security personnel in the lobby. The presence of uniformed security guards can create a perception of safety; however, non-uniformed guards can be more attuned as the eyes and ears of hotel security.

• Staff should be trained to spot potentially dangerous activities. All employees who may have contact with guests, including housekeeping, maintenance, front desk, guest services, food and beverage, transportation, and parking should be given detailed instructions on what types of activity should be reported to hotel security.

• Staff should also have equally detailed instructions on panic control and ways to manage the turmoil of natural disasters.

• Record keeping is also vital, especially with health related issues. Knowing which employees have medical ailments or potential concerns will help reduce health risks stemming from natural disasters and terrorist attacks. Though some guests may not want to disclose such information, consider asking guests whether they have any heart conditions, diabetes or other issues that would be necessary for the staff to know in case of an emergency. Such inquiries should be phrased “as non-intrusive” inquiries geared toward providing the best possible customer care and service in the rare chance that something may happen.

• Keeping both paper and electronic copies of records, including which guests are checked into the hotel at any given time, is also key to minimizing confusion and chaos when responding to an emergency.

• Develop specific evacuation plans. The standard “in-case-of-a-fire” evacuation route may not be helpful during a chemical weapon attack, bombing or hurricane.

• Have designated evacuation areas equipped (or readily able to be equipped) with vital supplies. Back up energy sources, medical supplies and non-perishable foods, and bottled waters are all necessary to keep guests safe and calm.

• Make the evacuation routes easy to follow, and ensure that the staff knows exactly where guests should be located during the different emergencies.

Being vigilant, heightening security efforts, and ensuring staff preparedness will help reduce the stress, commotion and devastating aftermath of natural disasters and terrorist related incidents.

* Tara L. Tedrow is co-author of this article. She is a rising third year law student and has not been admitted to the Florida Bar.

To read the press release issued by the American Hotel & Lodging Association, please click on the following : AHLEI PR_TerrorWarningReinforcesNeedVigilanceTraining.pdf

© Lowndes, Drosdick, Doster, Kantor & Reed, PA, 2011. All rights reserved.

New York’s Highest Court Reinstates $5 Billion Lawsuit By Big Banks Against MBIA

Posted recently at the National Law Review by Michael C. Hefter and Seth M. Cohen of Bracewell & Giuliani LLP news about New York’s highest court reinstating a $5 billion lawsuit brought by a group of banks, including Bank of America and Wells Fargo, against MBIA. 

New York’s highest court yesterday reinstated a $5 billion lawsuit brought by a group of banks, including Bank of America and Wells Fargo, against insurance giant MBIA. ABN AMRO Bank, et al. v. MBIA Inc., et al., — N.E. 2d –, 2011 WL 2534059, slip op. (June 28, 2011). The Plaintiffs-banks sought to annul MBIA’s 2009 restructuring, which separated the insurer’s municipal bond business from its troubled structured finance unit, on the grounds that the transactions left the insurer incapable of paying insurance claims in violation of New York’s Debtor and Creditor Law. The Superintendent of Insurance in New York approved the transactions that effectuated the split of MBIA’s business in 2009. 

The Court of Appeals’ decision represents a victory for Wall Street banks in one of the many battles being fought in connection with the collapse of the financial markets. Those banks saw their fraudulent transfer claims against MBIA dismissed earlier this year by the Appellate Division, First Department. The intermediate appellate court determined that the banks’ fraudulent transfer claims were a “collateral attack” on the Superintendent’s authorization of the restructuring and that an Article 78 proceeding challenging that authorization was the sole remedy available to the Plaintiffs. The banks’ remedies under Article 78 – a procedure entitling aggrieved parties to challenge agency decisions – would be limited compared to those remedies available in state or federal court under a fraudulent transfer theory. 

At issue for the Court of Appeals was whether the Plaintiffs-banks had the right to challenge the restructuring plan in light of the Superintendent’s approval. Plaintiffs argued that the restructuring was a fraudulent conveyance because MBIA Insurance siphoned approximately $5 billion in cash and securities to a subsidiary for no consideration, thereby leaving the insurer undercapitalized, insolvent and incapable of meeting its obligations under the terms of the respective insurance policies. MBIA countered that, as held by the First Department, Plaintiffs’ claims were impermissible “collateral attacks” on the Superintendant’s approval of the restructuring. 

In a 5-2 decision, the Court of Appeals modified the First Department’s decision and reinstated the Plaintiffs’ breach of contract, common law, and creditor claims. In an opinion authored by Judge Carmen Beauchamp Ciparick, the Court held that NY Insurance Law does not vest the Superintendent with “broad preemptive power” to block the banks’ claims. MBIA Inc., 2011 WL 2534059, slip op. at 16.

