Author: National Law Forum

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Mexico’s Unified Secured Transactions Registry Offers New Opportunities for Secured Lending

A big thank you to recent featured bloggers at the National Law Review from Strasburger & Price LLP.  John E. Rogers wrote a helpful post about commercial lending changes in Mexico. 

Mexican companies have historically encountered difficulties in attracting secured lending from U.S. and other foreign banks, mainly because of concerns as to the reliability of Mexican laws governing secured transactions and of its systems for filing and perfecting security interests (garantías reales) in personal (movable) property or goods (bienes muebles).  Mexican banks have shared these concerns and have tended to rely on real property collateral in most of their secured lending.  As a result, many Mexican companies whose primary assets are inventory, receivables and equipment have lacked access to adequate financing on competitive terms.

In order to encourage lenders to finance the operations of Mexican borrowers, Mexico has enacted significant reforms of its secured transactions laws. Most recently, dramatic steps have been taken to improve its public registry system to make it easier to search for existing liens on a debtor’s property and to perfect new security interests.

Mexican Bankruptcy Considerations

The importance to creditors of taking collateral security from Mexican debtors has arguably been increased by certain difficulties in the application of the Mexican Bankruptcy Law (the Ley de Concursos Mercantiles or LCM) enacted in 2000 and subsequently amended.1 As a practical matter, the LCM does not ensure the “cram down” of secured creditors to the extent possible under the U.S. Bankruptcy Code, which allows a debtor, under a reorganization plan, to pay a secured creditor less than its full claim if it is under-collateralized.   The secured claim can be “crammed down” to the value of the collateral by paying under the plan, over time, the value of the collateral, with the remainder of the claim being treated as unsecured.2

The LCM provides that a secured creditor may proceed with the enforcement of its collateral security if the reorganization plan does not provide for full payment of the secured debt, or the payment of the value of the collateral.3 On the surface, the latter option suggests the possibility of a cram down, but the absence of clear valuation procedures and criteria in the LCM, combined with the fact that bankruptcy judges often have limited experience with the LCM and few precedents to rely upon, means that it is more difficult than it would be under the U.S. Bankruptcy Code to prevent the secured creditor from proceeding (or threatening to proceed) with an action to enforce its collateral.  Depending on the importance of the collateral to the future operation of the debtor, any such enforcement action could in effect jeopardize the success of the reorganization plan.

This gives the secured creditor significant negotiating leverage in a restructuring under the LCM, and has implications not only for secured bank lending but also for Mexican corporate bond financings, as to which bond investors may have a strong argument based on the LCM to insist on collateral security when the bonds are issued.  If an issuer must provide such collateral, for example to support a high-yield bond offering, it may be less costly for the issuer to provide collateral consisting of personal property than to mortgage its real property, partly because of high mortgage recording costs and the related notarial fees.  In order to obtain the advantages of treatment as a secured creditor under the LCM, having personal property collateral is as effective as having real property collateral of comparable value.

Like the U.S. Before the UCC

Mexico has a bewildering variety of personal property security interests, including among others the pledge (prenda), the industrial mortgage (hipoteca industrial) and the specialized security interests tied to the crédito refaccionario and the crédito de habilitación y avío, that brings to mind the personal property collateral devices (chattel mortgages, trust receipts etc.) that were commonly used in the U.S. prior to the adoption of the Uniform Commercial Code.  Although Mexico has had the advantage of a single Commercial Code (and other federal secured transactions laws) that apply to the entire country, rather than a system of separate State laws as in the U.S., each of the 32 States and the Federal District has its own Civil Code establishing a Public Registry system for real property deeds and mortgages (each such registry is a Registro Público de la Propiedad) and, although personal property security filings are governed by the federal Commercial Code, they have previously been required to be made in the commercial registry (Registro Público de Comercio or “RPC”), which is normally managed by a unit of the related State or municipal government, in the place of the debtor’s domicile.  Some of these locally managed commercial registries are less reliable than others, and significant delays are common in searching for existing liens and filing new security interests on collateral of companies domiciled in remote locations.

The Nonpossessory Pledge and the Guaranty Trust

On the substantive side, Mexico has made significant progress since 2000 by amending the Mexican Commercial Code and the General Law of Credit Instruments and Transactions (the Ley General de Títulos y Operaciones de Crédito or LGTOC) to permit personal property security interests to be created more easily on a “floating lien” basis.  A new type of nonpossessory pledge called theprenda sin transmisión de posesión allows a debtor to pledge all of its inventory and receivables, for example, generically described (rather than described by reference to specific items), to a secured party without requiring that possession of the collateral be transferred to the secured party.  This pledge can permit the debtor to sell the pledged collateral in the ordinary course of business without obtaining a case-by-case release from the secured party, and can automatically subject newly acquired property to the pledge without any further filing, which effectively results in a floating lien.  A similar effect can be achieved through a guaranty trust (fideicomiso de garantía) with respect to the same or similar types of property, whereby title to the collateral is transferred to a Mexican trustee (typically a Mexican bank).4 Although these new devices resemble a security interest created in the U.S. under Article 9 of the UCC, lenders have remained reluctant to significantly expand their secured lending activities in Mexico because of ongoing concerns about their ability to perfect these security interests against third parties through the public registry system.

UNCITRAL and the OAS Encourage Registry Reforms

Recently, in an attempt to provide guidance for emerging market countries like Mexico that wish to improve access by borrowers to secured lending, the United Nations Commission on International Trade Law (UNCITRAL) has promoted reforms of the bankruptcy laws and secured transactions laws in such countries. Its 2008 Legislative Guide on Secured Transactions indicated the importance of a country having a “registry in which information about the potential existence of security rights in movable assets may be made public.”5 In 2010, UNCITRAL decided to expand its work in this field by preparing a “model registry regulation,” which is still in the process of preparation.

The previous efforts of the Organization of American States (OAS) to adopt a Model Inter-American Law on Secured Transactions (the “Model Law”)6 appear to have influenced Mexico in its adoption of the nonpossessory pledge concept. The OAS has also been tackling the registry issue; in October 2009, it held its Seventh Inter-American Conference on Private International Law, which approved Model Registry Regulations to “provide the legal foundation for implementing and operating the registry regime contemplated by the Model Law.”7 Among other things, the Model Registry Regulations contemplate the adoption of electronic filing systems and acknowledge that most of their features were recommended in UNCITRAL’s 2008 Guide and included in the registry systems recently developed in some Latin American countries, including Mexico, as well as in the U.S. (the UCC), Canada (the Personal Property Security Act) and some European countries.

Mexico’s 2009 Commercial Code Amendments and Creation of the RUG

Mexico has been receptive to the objectives reflected by the UNCITRAL and OAS efforts.  Not only did Mexico enact secured transactions law reforms in 2000 and subsequent years to reflect many of the changes contemplated by the OAS’ Model Law, but Mexico’s initiatives with respect to public registry reforms have actually preceded the formal adoption of model rules by UNCITRAL and the OAS.  In August 2009, a few months prior to the adoption of the OAS Model Registry Regulations, the Mexican Congress approved amendments to the federal Commercial Code that provide for the establishment of a Unified (or Sole) Registry of Movable Property Collateral (the Registro Único de Garantías Mobiliarias or “RUG”).8 The new Article 32 bis of the Code provides for the RUG (pronounced “roog”) to be a centralized registry for all types of security interests granted in favor of any creditor that carries out commercial activities (a comerciante) in personal property.  The RUG will be a section of the PRC under the supervision of the Ministry of Economy (Secretaría de Economía), in which all filings are to be carried out electronically, through the RUG website, www.rug.gob.mx.