“If the Legislature actually intended the Superintendent to extinguish the historic rights of policyholders to attack fraudulent transactions under the Debtor and Creditor Law or the common law, we would expect to see evidence of such intent within the statute. Here, we find no such intent in the statute.” Id.

Critical to the Court’s holding was that Plaintiffs had no notice or input into the Insurance Department’s decision to approve MBIA’s restructuring. “That the Superintendent complied with lawful administrative procedure, in that the Insurance Law did not impose a requirement that he provide plaintiffs notice before issuing his determination, does not alter our analysis,” Judge Ciparick wrote. “To hold otherwise would infringe upon plaintiffs’ constitutional right to due process.” MBIA Inc., 2011 WL 2534059, slip op. at 21. Moreover, the Court noted that Plaintiffs’ claims could not be properly raised and adjudicated in an Article 78 proceeding. Id.

The Court’s decision re-opens claims by multiple financial institutions that MBIA instituted the restructuring in order to leave policyholders without financial recourse. 

The case is ABN AMRO BANK NV. et al., v. MBIA Inc., et al, 601475-2009 (N.Y. State Supreme Court, New York County.)

© 2011 Bracewell & Giuliani LLP

Interview with C. David Morris, Senior Counsel International at Northrop Grumman Corporation

Recently postd at the National Law Review by Michele Westergaard of marcus evans an interview with a Senior in house Counsel of Northrop Grumman about FCPA compliance issues: 

With the steady increase in enforcement, organizations need to now move beyond FCPA compliance and embrace a global anti-corruption compliance program. Global companies should assess their existing anti-corruption compliance programs and adjust them to meet potentially more stringent requirements.

C. David Morris, Senior Counsel International at Northrop Grumman Corporation is a speaker at the 6th FCPA & Anti-Corruption Compliance Conference taking place on June 22-24, 2011 in Washington, DC.

Mr. Morris is Senior Counsel in the Northrop Grumman Corporation International Law Department located in Linthicum, MD. His practice focuses on international regulatory compliance and cross-border transactions involving the corporation’s domestic and international businesses and joint ventures. David answered a series of questions on how to enhance FCPA and anti-bribery initiatives to adapt to heightened global anti-corruption enforcement.

What is the importance for companies to conduct regular compliance training for FCPA and foreign anti corruption laws?

DM:  From a legal perspective, the U.S. Government has made it clear through many Department of Justice and Securities and Exchange Commission settlement agreements and the Federal Sentencing Guidelines that regular training is an essential component of a corporate compliance program for companies that conduct business with foreign government entities. As such, a company’s history of conducting anti-corruption training can be viewed as either a mitigating or aggravating factor should a company find itself in litigation on a FCPA matter. Likewise, the Guidance to the UK Bribery Act also identifies training as a key component to the corporate defense of having adequate compliance procedures. In this regard, the failure to provide training could be detrimental to the statutory defense. From a business perspective, anti-corruption training is a wise investment as part of a preventative law program.  Regular anti-corruption training helps to reinforce and shape a corporation’s ethical culture and standards of business conduct. When clear policies and expectations are communicated, a culture for ethical behavior becomes engrained throughout the enterprise.    

How can companies not only meet the minimal expectationsforFCPA compliancebut also exceed them?

DM: Two features of a robust compliance program that companies can undertake to achieve top tier status are to conduct benchmarking activities relative to their industry peer companies and to regularly conduct comprehensive internal risk assessments on a periodic basis. Collaboration with outside experts on these activities can be particularly helpful because they can bring an independent perspective to aid in the decision making process. In addition, there are numerous webinars, conferences, and bar association committees that provide useful practice tips and networking opportunities to stay abreast of best practices. Finally, the OECD published guidance in this area last year with their Good Practice Guidance on Internal Controls, Ethics, and Compliance, which is often cited by enforcement authorities as a model for companies to embrace.

What are the effects of non-compliance on share price, organizational reputation etc?

DM:  The effects of a corruption related enforcement action can be devastating on all of a company’s constituencies. For shareholders, it is fairly common to see a company’s market capitalization decline following the announcement of a government investigation or a financial reserve set aside to cover potential fines and penalties. In 2010 alone, there were five settlements with the DOJ and SEC in excess of $100M.  For customers and trading partners, uncertainties about the reliability of a company undergoing an enforcement action can be problematic because of the possibility of suspension, debarment, and/or revocation of export privileges in some cases. For employees, morale can take a hit when they observe their leaders prosecuted for criminal activity. Lastly, the enterprise as a whole can suffer because the lifecycle of a typical enforcement action (investigation, litigation, consent decree, and compliance monitor) can consume management focus for many years.

How can existing anti corruption programs be strengthened to take account of emerging global anti-corruption trends?

DM:  Given the extra-territorial reach of the FCPA, the jurisdictional reach of the UK Bribery Act, and the level of inter-country prosecutorial cooperation, companies need to review their policies, procedures, and internal controls to ensure their anti-corruption compliance program is in lock-step with their corporate footprint. As with any business activity, capital, human, and technological resources need to be deployed where they will be most effective and adjusted as the business evolves. An internal risk assessment and procedural gap review are two features of a healthy continuous improvement program. Lastly, I would add that partnering with Internal Auditors, Country Managers, Ethics Officers, Finance personnel and others with an anti-corruption focus can be a beneficial way to leverage and extend the reach of existing resources.

How best can red flags of possible FCPA violations be identified?

DM:  The FCPA’s accounting and internal controls provisions require companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are executed in accordance with management’s authorization and are recorded as necessary to maintain accountability for assets. In addition, there are Sarbanes-Oxley requirements for management to provide a statement of the effectiveness of the company’s internal control structure and procedures for financial reporting. As such, procedures and controls should be established for entering into third party commitments, making payments, and cash disbursements to detect red flags which may require additional due diligence. In addition to periodic internal risk assessments and related interviews of key personnel, it is a good practice to provide awareness training on red flags and to require those involved with international transactions to certify if they are aware of red flags or adverse information at milestones throughout a business transaction. The establishment of an anonymous hot line to report ethical concerns is also often cited as a best practice to detect red flags. In terms of identifying red flags of external trading partners, periodic media searches can reveal a wealth of information.  The commercial attaché of the US Embassy of the country in question can also be a valuable red flag identification resource, as well as in-country employees and outside counsel.

© Copyright 2011 marcus evans

 

 

 

Texas Supreme Court Makes Enforcement of Noncompete Agreements Easier for Employers

Posted this week at the National Law Review by Morgan, Lewis & Bockius LLP  a good recap of the Texas Supreme Court decision which clarifies the standards for enforcing noncompete agreements: 

On June 24, the Texas Supreme Court issued a long-awaited decision clarifying the standards for enforcement of noncompete agreements under the Texas Business and Commerce Code. In Marsh USA Inc. and Marsh & McLennan Cos. v. Rex Cook, the court considered whether an employee’s receipt of stock options could sustain an agreement that prohibited the employee from soliciting or accepting business from certain customers of Marsh McLennan (Marsh).

Noncompete agreements, which include prohibitions on working for a competitor and limitations on an employee’s ability to solicit customers, are governed in Texas by the Texas Business and Commerce Code. Under that statute, such agreements may be enforced only if they contain reasonable limitations with respect to geography, time, and scope of activity to be prohibited and only if they are “ancillary to or part of an otherwise enforceable agreement.” Texas courts, as well as practitioners and employers, have struggled with this latter requirement. The Cook case represents a significant change in Texas law and a departure from the Texas Supreme Court’s previous analysis of noncompete agreements.

Under previous court decisions, the analytical focus was on the type of consideration provided by the employer in exchange for the employee’s promise to refrain from competing. Specifically, a Texas employer seeking to enforce a noncompete agreement must have been able to show that the consideration it provided to the employee “gave rise to an interest” in restraining competition. For example, an employer’s promise of trade secrets or confidential information was deemed sufficient consideration to support a noncompete agreement whereas simple cash consideration was not.

In Cook, the Texas Supreme Court considered whether an employer’s grant of stock options satisfied the “ancillary” prong of the Texas Business and Commerce Code. Cook joined Marsh in 1983 and signed an agreement under which he could exercise certain stock options in exchange for signing an agreement limiting his ability to solicit or accept business from clients of Marsh with whom he had business dealings during his employment. Cook thus signed the noncompete agreement not when he was provided the original grant of stock options, but rather when he chose to exercise the options.

After his separation from employment with Marsh, Cook went to work for a competitor. He thereafter was sued by Marsh for breach of his contract and for breach of fiduciary duty. Cook filed a motion for summary judgment in the district court on the grounds that the agreement was unenforceable under the Texas Business and Commerce Code. The trial court granted Cook’s motion and an appellate court affirmed that ruling.