The stated Congressional purpose of the RUG is to strengthen the system for personal property secured transactions “as an effective tool for access to credit.”  Its main functions are to create a mechanism that allows public disclosure of security interests created on personal property and to establish priority rules for secured creditors.  Filings through the RUG have immediate effect, without requiring any approval by any authority.  Such filings can be made by financial institutions, public officials, public notaries (notarios públicos) or brokers (corredores públicos) and others authorized by the Ministry of Economy.  Under Article 32 bis 4 of the amended Commercial Code, a debtor is generally deemed to have authorized any secured party creditor that is acomerciante to file evidence of the applicable security interest in the RUG.  Article 32 bis 7 allows “any interested party” to request the issuance of a certification as to the filings that have been made in the RUG with respect to any debtor.

New Registry Regulations

On September 23, 2010, an executive decree was issued by Mexican President Felipe Calderón implementing the 2009 Commercial Code amendments by amending the Regulations governing the PRC to provide specifically for the inclusion of the RUG as a section of the overall PRC.9 The amendments clarify how the RUG will operate through the electronic system called the Integrated System of Registry Procedures (Sistema Integral de Gestión Registral or SIGER) and the procedures to be followed for the use of the RUG by those who wish to (i) search it for the existence of existing security interests and (ii) perfect their own security interests as against third parties by filing notices.  Anyone who registers with the RUG can initiate a search, but filings of security interests directly by an institutional creditor can only be done if the creditor entity has arranged to utilize an electronic signature for this purpose which satisfies the technical requirements contemplated by the Commercial Code10. Otherwise the security interest must by filed on the creditor’s behalf by someone else authorized under the RUG to do so.

The provisions of the amended Regulations (the “Amended Registry Regulations”) impose certain formalities which do not seem to be contemplated by the new Article 32 bis of the Commercial Code and may contravene the policy guidelines recommended by the OAS and UNCITRAL.  For example, Article 10 of the Amended Registry Regulations provides for the RUG registrar or officer to verify that a filing has been properly made “in accordance with applicable legal and regulatory provisions,” which would seem to prevent the filing from becoming immediate and automatic, as provided in Article 32 bis 4 of the amended Commercial Code.  Also, Article 10 bis of the Amended Registry Regulations specify that filings can only occur through a public authenticating officer (fedatario), i.e. a public notary (notario público) or broker (corredor público), although Article 30 bis seems to permit others, including financial entities, to make filings without using a fedatario.   As a practical matter, until changes are made in Article 10 bis to allow filings to be made otherwise, it seems advisable to use a fedatario to carry out the filing.  A number of law firms in Mexico employ fedatarios, so this should not be a significant impediment to the filing process or impose a significant additional cost.   The use of a fedatario has the advantage of avoiding the requirement under Article 10 that the RUG registrar or officer verify the propriety of the filing; under Article 10 bis a filing by a fedatario has immediate effect.

Preventive Filings

Prior to the closing of a secured lending transaction, the proposed lender may wish to have the comfort that there will be no last-minute filings by other lenders of security interests that would have priority (based on time of filing) over any security interest to be filed to secure the transaction in favor of the proposed lender.   To obtain such comfort, Articles 32 bis 5 of the Commercial Code amendments and 33 bis of the Amended Registry Regulations permit the proposed lender to make a filing prior to the scheduled closing, which will have the effect of preventing any other lender from making a filing that would have priority over the later definitive filing by the proposed lender of its own security interest.  If the closing does not take place, the debtor need not seek removal of the preventive filing from the records of the RUG, because such filing would automatically cease to be effective after the passage of a specified period, normally two weeks.

Information to be Provided in Filings through the RUG

Article 33 Bis 2 of the Amended Registry Regulations provides that the information that must be provided in the filing of the security interest will be (i) the name of the debtor or debtors granting the security interest, (ii) the name of the creditor or secured party, (iii) the type of security device utilized to create the security interest, (iv) the personal property securing the relevant obligations, (v) the secured obligations, (vi) the term or time frame during which the filing will be effective, and (vii) anything else contemplated by Article 33 of such regulations, i.e. anything else that may be required by the forms to be used in order to effect such filings, which are to be specified in a publication in the official Gazette (Diario Oficial) of the Republic.

Using the RUG

As contemplated by the Amended Registry Regulations, to provide further guidance on using the RUG, the Ministry of Economy published a User’s Guide (Guía de Usuario) in Spanish providing additional guidance as to how the search and filing processes will operate.11 The User’s Guide shows how (i) a user can become registered with the RUG, (ii) searches can be performed, (iii) search certificates can be obtained, (iv) secured party creditors (whether organized or resident within or outside of Mexico) can be registered and (v) the creditor’s representatives can be registered in order to be entitled to submit filings on behalf of the creditor.

Mexican creditors can be registered online by including their Mexican tax ID numbers in the creditor information they provide.  In the case of foreign creditors not having such numbers, the registration may be carried out at one of the designated offices of the Ministry or through a fedatario. Foreign creditors that wish to avoid delays at the closing of a secured loan may wish to become pre-registered before the closing.  For cases involving multiple creditors, such as a syndicated loan, there is a separate procedure for entering the names of the additional creditors.  As for the debtor, the filing form contemplated by the User’s Guide mandates that it be filed electronically in such a way that the debtor’s name is accompanied by an indication of whether the debtor is an individual or an entity and his or its nationality, registration file (folio) number and taxpayer ID or CURP number.  A debtor that is an individual may be registered by a fedatario at the time of the filing of the security interest, but a debtor that is a company or other entity will have to have been registered in the PRC prior to the time of filing.

According to the User’s Guide, the filing of a security interest is to be effected by making entries in the electronic equivalent of a document akin to a UCC financing statement, which should specify

  • (i) the name and address of the person requesting the registration of the security interest,
  • (ii) a description of the type of property subject to the security interest, such as “machinery and equipment” (the applicable type is to be selected from alternatives that appear on the screen),
  • (iii) the type of security document under which the security interest was created, i.e. whether it was a nonpossessory pledge, guaranty trust etc. (again, the selection is from the types indicated on the screen),
  • (iv) the date of the relevant security agreement,
  • (v) the maximum amount secured, specifying the applicable currency,
  • (vi) a more detailed description of the property subject to the security interest,
  • (vii) a description of the public deed issued before the fedatario which formalized the security agreement,
  • (viii) a description of the agreement under which the secured obligation arose,
  • (ix) optionally, any terms and conditions established by the documents, and
  • (x) the period of time for which the filing is to remain effective.

The User’s Guide provides examples of entries that are to be made in the online “financing statement,” and indicates how the electronic signature is to be applied to the document in order to affect its filing.