The Texas Supreme Court, in a 6-3 opinion, disagreed with the lower courts and reversed the grant of summary judgment. Significantly, the court overruled previous authority that focused on the type of consideration provided by the employer and the assessment of whether or not that consideration “gives rise” to an interest in restraining competition. Rather, the court construed the Texas Business and Commerce Code as requiring simply that there be a nexus between the noncompete agreement and the employer’s interests, holding that the noncompete agreement “must be reasonably related to the [employer’s] interest worthy of protection.” The court emphasized Cook’s high-level executive position with the company and found that, by providing an ownership interest in the company, the stock options provided to Cook were “reasonably related to the company’s interest in protecting its goodwill, a business interest the [Texas Business and Commerce Code] recognizes as worthy of protection.” The noncompete was thus enforceable on that basis.

As a practical matter, Cook should make enforcement of noncompete agreements easier in Texas. The decision represents a shift from the previous, more technical focus on the type of consideration provided in the noncompete agreement to a more generalized assessment of the employer’s interests in restraining competition. Cook follows a trend of other recent Texas Supreme Court cases that have found that the enforcement of noncompete agreements should be decided in the context of the overall purpose of the Texas Business and Commerce Code, which is to provide for reasonable restrictions that protect legitimate business interests.

Copyright © 2011 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

An Ounce of Prevention – The Importance of Periodic Corporate Audits

Posted this week at the National Law Review by James M. O’Brien, III and David R. Krosner of  Poyner Spruill LLP – a good overview of the many reasons managed care organization should perform periodic corporate audits:  

Most, if not all, long term care providers operate their business in an entity form, such as a corporation or limited liability company.  Many use multiple entities – for example, one entity to own the real estate (or a separate entity to own each parcel of real estate) and another to operate the business.

Although the type of entity (or entities) used in your business was likely selected based on an evaluation of the benefits and drawbacks of each type of entity (including tax considerations and management structure), one of the principal benefits of both a corporation and a limited liability company (LLC) is limited liability, which is often referred to as the “corporate veil” or “corporate shield.” The corporate veil refers to the concept that the owners of the corporation or LLC are generally not liable for the debts and obligations of the entity. Rather, the “corporate veil” protects the owners from that personal liability and places responsibility for the entity’s debts and obligations on the entity.

As we all know, for every rule, there are exceptions, and that holds true with respect to the corporate shield. Some of these exceptions are created by statutes and others by case law. For example, under federal statutes, employees who are responsible for the entity’s payroll or financial affairs may be personally liable (and also subject to penalties) for willfully failing to collect and remit required federal withholding or employment taxes. Similarly, under certain federal environmental laws, corporate officers who have authority and control over the disposal of hazardous wastes can be held personally liable for the corporation’s failure to comply with certain environmental laws.

In the category of case law type exceptions, generally an individual will always be liable for his own wrongdoing. For example, if I get frustrated at work and punch my partner in the nose, the corporate shield will not protect me from liability to my partner! We all understand (and can’t legitimately complain about) those types of exceptions to the corporate shield. But there is also a broader set of case law that creates additional exceptions that allow plaintiffs to “pierce the corporate veil.” Under this concept, a judge may decide that the facts of a particular case warrant piercing the corporate veil and, thereby, holding the owners of the entity personally liable for the matter being litigated. Generally, the courts examine a laundry list of factors, including, most importantly whether the facts suggest that a refusal to pierce the corporate veil would result in fraud or similar injustice.

Generally, to succeed in a veil piercing case, the plaintiffs would have to prove, among other items, that the owners of the entity so dominated its finances, policy and business that the entity had no separate mind, will or existence of its own. In determining whether that level of control exists, a court looks to several factors (none of which are typically decisive in and of themselves). These factors include (i) inadequate capitalization of the entity, (ii) noncompliance with corporate formalities, (iii) excessive fragmentation of a single enterprise into multiple entities, (iv) absence of company records, and (v) siphoning of funds from the company by the dominant owner.

Although the case law rules for veil piercing vary somewhat from state to state, the good news is that courts are typically very reluctant to pierce the corporate veil. The perhaps better news is that there are steps you can take to make it less likely that the veil of your entity will be pierced. So what can you do to lessen the risk of a successful veil piercing claim? For one, be sure your entity complies with appropriate corporate formalities and maintains appropriate corporate records. For example, if your entity is a corporation, each year the corporation should hold a shareholders’ meeting to elect its Board of Directors and the directors should appoint the officers. All major corporate actions should be approved by the Board of Directors and records of those approvals should be maintained. If money is distributed to the owners or there are multiple entities and money flows between the entities, all of this should be approved in writing by the directors and properly documented. Generally, these types of records are kept in the entity’s minute book. If the last entry in your minute book dates from 1982, your entity is not keeping proper records!