The User’s Guide includes similar instructions for related procedures, such as amendments, assignments, renewals or reductions of the effective term of the filing, corrections of errors, cancellations and “annotations” (anotaciones).   The annotations might include information on any enforcement action with respect to the security interest, and would be made pursuant to instructions from a court or other authority.  An annotation might result from a debtor challenging the propriety of the filing.

Effect of the Reforms: Better than the UCC?

The RUG is now the exclusive method in Mexico for perfecting security interests in inventory, receivables, equipment and many other types of personal property, whether created through a possessory or nonpossessory pledge, guaranty trust or other device, superseding all of the local public registries.  However, security interests previously filed in the local registries will continue to be effective, so lenders must undertake searches as to any debtor in the locally-managed public registry responsible for such debtor’s domicile until such time as the previously filed security interests are no longer effective (for example, because they have been released or the related debt has been repaid), or otherwise satisfy themselves that no such filings have occurred (for example, by obtaining representations and warranties from the debtor to this effect).   Similar transition issues were encountered in the U.S. during the implementation of the UCC and its associated filing systems.

Two features are present in the Mexican situation which did not exist in the case of the adoption of the UCC.  First, the RUG will be the sole registry in Mexico for filing security interests in personal property, unlike the separate filing systems in the 50 States of the U.S. and in the District of Columbia, and many local filing places such as the offices of County Clerks.  Thus, the sometimes thorny question in the U.S. of where to file will not apply in Mexico.  Secondly, the RUG is exclusively electronic, as opposed to the recordation systems in the U.S., which initially relied entirely on paper filings and have only recently began to transition to electronic systems, gradually, on a State by State basis.

It will still be necessary to comply with the relevant requirements for creating security interests, which in Mexico often requires that the security agreement or pledge agreement be formalized by the preparation by afedatario of a formal deed (escritura).  Instead of being recorded in the locally managed public registry, such deed should now be recorded in the RUG.   Filings as to some types of collateral, such as vessels and aircraft, will continue to be made in specialized registries. Also, some of the enforcement remedies available under the UCC are not available under Mexican law, and the enforcement process in Mexico is likely to be more time-consuming than it is in the U.S.

But with those exceptions, and despite some uncertainty created by the amended Regulations, the establishment of the RUG represents a huge step forward by Mexico in making secured lending an attractive option for borrowers and lenders alike. Even a lender that remains skeptical about the enforcement of security interests in Mexico may be persuaded that it is worth perfecting security interests pursuant to a filing in the RUG in order to obtain the important practical advantages under the Mexican bankruptcy law of being a secured lender.

*The authors gratefully acknowledge the collaboration of Fernando Barrita of Strasburger & Forastieri and the helpful comments of Steve Roberts and John Dorsey in Austin and of Professor Alejandro Garro of Columbia Law School in New York.  The authors are, however, solely responsible for the contents of this article.

1 Published in the Diario Oficial de la Federación (the “D.O.F.”) on May 12, 2000. Amendments to the LCM were published in the D.O.F. on December 27, 2007.

2 11 U.S.C. § 1129(b)(2)(A).

3 See LCM Articles 158, 160.

4 Published in the D.O.F. on May 23, 2000, with amendments published in the D.O.F. on June 13, 2003.

5 Legislative Guide on Secured Transactions of the United Nations Commission on International Trade Law,  GA Res. 63/121, UN GAOR, 63rd Sess., 17 December 2008.

6 Adopted on February 8, 2002, by the Sixth Inter-American Specialized Conference on Private International Law (known as “CIDIP-VI”, for its Spanish acronym) [CIDIP-VI, Final Act 3(f), OEA/Ser.K/XXI.6/ CIDIP-VI/doc.24/02 rev.3 (March 5, 2002)].

7 Approved by the Seventh Inter-American Specialized Conference on Private International Law (CIDIP-VII)
at its second plenary session of October 9, 2009); quoted language appears in the Introduction.

8 Published in the D.O.F. on August 27, 2009.

9 Published in the D.O.F. on September 23, 2010.

10 Art. 11 of the Amended Registry Regulations.

11 See http://www.rug.gob.mx/Rug/resources/pdf/
guia%20de%20usuario/Manual%20de%20Usuario%20RUG.pdf.

© Copyright 2011 Strasburger & Price, LLP.

 

A Brave New World for Commercial Buildings: ASTM's "BEPA" Standard

Recently posted at the National Law Review by Douglas J. Feichtner of Dinsmore & Shohl LLP –   ASTM BEPA standard is expected to become the standard for building energy use data collection. 

On February 10, 2011, ASTM formally published its Building Energy Performance Assessment (BEPA) Standard – E 2797-11. This standard will enable users to measure the energy performance of a commercial building in connection with a real estate transaction. Regulatory drivers spurred the development of the BEPA standard, even in the midst of a construction recession. In the past few years, several states and local governments passed mandatory building energy labeling and transactional disclosure regulations. These disclosure regulations, combined with some building codes that are now requiring specific energy-efficiency improvements, triggered the development of a standardized methodology to assess and report on a commercial building’s energy use. The BEPA’s passage arrives at a crucial time when building certification standards face increased scrutiny, both in the market and the courtroom.

The ASTM BEPA standard includes the following five components: (1) site visit; (2) records collection; (3) review and analysis; (4) interviews; and (5) preparation of a report. ASTM is not creating or implying the existence of a legal obligation for the reporting of energy performance or other building-related information. Rather, the BEPA offers certain guidelines to the industry to promote consistency when collecting (and perhaps reporting) buildings’ energy usage data, such as:

 

  • collecting building characteristic data (i.e., gross floor area, monthly occupancy, occupancy hours)
  • collecting a building’s energy use over the previous three years (with a minimum of one year) – including weather data representative of the area where the building is located;
  • analyzing variables to determine what constitutes the average, upper limit, and lower limit of a building’s energy use and cost conditions;
  • determining pro forma building energy use and cost; and
  • communicating a building’s energy use and cost information in a report

One of the options available to users of the BEPA standard is to identify government-sponsored energy efficiency grant and incentive programs that may be available for any energy efficiency improvements that could be installed at the building (thereby increasing its value, and making it more attractive to potential buyers).

Building benchmarking (i.e., comparing a building’s energy output to its peers) is not part of the ASTM BEPA standard’s primary scope of work, but rather a “non-scope consideration.” The BEPA certainly could be used in conjunction with building certification tools already in the marketplace, such as ASHRAE, Green Globes, and U.S. Green Building Council (LEED), to name a few.

However, as the economic noose has tightened in recent years, green building standards have received increased scrutiny. Indeed, builders and landlords who sell their properties with the promise that they have some green certification (which can be expensive to obtain), and that promise for whatever reason fails to translate to the economic savings contracted for, could face liability.

The Gifford v. USGBC lawsuit currently pending in the United States District Court for the Southern District of New York crystallizes the debate over green building certification (in this case – LEED). The core allegations in the lawsuit prompt this author to see significant value for stakeholders to use ASTM’s BEPA as a supplement to applying rating and benchmarking systems like LEED.

Gifford’s primary complaint is that LEED-certified buildings are not as energy-efficient as advertised. Support for this contention rests on Gifford’s analysis of a 2008 New Buildings Institute (NBI) study comparing predicted energy use in LEED-certified buildings with actual energy use. In the study, NBI concluded that LEED buildings are 25-30% more energy-efficient compared to the national average. To the contrary, Gifford concluded that LEED-certified buildings use 29% more energy than the national average. He further emphasized that the NBI results were skewed in part because the NBI study compared the median energy use of LEED buildings to the mean energy use of non-LEED buildings.

The purpose of this article is not to comment on the merits of the Gifford lawsuit or criticize LEED. But this apples-to-oranges argument articulated by Gifford magnifies the proverbial elephant in the “green” room – the need for sufficient objective data to accurately compare the energy use and energy cost of buildings against their relevant peer groups. With such data in hand, the benchmarking and rating systems already in place can be buttressed with a greater measure of consistency and transparency (a big issue for detractors of green building certification, like Gifford). Furthermore, the more stakeholders in the real estate industry (buyers, sellers, lenders) understand how a building’s energy performance was determined, the better equipped they will be to put a price on the economic and environmental benefits of green buildings.

In sum, the ASTM BEPA standard is expected to become the standard for building energy use data collection. It can be used to quantify a building’s energy use as well as its projected energy use and cost ranges, factoring in a number of independent variables (i.e., weather, occupancy rates), by way of a transparent process. Finally, the BEPA building energy use determination can complement compliance reporting under applicable building energy labeling or disclosure obligations. In the end, ASTM’s BEPA can provide the foundation by which an apples-to-apples comparison can take place in evaluating commercial building energy performance determinations and certifications.

© 2011 Dinsmore & Shohl LLP. All rights reserved.

Out of Work? Out of Luck

Great posted added today at the National Law Review about the EEOC’s hearing about the impact of employers considering only those currently employed for job vacancies.  

EEOC Examines Employers’ Treatment of Unemployed Job Applicants at Hearing

WASHINGTON—In a public meeting held today, the U.S. Equal Employment Opportunity Commission (EEOC) examined the impact of employers considering only those currently employed for job vacancies.

“Throughout its 45 year history, the EEOC has identified and remedied discrimination in hiring and remains committed to ensuring job applicants are treated fairly,” said EEOC Chair Jacqueline A. Berrien. “Today’s meeting gave the Commission an important opportunity to learn about the emerging practice of excluding unemployed persons from applicant pools.”

According to Helen Norton, Associate Professor at the University of Colorado School of Law, employers and staffing agencies have publicly advertised jobs in fields ranging from electronic engineers to restaurant and grocery managers to mortgage underwriters with the explicit restriction that only currently employed candidates will be considered. “Some employers may use current employment as a signal of quality job performance,” Norton testified. “But such a correlation is decidedly weak. A blanket reliance on current employment serves as a poor proxy for successful job performance.”

“The use of an individual’s current or recent unemployment status as a hiring selection device is a troubling development in the labor market,” said Fatima Goss Graves, Vice President for Education and Employment of the National Women’s Law Center. She noted that this practice “may well act as a negative counterweight” to government efforts to get people back to work. Women, particularly older women and those in non-traditional occupations, are disproportionately affected by this restriction, testified Goss Graves.

Denying jobs to the already-unemployed can also have a disproportionate effect on certain racial and ethnic minority community members, Algernon Austin, Director of the Program on Race, Ethnicity, and the Economy of the Economic Policy Institute, explained. Unemployment rates for African-Americans, Hispanics and Native Americans are higher than those of whites. When comparing college-educated workers, the unemployment rate for Asians is also higher. Thus, restricting applications to the currently employed could place a heavier burden on people of color, he concluded.

The use of employment status to screen job applicants could also seriously impact people with disabilities, according to Joyce Bender, an expert in the employment of people with disabilities. “Given my experience, I can say without a doubt that the practice of excluding persons who are currently unemployed from applicant pools is real and can have a negative impact on persons with disabilities,” Bender told the Commission.

Dr. William Spriggs, Assistant Secretary of Labor for Policy, offered data supporting this testimony. Spriggs presented current national employment statistics showing that African-Americans and Hispanics are overrepresented among the unemployed. He also stated that excluding the unemployed would be more likely to limit opportunities for older applicants as well as persons with disabilities.

“At a moment when we all should be doing whatever we can to open up job opportunities to the unemployed, it is profoundly disturbing that the trend of deliberately excluding the jobless from work opportunities is on the rise,” said Christine Owens, Executive Director of the National Employment Law Project. In addition to presenting statistical evidence, she recounted stories unemployed workers have shared with her organization where they were told directly that they would not be considered for employment due to being unemployed.

James Urban, a partner at the Jones Day law firm, who counsels employers, expressed doubt as to the extent of the problem. Fernan Cepero, representing the Society of Human Resource Professionals, told the Commission that his organization is not aware of this practice being in regular use. But both Mr. Urban and Mr. Cepero noted that the automatic exclusion of unemployed persons from consideration does not constitute “due diligence” in the screening of job applicants.

© Copyright 2011 – U.S. Equal Employment Opportunity Commission

Ice Inspection Hits Close to Home – Guilty of I-9 Form Violations

Recently posted by Jennifer G. Parser of Poyner Spruill LLP at the National Law Review – details about a recent employer immigration fine – where the employer had a legal workforce…..

Fast Food Franchisee In Fayetteville, NC Fined Over $27,000 — Despite Legal Workforce

In a decision dated December 22, 2010, the US Department of Justice Executive Office for Immigration Review’s Office of the Chief Administrative Hearing Officer (OCAHO) found a fast food franchisee in Fayetteville, North Carolina, guilty of I-9 violations and fined the company $27,150. Count I alleged that the franchisee hired 11 individuals from 2006 through early 2009, yet failed to ensure that they properly completed Section 1 of the I-9 Form and/or failed itself to properly complete Section 2 or Section 3. Count II alleged that the franchisee hired 97 individuals during the same time period for whom it failed to prepare any I-9s. Penalties were sought in the amount of $1,028.50 for each violation, for a total of $111,078. OCAHO found that, based upon a visual inspection, the I-9 Forms for the 11 individuals named in Count I contained substantive violations, and no I-9 Forms could be produced for any of the 97 employees named in Count II. For reasons discussed below, OCAHO ultimately fined the franchisee $27,150, approximately 25% of the penalties sought by ICE.

Never Backdate I-9 Forms

Employers should be aware that the substantive violations found in Count I were caused in part by the ICE auditor subtly marking a Form I-9 to determine if it was later tampered with, something that the franchisee tried to do, demonstrating bad faith. In this case, the ICE auditor made “three subtle marks” to determine later whether the forms produced were backdated or completed after service of the Notice of Inspection on the franchisee in the context of the auditor simultaneously providing a sample I-9 Form and a copy of the Handbook for Employers (M-274). At that time, the ICE auditor expressly warned the franchisee’s employee not to backdate the I-9 Form if new ones were prepared. When the I-9s were subsequently reviewed by ICE, however, it was determined that they had all been completed after the Notice, and that 7 of the 11 forms were backdated with the employer attestation at Section 2 still left blank.