As a service to our clients, we often conduct legal reviews of a client’s corporate/LLC records, including, as applicable, minute books, shareholders’ or operating agreements, articles of incorporation/articles of organization, bylaws, annual reports, stock transfer ledgers, foreign qualifications, good standing certificates, tax clearance certificates, etc., to ensure the records are up to date, reflect the current operations of the company, comply with current law, and generally reflect compliance with the governing documents and formalities applicable to the company. To the extent we find deficiencies, we propose a course of action and help our clients implement corrections. This is an easy and inexpensive way for you to eliminate one of the factors associated with piercing the corporate veil and help protect owners from personal liability.

© 2011 Poyner Spruill LLP. All rights reserved.

 

Don't Gamble with My Money: When a Lawsuit Seeks Damages in Excess of Policy Limits, What Are the Insured's Rights in Illinois?

Posted this week at the National Law Review by Daniel J. Struck and Neil B. Posner of Much Shelist Denenberg Ament & Rubenstein P.C.  a good overview of R.C. Wegman Construction Company v. Admiral Insurance Company which help address the issues involved with insurance claims in excess of policy limits in Illinois: 

In general, if a lawsuit is covered or potentially covered by a commercial general liability (CGL) insurance policy, the insurer has a duty to defend that claim. If the insurer provides that defense without reserving its rights to deny coverage, the insurer is entitled to select defense counsel and control the defense. But when the insurer defends under a reservation of rights, that reservation may create a conflict of interest between the insurer and the insured.

The leading Illinois Supreme Court case on this subject is Maryland Casualty v. Peppers, decided in 1976. According to Peppers, when an insurer defends an insured, but reserves the right to deny coverage based on an exclusion in the insurance policy (the applicability of which could be established during the course of defending the insured), there is a conflict of interest that gives the insured the right to select independent counsel to defend it at the insurer’s expense. But the Illinois Supreme Court did not say that this is the only conflict of interest that could give rise to the insured’s right to select independent defense counsel.

In R.C. Wegman Construction Company v. Admiral Insurance Company, decided in 2011, the United States Court of Appeals for the Seventh Circuit answered a question that has vexed Illinois insureds for a long time. Although the case involves a relatively uncommon set of facts, the court’s ruling in Wegman recognizes the conflicting interests that can arise between insureds and insurers when an insured faces a claim in which there is a “non-trivial probability” that there could be a judgment in excess of policy limits.

The Nuts and Bolts of Wegman

R.C. Wegman Construction Company was the manager of a construction site at which another contractor’s employee was seriously injured. Wegman was an additional insured under a policy issued by Admiral Insurance to the other contractor. When the worker sued Wegman, Admiral acknowledged its duty to defend, apparently without reserving any rights, and undertook the control of Wegman’s defense. The Admiral policy provided $1 million in per-occurrence limits of liability. Although it soon became clear that there was a “realistic possibility” that the underlying lawsuit would result in a settlement or judgment in excess of the policy limits, Admiral never provided this information to Wegman.

Shortly before trial, a Wegman executive was chatting about the case with a relative who happened to be an attorney. That relative pointed out the risk of liability in excess of policy limits, and mentioned that it was important for Wegman to notify its excess insurers. But by then it was too late, and the excess insurer denied coverage because notice was untimely. A judgment was entered against Wegman for more than $2 million. Wegman sued Admiral for failing to give sufficient warning of the possibility of an excess judgment so that Wegman could give timely notice to its excess insurer. According to the Seventh Circuit, the key issue was whether this situation—in which there was a risk of judgment in excess of the limit of liability, and where the insurer was paying for and controlling the defense—gave rise to a conflict of interest.

Admiral’s explanation for failing to inform Wegman was ultimately part of its downfall. Because there were other defendants in the underlying lawsuit, there was a good chance that Wegman would not be held jointly liable and that if a jury determined that Wegman was no more than 25% responsible for the worker’s injury, Wegman’s liability would have been capped at 25% of the judgment. Admiral’s trial strategy was not to deny liability, but to downplay Wegman’s responsibility. Admiral, however, never mentioned this litigation gambit to Wegman!

In the Seventh Circuit’s view, this was a textbook example of “gambling with an insured’s money.” And that is a breach of an insurer’s fiduciary duty to its insured.