Factors Used by OCAHO in Setting Penalties

Turning to assessing the amount of fines to be levied, OCAHO considered the following five factors which were not given equal weight:

  • Size of the business,
  • Good faith of the employer,
  • Seriousness of the violation(s),
  • Whether or not the individuals involved were unauthorized aliens, and
  • Any history of previous violations of the employer.

 Each factor will be reviewed in light of the fines levied against the franchisee.

Size of Employer

OCAHO found the franchisee’s relatively small size to be a mitigating factor in assessing the fines. Analyzing its number of employees, OCAHO determined that despite being part of a national fast food franchise, the franchisee was in fact a small employer with a large turnover common in the fast food industry, hence the 97 former employees.

Good Faith

Any analysis of an employer’s good faith focuses first on whether or not the employer reasonably attempted to comply with its obligations prior to issuance of the Notice of Inspection. Here, OCAHO determined that:

“…there is not a scintilla of evidence that suggests [the franchisee] made any effort whatsoever to ascertain the requirements of the law…[The franchisee] made no effort at all to ascertain what the law required and lacked the reasonable diligence required: there was simply no attempt at compliance prior to the Notice of Inspection. [The franchisee’s] subsequent attempts at compliance have minimal bearing on an analysis of its good faith because conduct occurring after the investigation is over is ordinarily outside the permissible scope of consideration.”

It is important for employers to note that mistakes found in Section 1 completed by the employee can be attributable to the employer as the employer is obligated to ensure that the employee properly completes Section 1: “[The franchisee] not only made no effort at all to ascertain what the law requires or to conform its conduct to it, it also attempted deception by permitting employees to backdate I-9 forms, and this is sufficient to support an assessment of bad faith.”

Further, the franchisee’s belated and disingenuous attempt to complete the I-9s by failing to attest to its own compliance in Section 2 implies an avoidance of liability for perjury.

Seriousness of the Violation(s)

OCAHO noted that a failure to prepare an I-9 at all is among the most serious of paperwork violations. As described above as a demonstration of a lack of good faith, OCAHO found the franchisee’s failure to complete Section 2 to imply an avoidance of liability for perjury.

Employees were not Unauthorized and Employer had no History of Previous Violations
None of the employees whose I-9s were involved was an unauthorized to work, nor had the franchisee a history of violations, probably mitigating the fines levied.

Mitigating or Exacerbating Factors in Assessing Penalties

Here, OCAHO took into account the depressed state of the economy and the difficulty any displaced employee would have in finding other work and reduced the penalties accordingly. As a result, the franchisee was directed to pay $27,150 in civil money penalties and not the $111,078 sought by ICE.

Conclusion

Employers should be aware that they will be blamed by ICE and penalized accordingly for failing to ensure their employees are properly completing Section 1, for permitting backdating or tampering with incomplete or missing I-9s for failing to complete its Section 2. Merely employing a legal workforce will not absolve an employer from imposition of penalties if Section 1 of its I-9 Forms are not meticulously completed by the employee on day one of hire for pay and Section 2 by the employer by day three.  

© 2011 Poyner Spruill LLP. All rights reserved.

Discrimination Charges Against Employers Hit Record High in 2010

Posted yesterday at the National Law Review by Laura Broughton Russell and David L. Woodard of Poyner Spruill LLP – EEOC statistics recently released  revealing a record-breaking number of charges of workplace discrimination filed against private sector employers in 2010. 

The Equal Employment Opportunity Commission (EEOC) has recently released its charge statistics for fiscal year 2010 (which ended September 30, 2010). The EEOC enforces federal laws prohibiting employment discrimination, which includes Title VII of the Civil Rights Act of 1964, the Equal Pay Act, the Age Discrimination in Employment Act, the Americans with Disabilities Act, and the Genetic Information Nondiscrimination Act.

Not surprisingly, these statistics reveal a record-breaking number of charges of workplace discrimination filed against private sector employers in 2010. The number of charges filed hit 99,922, an unprecedented number which amounts to a more than 7% increase over the previous year’s filings. The somber economy and the accompanying layoffs in 2009 and 2010 may be behind this increase, as well as the EEOC’s expansion of educational training and other outreach efforts to approximately 250,000 persons.

What the Statistics Foreshadow for 2011 

  • In its release, the EEOC noted its “concerted effort to build a strong national systemic enforcement program,” which resulted in 465 systemic investigations, involving more than 2,000 charges, being undertaken. This emphasis on systemic or class-wide discrimination means the EEOC is devoting more of its resources to bringing more multiple plaintiff cases against employers. This trend is expected to continue.

  • The new Genetic Information Nondiscrimination Act resulted in 201 charges being filed. Significantly more charges are expected in this area in 2011, due to the release of the accompanying regulations at the end of 2010 and the continuing publicity about and public awareness of this law.
     
  • Disability discrimination claims numbered 25,165 in 2010, which constituted slightly more than 25% of all claims filed with the EEOC. With the recent expansion of the Americans with Disabilities Act (ADA) by the ADA Amendments Act, and the anticipated 2011 release of the accompanying regulations, claims in this area are expected to continue to increase.

Some Final Observations 

The EEOC has been energized by the December 2010 Senate confirmations of its new Chair, as well as its General Counsel and two new Commissioners. The EEOC now has a full complement of members, which it has been lacking for quite some time. In addition, the EEOC recently has added to its front-line staff. Notably, the EEOC recently has held two significant Commission meetings during which it explored the use of credit histories as employment screening devices, and the impact of the economic situation on older workers. By reviewing their employment decisions in advance with counsel, as well as generally reviewing their employment policies and practices to ensure compliance with the law, employers can lower the risk of expensive and onerous legal proceedings filed by individuals and by the EEOC.
 

© 2011 Poyner Spruill LLP. All rights reserved.

The "Safer Products" Database: Reports of Harm Made Public on March 11, 2011

Posted last week at the National Law Review by Mary C. Turke of Michael Best & Friedrich LLP – updated information on the U.S. Consumer Product Safety Commission’s Publicly Available Consumer Product Safety Information Database which is set to officially launch March 11, 2011: 

The U.S. Consumer Product Safety Commission’s Publicly Available Consumer Product Safety Information Database (the “Database”) (found atwww.saferproducts.gov) will be launched officially on March 11, 2011. Mandated by the Consumer Product Safety Improvement Act of 2008 (the “Act”), the Database includes a new mechanism for consumers to report harm, or merely a risk of harm, involving consumer products (excluding food and drugs). The Database makes qualified reports of harm available to the public, in an online, searchable format. Prior to publication of any report, the Commission will allow manufacturers to comment and/or challenge reports containing materially inaccurate or confidential information. In certain cases, manufacturers’ comments may be published as well. Previously, reports of harm and responsive comments were not available to the public unless published in a Commission report or obtained through a Freedom of Information Act request.

The Database is currently in “soft-launch” i.e., the Commission and stakeholders are testing the new reporting and response system with the knowledge that until March 11, 2011, nothing will be made publicly available in the Database. Indeed, consumer reports are being accepted through the website and any report meeting minimum requirements for publication are transmitted to registered manufacturers, importers and private labelers. These companies are able to provide comments online and challenge reports as containing inaccurate or confidential information.

This practice time is valuable, particularly because the faster a company is able to respond to a negative consumer report, the better. Companies should use the soft-launch to establish protocols for dealing with reports of harm involving their products, including designating persons within the company to be notified of reports via email and identifying the single account holder who is allowed to submit comments. The Act does not require that reports be based on first-hand knowledge or that they be made within a certain time following the alleged harm. Thus, companies should carefully review all reports in which they are named and consider monitoring reports in the Database by industry — where no manufacturer is named. Perhaps most importantly, companies should develop procedures for responding to reports that contain materially inaccurate or confidential information. The Act requires that any request to remove information from a report be “timely” and accompanied by a certification to defend the Commission if the removal is later challenged. Thus, companies must be prepared to act quickly and accurately in responding to reports of harm. Practice and preparation during soft-launch will help in that endeavor.

To succeed in an increasingly competitive business environment, manufacturing companies need to seize every available advantage. Whether negotiating a contract, moving an idea through the patent process or dealing with customers, getting your manufactured products to market requires expertly-coordinated efforts. Any delay can have a significant impact on your business. 

© MICHAEL BEST & FRIEDRICH LLP

New Guidelines for Preservation of Electronically Stored Information "ESI" Released; Federal Court Rules that Metadata Subject to FOIA

Recently posted at the National Law Review by Bracewell & Giuliani – some news about Delaware’s Chancery court’s recent publication of  Guidelines for Preservation of Electronically Stored Information and  Judge Shira A. Scheindlin’s  ruling  that metadata is “an integral or intrinsic part of an electronic record, and, consequently, part of the public record that must be produced by the Government in response to Freedom of Information Act (FOIA) requests:  

In an effort to advise parties to a litigation, the Delaware Court of Chancery released last month its Guidelines for Preservation of Electronically Stored Information. The publication of the Guidelines is timely in light of a decision released late last month in Victor Stanley, Inc. v. Creative Pipe, Inc., Civil No. MJG-06-2662 (D. Md. Jan. 24, 2011), where defendants were ordered to pay over $1 million in sanctions for the willful loss and destruction of electronically stored information (ESI).

As a preliminary matter, the Guidelines advise litigants to take all reasonable steps to preserve ESI that is potentially relevant to a litigation and within their possession, custody or control.  This requires the parties and counsel to “develop and oversee a preservation process.” Key to the preservation process is identifying potentially relevant sources of ESI, i.e. custodians and devices, and enacting a litigation hold. Although there is no single definition among the State and Federal Courts for a litigation hold, the Guidelines advise that, at the least, it entails developing well-written instructions for the preservation of ESI that are then distributed to all custodians of potentially relevant ESI.

Just as important is the timing of the litigation hold.  Various courts have found that the duty to preserve potentially relevant documents occurs once litigation is “reasonably anticipated,” not once litigation has commenced. As a result, theGuidelines recommend that, to the extent a litigation hold has not been disseminated before litigation has commenced, counsel should instruct their clients to do so quickly and “to take reasonable steps to act in good faith and with a sense of urgency to avoid the loss, corruption or deletion of potentially relevant ESI.” While the Guidelines note that this may not be sufficient to avoid the imposition of sanctions if potentially relevant ESI is lost or destroyed, the Chancery Court “will consider the good-faith preservation efforts of a party and its counsel.”

Counsel is well-advised to reference the Guidelines in light of the significant increase in the number of motions and awards for e-discovery sanctions. See Dan H. Willoughby, Jr. et al., Sanctions for E-Discovery Violations: By the Numbers, 60 Duke L.J. 789 (2010). In fact, in the past six years, there have been over five cases where sanctions exceeded $5 million, with one leading the pack at $8.8 million. See id. at 814-15.

As noted above, defendants in Victor Stanley were recently ordered to pay over $1 million in sanctions for the willful loss and destruction of ESI. See also Sanctionable Conduct Involving E-Discovery, Bracewell & Giuliani Legal Advisory, dated Sept. 28, 2010. Magistrate Judge Paul W. Grimm found defendants’ acts of spoliation to be so “extraordinary” as to treat them as contempt, pursuant to Federal Rules of Civil Procedure 37(b)(2)(A)(vii). As such, failure to pay the ordered amount within 30 days will subject the owner of the defendant corporation to up to two years of jail time. Not surprisingly, one of the many actions cited by the court that defendants failed to take: enforcing a litigation hold.

In other e-discovery developments, Judge Shira A. Scheindlin of the Southern District of New York, and author of the instructive Zubalake series of opinions, ruled this week that metadata is “an integral or intrinsic part of an electronic record,” and, consequently, part of the public record that must be produced by the Government in response to Freedom of Information Act (FOIA) requests. Nat’l Day Laborer Org. Network v. U.S. Immigration and Customs Enforcement Agency, 10 Civ. 3488 (S.D.N.Y. Feb. 7, 2011). Although the issue had been addressed by several state courts, this was a matter of first impression for a Federal Court. 

Noting that different types of metadata are inherent to different types of electronic records, Judge Scheindlin determined that “metadata maintained by the agency as a part of an electronic record is presumptively producible under FOIA, unless the agency demonstrates that such metadata is not ‘readily producible.'” (Emphasis in original). She further determined that the onus is on the requesting part to specifically request the metadata. However, Judge Scheindlin found that it was “no longer acceptable” for a party to produce “a significant collection of static images of ESI without accompanying load files.” Citing to Federal Rule of Civil Procedure 34 as a source that should inform FOIA productions, Judge Scheindlin’s ruling will likely carry equal weight in the context of civil discovery. 

© 2011 Bracewell & Giuliani LLP

Not Your Father's Insurance Coverage: Using Transactional Insurance to Drive Business Opportunities

Posted at the National Law Review last week by Daniel J. Struck and Neil B. Posner of Much Shelist – a review of different type of insurance products that can be helpful in facilitating certain types of financial transactions: 

Insurance coverage as a commercial risk management tool has been around for centuries, but there are a number of newer transactional insurance products that can actually help drive business opportunities and close deals. Developed in the last decade or so and becoming more widely available, these products—including representations and warranties (R&W), tax liability, litigation liability and environmental stop-loss insurance—are decidedly not your father’s insurance coverage. Rather, these less traditional types of coverage can help facilitate the purchase or sale of a business or a significant business asset by reducing the uncertainties associated with potential indemnification obligations and liability exposures.

Traditional Insurance Coverage: Still an Important Corporate Asset

For many businesses, standard commercial insurance is treated as a routine expense in which premiums are the deciding factor in evaluating largely interchangeable form policies. In previous articles, we have discussed why this approach is often short-sighted.