When a potential conflict of interest arises, the insurer has a duty to notify the insured, regardless of whether the potential conflict relates to a basis for denying coverage, a reservation of rights, or a disconnect between the available limits of coverage and the insured’s potential liability. Once the insured has been informed of the conflict of interest, the insured has the option of hiring a new lawyer whose loyalty will be exclusively to the insured. In reaching its Wegman conclusion, the Seventh Circuit cited the conflict-of-interest rule established by the Illinois Supreme Court’s Peppersdecision. Thus, a potential conflict of interest between an insured and an insurer concerning the conduct of defense is not limited to situations in which the insurer has reserved its rights.

In rejecting Admiral’s arguments, the Seventh Circuit explained that a conflict of interest (1) can arise in any number of situations and (2) does not necessarily mean that the conflicted party—the insurer—has engaged in actual harmful conduct. A conflict of interest that permits an insured to select independent counsel occurs whenever the interests of the insured and the insurer are divergent, which creates a potential for harmful conduct.

The conflict between Admiral and Wegman arose when Admiral learned that a judgment in excess of policy limits was a “non-trivial probability.” When confronted with a conflict of this type, the insurer must inform the insured as soon as possible in order to allow the insured to give timely notice to excess insurers, and to allow the insured to make an informed decision as to whether to select its own counsel or to continue with the defense provided by the insurer.

Looking Beyond Wegman

The fact pattern discussed in Wegman, however, is not the only situation in which there may be a conflict of interest between an insurer and an insured concerning the control of the defense. Under the supplemental duty to defend in a CGL policy, an insured is entitled to be defended until settlements or judgments have been paid out in an amount that equals or exceeds the limits of liability. The cost of defense does not erode the limits of liability, which means that the supplemental duty to defend is of significant economic value to an insured.

The following hypothetical situations (involving an insured covered by a CGL policy with $1 million in per-occurrence and aggregate limits of liability and a supplemental duty to defend) illustrate the economic value of the duty to defend:

  • The insured is sued 25 times in one policy year. In each instance, the insurer acknowledges coverage and undertakes to defend the lawsuits. Each lawsuit is dismissed without the insured becoming liable for any settlements or judgments. The total cost of defending these 25 lawsuits is $1.5 million. The limits of liability are completely unimpaired with $1 million in limits of coverage remaining available.
  • The insured is a defendant in dozens of lawsuits alleging that one of the products it sells has a defect that has caused bodily injury. The insurer agrees to defend. The lawsuits are consolidated, and the costs of defense accumulate to more than $2.5 million. Eventually, there is a global settlement of the lawsuits for $1 million. Thus, a total of $3.5 million has been paid out on an insurance policy with a $1 million limit of liability.
  • The insured is involved in a catastrophic accident for which he was solely responsible and in which four other people were permanently disabled. Each of the victims files a lawsuit and the realistic projected liability exposure to each victim is $1.5 million—or $6 million collectively. Shortly after the complaints are filed (and before there has been any significant discovery or investigation), three of the plaintiffs make a joint offer to settle their claims for a collective $1 million. The insurer and the insured both believe that this is an outstanding settlement opportunity, but the fourth plaintiff wants her day in court. If the insured agrees to this promising settlement opportunity, the limits of liability will be exhausted, the duty to defend will be extinguished, and the insured will be forced to pay for his own defense or rely on his excess insurance to reimburse him for defense costs.

Any insured who has been in the position of defending against either a serious claim or a multitude of smaller claims will understand that the supplemental duty to defend under a CGL policy may have much greater economic value than the limit of liability alone.

In these kinds of situations—when either the potential liability exceeds policy limits or there are multiple claims against the insured such that the economic value of the defense is worth more than the limit of liability—who should be allowed to control the defense of claims against the insured? In prior cases (Conway v. County Casualty Insurance Company [1992] and American Service Insurance Company v. China Ocean Shipping Co. [2010]), Illinois courts concluded that an insurer cannot be excused of any further duty to defend by paying out its remaining limits to the plaintiffs or by depositing its policy limits into court. But this rule does not address the conflict of interest when (1) it is in the insurer’s financial interest to avoid the potentially unlimited expense of defending its insured but (2) it is in the insured’s interest to continue receiving a defense that may have greater financial value than the limits of liability of a primary CGL policy.

Thanks to the Wegman decision, there is now some authority acknowledging that the insured’s right to select independent counsel may exist even if the insurer defends without a reservation of rights. The court recognized that the insurer-insured relationship and the right to control the defense is fraught with potential conflicts. Therefore, it is more important than ever for insureds to protect their interests.

Editor’s note: For more on the insured’s right to a defense, see “Policyholders and the Right to a Defense: Don’t Be Left Holding the Bag.”