The types of insurance coverage purchased by most businesses are predictable. General liability insurance protecting against liabilities owed to third parties resulting from bodily injury, personal injury and property damage is a given. Some kind of first-party property coverage for loss to owned or rented premises, damage to inventory and equipment, and resulting business interruptions also is generally necessary. Because most businesses have employees, insurance related to workers’ compensation and employee benefits programs is essential. Depending on the particular business, additional lines of insurance—such as management liability, employee dishonesty/fidelity, fiduciary liability, cyber-liability and professional liability—may be necessary as well.

For all their differences, these types of coverage all serve as a means to manage risk and reduce the exposure to potential “fortuitous” first-party losses or third-party liabilities, ranging from slip-and-fall accidents at a retail location to a devastating explosion at a factory or an alleged breach of duty by a company’s directors. Although traditional insurance coverage may help protect the financial health and solvency of a business and its individual partners, officers or directors, it does not often operate as an actual driver of business opportunities.

Transactional Insurance: A Tool for Facilitating Corporate Transactions

Transactional insurance policies, on the other hand, generally insure against risks that fall outside the scope of more traditional coverage and have the potential to drive, or at least facilitate, certain corporate transactions. Examples include:

  • R&W insurance, which provides coverage for the contractual indemnification obligations resulting from breaches of the representations and warranties of a specific agreement (often a contract for the purchase/sale of a business or a significant corporate asset);
  • Tax liability insurance, which provides coverage for an identified potential tax liability or penalty, or for the liability resulting from an adverse determination in a specified ongoing tax dispute;
  • Litigation liability insurance, which may provide coverage if an award of damages in an identified piece of litigation exceeds a threshold specified in the insurance policy; and 
  • Environmental stop-loss insurance, which may provide coverage for the costs of an ongoing environmental remediation project that exceeds a specific cost threshold.

Although commercial insurance policies of every type should be tailored to the particular needs of the insured, the levels of detail and specific underwriting and negotiation involved in placing transactional insurance are generally even greater. For example, the process tends to be fact specific and often involves extensive manuscripting (i.e., the negotiation of customized coverage terms applicable to the specific risks insured against).

But how can transactional insurance facilitate the completion of corporate transactions? Even in the best of times, potential buyers and sellers may find it difficult to agree on price. In the current economic environment, however, distressed sellers may be reluctant to discount the value of their businesses in hopes of a return to better days, while value-conscious purchasers are determined to buy at a substantial discount. Assuming that agreement can be reached on price, the parties must still negotiate the representations and warranties provided by both the buyer and the seller, and then reach acceptable indemnity terms for breaches of those representations. But the challenges don’t end there. A buyer with concerns about the ability of the seller to satisfy its indemnification obligations naturally will want the indemnification provision to be backstopped by a substantial escrow. A seller, however, likely will not want a substantial portion of his or her personal wealth tied up in an escrow account to pay for liabilities related to a business with which he or she is no longer associated.

In this challenging context, R&W insurance might help bridge differences and facilitate the successful closing of the transaction. For example, a potential buyer can use R&W insurance as a means to avoid relying solely on the seller for indemnification. A potential buyer might be able to make an offer more appealing by incorporating R&W insurance into its bid to reduce the portion of the purchase price that will be held in escrow. Similarly, for a seller that is eager to divest a business and minimize the scope of its continuing obligations relating to that business, a carefully tailored R&W insurance policy may provide a greater level of comfort that the seller will not be forced to pay out of pocket to satisfy potential indemnification obligations.

The following scenarios illustrate some of the ways in which transactional insurance might be used effectively to facilitate a transaction or to make a particular proposal more financially appealing.

Scenario One: Show Me the Money

After spending 25 years building a successful manufacturing business, Jacob Marley has decided to retire and tour the world on a yacht purchased with the proceeds from the sale of his company. He retains an investment banker to put the business up for auction and receives interest from a number of private equity firms, including HavishamCo. Rather than grossly over-bidding its competitors, Havisham distinguishes its offer by including an escrow requirement that is dramatically lower than would normally be expected (subject only to Havisham’s ability to secure R&W coverage). While putting its bid together, Havisham negotiated terms of an R&W insurance policy to insure over the seller’s representations and warranties. The bid prices from the various private equity firms were roughly equivalent, but Havisham’s escrow holdback was several million dollars lower than in any of the competing bids. Thanks to this creative use of R&W insurance, Marley accepts Havisham’s bid and sails off into the sunset.

Scenario Two: Good Intentions and a Token Will Get You on the Subway

CogswellCorp is experiencing financial difficulty because its “visionary” CEO has begun expanding the company beyond its core cog-manufacturing business. In order to finance its ambitious growth strategy, Cogswell decides to sell its cog-manufacturing operations. SpacelyCo seizes the opportunity to purchase the operations of a longtime competitor, and the parties easily agree on price. In an effort to close the deal quickly, Spacely proposes a modest escrow of only $1 million. However, the cap on Cogswell’s indemnification obligations for breaches of its representations and warranties is significantly higher at $30 million. Although Spacely believes it is purchasing the fundamentally sound operations of one of its largest competitors at a bargain price, Spacely’s management team fears that Cogswell’s expansion efforts will fail, leaving the company unable to honor its indemnification obligations if called upon to do so. In order to address this concern, Spacely obtains an R&W policy that provides coverage above a retention amount equal to the escrow of $1 million, and the deal closes successfully.

Scenario Three: The Long Goodbye

Forty years ago, ApexCo was the world’s largest electronics manufacturer. The company also maintained one of the foremost R&D departments in the world and now holds patents for inventions that are widely used in data storage devices, computer chips and consumer electronics. Over time, Apex discovered that the licensing of its patents was far more lucrative than its manufacturing operations. After being acquired by a private equity firm, Apex shut down its manufacturing and marketing operations in order to focus on licensing its patents and vigorously protecting its intellectual property. Today, the company continues to own a number of shuttered manufacturing facilities and distribution centers in populous suburban locations. There is extensive environmental contamination at several of these sites, which makes them difficult to sell without providing broad, open-ended indemnifications to the buyers. In an effort to control the financial obligations associated with these facilities, Apex seeks the placement of stop-loss insurance that will apply to each of the properties. The underwriting process requires significant due diligence, testing and the preparation of estimates for the remediation cost at each property. Ultimately, Apex is able to secure a stop-loss policy that generally covers remediation costs above a threshold specified for each site. As a result, Apex is now able to market the properties knowing that its financial obligations will be fixed but that buyers will enjoy a level of assurance that additional remediation costs will be paid for under the stop-loss policy.

Scenario Four: Death and Taxes

Holding company Jarndyce & Sons consolidated a number of its subsidiaries into a new subsidiary, BleakCo. Based on the tax opinion of its law firm, Kenge & Carboy, Jarndyce believed that the roll-up had been accomplished through a series of tax-free transactions. Eventually, Jarndyce decided to sell Bleak and entered into negotiations with private equity firm PickwickPip. During due diligence, however, PickwickPip’s law firm, Dodson & Fogg, raised concerns about whether the roll-up transactions had indeed been tax free. Despite these concerns, PickwickPip felt strongly that Bleak would be a valuable addition to its portfolio. Because it disagreed with the tax position taken by PickwickPip’s counsel, Jarndyce was unwilling to place the full amount of the potential tax liability in escrow or to provide a full indemnity. Jarndyce, however, was willing to pay a portion of the premium for a tax insurance policy that would cover PickwickPip for any tax liability above an escrow amount agreed to by the parties in the purchase agreement.