© 2011 Much Shelist Denenberg Ament & Rubenstein, P.C.

 

Supreme Court Grants Cert. In Caraco

Posted yesterday at the National Law Review by Warren Woessner of Schwegman, Lundberg & Woessner, P.A. deatils about the U.S. Supreme Court’s grant of certiorari in Caraco Pharm. Labs., Ltd., v. Novo Nordisk:   

Today (June 27, 2010), the Supreme Court granted cert. in yet another patent appeal, Caraco Pharm. Labs., Ltd., v. Novo Nordisk, (Supreme Ct. 10-844). Earlier this month, I did an extensive post on the decision below, in which the Fed. Cir. denied Caraco’s counterclaim seeking to strike the broad “use code” that Novo had put on its drug, Prandin (U-968). Even though Caraco would market the generic for a narrower use, the broad use code effectively prevented Caraco from “carving out” the still-patented use(s) from its labeling, thus effectively keeping it off the market.

I took a chance by posting on this one because the Solicitor General’s office recommended review and there was a strong dissent below. However, when the appeal started getting some attention in the press – though the issues were often mischaracterized – it began to look more likely that cert. would be granted. I am not so sure that the Fed. Cir.’s recent streak of affirmances will be left intact.

© 2011 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

Collision Occurs Between Copyrights and Misappropriation in Electronic News Media Space

Posted this week at the National Law Review by Bracewell & Giuliani LLP  and interesting article about copyrightable aspects of Wall Street research—the published models, insights, and facts:   

Despite winning in court to protect valuable copyrights, Wall Street firms are unable to protect their valuable trading recommendations as federal and state laws collide in Barclays Capital Inc. v. Theflyonthewall.com, Inc.1 (pending any potential review on appeal). The electronic news media continues to lead the charge, and now the walls of exclusivity are beginning to crumble for these respected recommendations.

Wall Street firms have for long provided detailed research reports and trading recommendations—exclusively to firm customers—to drive order flow with the recommending firm, thereby generating commission revenue. Storming the walls, however, are those in the electronic news media blasting the once-exclusive information to all corners of the Internet, immediately upon its release by Wall Street. But for Wall Street, this widespread, uncontrolled dissemination has cut into profitability and has wreaked havoc on traditional business models for market research.

Although the electronic news media scored a fresh victory, Wall Street has not suffered a devastating loss. The copyrightable aspects of Wall Street research—the published models, insights, and facts, for example, are often more valuable to institutional customers than the basic recommendation itself (e.g., Buy, Sell, or Hold). These copyrightable aspects, of course, remain protected by federal copyright law.2 Outside the realm of finance, however, this case may signal much broader implications for any business with both feet in the Information Age.

The appeals court received this case after the District Court for the Southern District of New York granted injunctive relief to plaintiffs Barclays Capital Inc.; Merrill Lynch; Pierce, Fenner & Smith Inc.; and Morgan Stanley & Co. Inc. (“the Firms”), which prohibited Theflyonthewall.com, Inc. (“Fly”) from publishing information about the Firms’ recommendations, within certain parameters.3 The issue presented on appeal was whether Fly could be enjoined from publishing “news,” i.e., bare facts, that the Firms [had] made certain recommendations.4 The appeals court vacated the injunction, paving the way for the electronic news media to publish Wall Street recommendations far and wide, and of course, to direct profits to publishers and sponsors, away from the recommending firm. In the wake of this decision, Wall Street firms must now reconsider business models built upon the value of their proprietary information.

Without further recourse from federal copyright law, which does not protect bare “facts” alone, the Firms sought relief under New York tort law through the doctrine of “hot news” misappropriation of information. The appeals court was bound to consider, however, whether federal copyright law preempted the applicability of state law in these circumstances. To survive preemption, Firms were required to prove that Fly’s use of the information constitutes “free riding” on the Firms’ efforts.5 By concluding that there was no “free riding,” the appeals court significantly narrowed the circumstances in which similar state law misappropriation claims can survive preemption by federal copyright law. Accordingly, this case signals a broader victory for electronic publishers hoping to widely distribute, and to profit from, factual information created by others.

In determining whether Fly engaged in “free riding,” the court looked to precedent in National Basketball Association v. Motorola, Inc.6 (“the NBA Case”). In the NBA Case, the NBA collected and broadcast information, based on live sports games, over a communication network; and likewise, a competitor collected and broadcast its own information, based on live sports games, over a competing communication network. The appeals court noted that, in the NBA Case, there was no free riding, in part, because Motorola was bearing its own costs of collecting factual information.