A Strategic Solution

As these scenarios illustrate, transactional insurance can be used strategically by both buyers and sellers to overcome obstacles that might otherwise make it difficult to complete an acquisition or divesture. It is not, however, an off-the-shelf product. The underwriting often requires its own due diligence, and the terms under which coverage is provided frequently require intense negotiations. Accordingly, whether transactional insurance products might be useful in bridging obstacles to a transaction should be an early strategic consideration. Given the myriad issues and financial interests at stake, it is important that a potential purchaser of transactional insurance pay close attention to the risks for which coverage is sought, the extent to which the proposed coverage terms respond to those risks and the legal effects of the negotiated coverage terms.

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

15th Annual North American Shared Services & Outsourcing Week – March 1-3 Orlando, FL

The National Law Review is a proud media partner of the 15th Annual North American Shared Services & Outsourcing Week – March 1-3 Orlando, FL    

The Shared Services & Outsourcing Network (SSON) is the largest and most established community of shared services and outsourcing professionals. SSON’s 15th Annual Shared Services Week is the largest annual gathering of Shared Services professionals in the world! This can’t-miss multi-tracked event is designed to provide executives from start-ups, intermediate and mature shared services with everything they need to know to bring shared services to the next level. Featuring outstanding keynotes, an impressive speaker faculty, workshops, master-classes, site-tours and the shared service excellence awards, there is little the Shared Services Executive could want outside of this conference.

The 15th Annual North American Shared Services & Outsourcing Week represents the next big wave of innovation in the shared services and outsourcing space. You will meet and network with the very best thought leaders, practitioners, providers and advisors in the shared services and outsourcing space, connecting with over 1,000 senior level attendees from various sectors all over the region.

If you want to seek fresh initiatives and reach new thresholds of productivity or revenue growth, are looking for game changing, innovative content and ideas to leverage technologies, and desperate to leave behind old legacies and shape the future of the sourcing world, then this event is for you.

Click Here -For More Information and to Register.

Patent Reform Is Again Before Congress – The Patent Reform Act of 2011

Recently posted at the National Law Review by Ashley Merlo of Sheppard Mullin – details on recent bill introduced by Senator Leahy.  

Patent reform has been a topic of congressional debate since the introduction of the Patent Reform Act of 2005. Having failed to enact the 2005 legislation or any subsequently proposed reform, patent reform has again been introduced into the Senate, this time entitled The Patent Reform Act of 2011. (S. 23, 112th Cong. (2011).)

In introducing the new bill, Senator Leahy noted the following: “China has been modernizing its patent laws and promoting innovation while the United States has failed to keep pace. It has now been nearly 60 years since Congress last acted to reform American patent law. We can no longer wait.” (157 Cong. Rec. S131 (2011).)

As Leahy further explained, the proposed reforms aim to accomplish three goals: (1) “improve the application process by transitioning to a first-inventor-to-file system”; (2) “improve the quality of patents issued by the USPTO by introducing several quality-enhancement measures”; and (3) “provide more certainty in litigation.” The most significant changes to implement these goals are described below.

The Application Process: Shift To First-To-File System

In an effort to harmonize the U.S. patent system with the systems of other countries, The Patent Reform Act of 2011 proposes to change the U.S. Patent System from a first-to-invent to a first-to-file system. This change means that patents will be awarded to the earliest-filed application for a claimed invention, regardless of the date of actual invention. In other words, under the proposed reform, if A invents a new, novel and non-obvious widget in April but fails to file its patent application (or disclose it) until August, and B invents the same widget in June and files its patent application at that time, B gets the patent under the new system, not A.

The change to the first-to-file system also impacts the prior art analysis. Under current law, for prior art that is publicly — available less than one year before an application for a patent is filed, an inventor can still obtain a patent if she can prove that she invented the claimed invention prior to the date of the prior art. The new bill, however, appears to limit a patent applicant’s ability to negate prior art. Namely, only disclosures by the inventor or someone who obtained the disclosure from the inventor are excluded as prior art.

However, inventors that get beat to the patent office are not entirely out of luck; the reforms provide for “derivation” proceedings to determine if the inventor of an earlier-filed patent “derived” the invention from the inventor of a later-filed application. In other words, returning to the example above, if A could show that B’s widget invention was derived from his widget invention, A may nonetheless obtain a patent despite B’s earlier filing date.

Patent Quality: Submission of Prior Art / Post-Grant Review Procedures

In an effort to improve patent quality, the proposed act establishes the opportunity for third parties to submit information (i.e., prior art) related to a pending application. This, in turn, should assist the examiner in determining whether an applied-for patent is indeed patentable.

In addition, the proposed act incorporates a post-grant 9-month window in which a person who is not the patent owner can institute a post-grant review proceeding to cancel as unpatentable one or more claims of the patent. However, post-grant review can only commence if, following petition, it is determined that it is more likely than not that at least one of the claims challenged is unpatentable.

To protect against abuse of the post-grant review procedure, the act also specifies that an accused infringer may not seek review (1) after it has already filed a lawsuit in district court challenging the patent, or (2) more than three months after the date the accused infringer must answer, or otherwise respond to, a complaint for patent infringement filed by the patentee. The post-grant review proceeding also has estoppel effect, i.e., the petitioner in a post-grant review proceeding cannot raise in a subsequent action any ground of invalidity that was raised or reasonably could have been raised in the post-grant proceeding.

Improve Certainty Surrounding Litigation: Damages

The proposed legislation aims to provide more certainty to litigants as to damage calculations and enhanced damages.

Specifically, the act empowers judges to serve as a gatekeeper on damages. The proposed legislation specifies that the court “shall identify the methodologies and factors that are relevant to the determination of damages, and the court or jury shall consider only those methodologies and factors relevant to making such determination.” As Senator Leahy explained: “the gatekeeper compromise on damages . . . is what is needed to ensure an award of a reasonable royalty is not artificially inflated or based on irrelevant factors.”

In addition, on a showing of good cause, litigants are entitled to have the trial sequenced such that the trier of fact decides the questions of validity and infringement prior to damages.

Finally, the proposed legislation would codify case law regarding willfulness, requiring a plaintiff to demonstrate by “clear and convincing evidence that the accused infringer’s conduct with respect to the patent was objectively reckless.” Objectively reckless conduct will be found where the infringer acted “despite an objectively high likelihood that his actions constituted infringement of a valid patent, and this objectively-defined risk was either known or so obvious that it should have been known.” Mere knowledge of a patent is insufficient to show willfulness for an enhanced damage award.

Conclusion

As Senator Leahy explained in his remarks presenting the bill to the Senate, reform of the American patent law system is long overdue. Overall, the proposed legislation is similar to previously proposed legislation; indeed it was structured around the legislative proposal from 2005. The 2011 Patent Reform Act proposes significant changes to American patent law, surely to receive comment from those in favor and those against. Whether patent reform will actually make its way onto the books is a question yet to be determined.
 

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.