In the present case, the appeals court’s ultimate inquiry was whether any of the Firms’ products enabled Fly “to produce a directly competitive product for less money because it has lower costs.”7 Extending the reasoning from the NBA Case to cover Fly’s actions, the appeals court concluded that that there was no “free riding” because approximately half of Fly’s twenty-eight employees were involved in the collection and distribution of Firms’ recommendations.8 According to the appeals court, Fly “is reporting financial news—factual information on Firm Recommendations—through a substantial organizational effort.”9

The appeals court, however, did not consider it important that the Firms had incurred substantial costs in research and analysis (i.e., acquiring and creating information) as the basis for their recommendations, whereas Fly’s only costs were in collecting and reporting the recommendations. The appeals court discarded the relevance of these basis costs—even though they provide an arguable distinction over the NBA Case—stating that although the Firms “may be ‘acquiring material’ in the course of preparing their reports . . . that is not the focus of this lawsuit. In pressing a ‘hot news’ claim against [Fly], [Firms] seek only to protect their Recommendations, something they create using their expertise and experience rather than acquire through efforts akin to reporting.”10 The appeals court concluded that there was no meaningful difference between “taking material that a Firm has created . . . as the result of organization and the expenditure of labor, skill, and money . . . and selling it by ascribing the material to its creator” and the “unexceptional and easily recognized behavior by members of the traditional news media [reporting on] winners of Tony Awards . . . with proper attribution of the material to its creator.”11 We expect that the contours of these differences to be a key issue if this case [is] heard on appeal, either at the Second Circuit en banc or at the United States Supreme Court.

Absent any legal recourse to ensure the exclusivity of their recommendations, Wall Street firms must now scramble to implement even greater security and counter-intelligence measures. After all, publishers such as Fly rely on information leaks and intelligence to timely obtain the recommendations in the first place. More likely, however, is that Wall Street firms will soon refine their business models to otherwise adequately monetize, or else reduce expenditures in, their intensive research and analysis efforts.

The broader implications of this case—that the “ability to make news . . . does not give rise to a right for it to control who breaks that news and how”12—will bear critically on the development, funding, and overall power of rapidly-advancing electronic information sources. In particular, businesses providing information aggregation services of all stripes—including, for example, those provided by Google, Inc. and Twitter, Inc.—will rejoice in the ability to gather and publish information from multiple sources across the entire nation with a lower risk of encountering divergent legal standards for misappropriation, on a state-by-state basis.

____________________

1 Barclays Capital Inc. v. Theflyonthewall.com, Inc., No. 10-1372-cv (2d Cir. June 20, 2011).
2 The District Court for the Southern District of New York awarded monetary relief for copyright infringement by Fly’s unauthorized distribution of the Firm’s actual reports. Issues concerning copyright infringement were not addressed on appeal.
3 The injunction allowed the Firms’ customers to trade on the Firms’ recommendations prior to the broader market. The injunction prohibited Fly from reporting a recommendation until (a) the later of one half-hour after the opening of the New York Stock Exchange or 10:00 am for those recommendations first distributed prior to 9:30 am, or (b) two hours after the recommendation is first distributed by one of the Firms to its clients, for those recommendations first distributed at or after 9:30 am on a given day. See Barclays Capital Inc. v. Theflyonthewall.com, Inc., slip op. at 29, n.20.
4 For example, a headline covering one of the Firms’ recommendations may state: “EQIX initiated with a Buy at BofA/Merrill. Target $110.”
5 “Free riding” was but one factor in a five-pronged test, the remainder of which were not the basis of the decision. The appeals court speculated, however, that proving certain other factors may be troublesome, such as “direct competition” between Fly and the Firms.
6 105 17 F.3d 841 (2d Cir. 1997).
7 Barclays Capital Inc. v. Theflyonthewall.com, Inc., slip op. at 67.
8Fly previously relied on employees at investment firms (without the firms’ authorization) to e-mail the research reports to Fly as they were released. Fly’s staff would summarize a recommendation as a headline, and sometimes, Fly would include in a published item an extended passage taken verbatim from the underlying report.  Fly maintains that it no longer obtains recommendations directly from such investment firms and, instead, that it gathers them using a combination of other news outlets, chat rooms, “blast IMs” sent by people in the investment community to hundreds of recipients, and conversations with traders, money managers, and its other contacts involved in the securities markets. Id. at 16-17.
9 Id. at 67.
10 Id. at 62.
11 Id. at 63-64.
12 Id. at 71.

© 2011 Bracewell & Giuliani LLP