Category: Legal News

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

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.

Federal Scrutiny of Social Media Policies – Facebook posting subject of NLRB settlement with employer

The much publicized case in front of the National Labor Relations Board (NLRB)  concerning the employer  charged by the NLRB with terminating an employee for posting disparaging comments about her supervisor on Facebook has been settled.   Bracewell & Giuliani posted the following on the National Law Review yesterday: 

 

On Monday, February 7, 2011, the National Labor Relations Board (NLRB) reached a settlement with American Medical Response of Connecticut, Inc., the employer recently charged by the NLRB with terminating an employee in violation of federal labor law for posting disparaging comments about her supervisor on Facebook. The NLRB complaint alleged that the employer’s policy regarding “Blogging and Internet Posting” was overly-broad and unlawfully interfered with employees’ rights under Section 7 of the National Labor Relations Act (NLRA) to engage in “concerted, protected activity.” As written, the challenged policy stated that “Employees are prohibited from making disparaging, discriminatory or defamatory comments when discussing the Company or the employee’s superiors, co-workers and/or competitors.”

Under the terms of the settlement agreement, the employer agreed to revise this policy to allow employees to discuss wages, hours, and working conditions with co-workers outside of the workplace, and agreed to refrain from disciplining or firing employees for engaging in such discussions. The matter of the employee’s discharge was resolved through a separate, private agreement between the employee and the employer.

Why is this important?

The NLRB’s involvement in this case indicates an increased focus on the enforcement of employee rights under Section 7 of the NLRA and on employers’ social media policies. Section 7 protects employees regardless of whether their workplace is unionized; therefore all employers must be cognizant of policies and practices that might be interpreted to limit employees’ right to engage in concerted action.

Actions needed?

The NLRB’s stated position on this issue is that employees are allowed to discuss the conditions of their employment with co-workers on Facebook, or other social media websites, to the same extent they are permitted to do so at the water cooler or a restaurant. To this end, policies or practices which could be interpreted as limiting such right should be modified to include a statement that the policy will not be construed or applied in any manner that interferes with employees’ rights under the NLRA.

© 2011 Bracewell & Giuliani LLP

Why We Decided to Become Certified Legal Project Managers

From this week’s Business of Law Guest Bloggers at the National Law Review – Stacy D. Ballin and Mitchell S. Thompson of Squire, Sanders & Demsey LLP insight on the need and the process of becoming a Certified Legal Project Manager: 

On January 7, 2011, in a simple conference call, the two of us struck out upon a new venture that we believe will help us serve our clients better, and might just mark the start of a new and significant trend for law firm partners.

In a kick-off telephone conversation with consultant Jim Hassett of LegalBizDev, we plunged into an innovative program of study in the rapidly growing field of legal project management.

That conversation was the beginning of a six-month distance learning course put together by LegalBizDev that we can complete at our own pace and that leads to the title of Certified Legal Project Manager. We are among the pioneers in this, the first formal program to certify lawyers as legal project managers.

Squire, Sanders & Dempsey LLP is one of the first major legal practices to take project management to a new level. As the co-chairs of Squire Sanders’ Project Management Committee, we are taking the lead in obtaining the certification ourselves and in helping to plan how to spread best practices within the firm.

What does project management have to do with lawyers? Well, pretty much everything.  The world has changed, and clients need more than ever from their law firms. They want their lawyers to partner with them to achieve their business goals and deliver value, not to merely send them a monthly bill showing how many hours have been spent.

Like every other kind of business worldwide, law firms are becoming more cost-effective and efficient in providing their services. It’s no secret that many users of legal services – including the corporations, governments, and nonprofits, big and small, that big law firms serve — have perceived some disconnect between their costs for legal services and the value of those services. This trend has been building since the DuPont Legal Model was launched in the 1990s, and it was accelerated by the recent economic downturn.  Even as the economy improves, however, we expect clients to continue to require greater value than ever from their law firms.

The Association of Corporate Counsel’s Value Challenge is perhaps the best known of several concerted efforts by corporate counsel to improve the methods and tools that law firms use in delivering legal services. Squire Sanders has formally endorsed the Value Challenge, and adopted our own principles in the form of the Squire Sanders Partnering for Worldwide Value Covenant. Our combination with Hammonds LLP, which took effect on January 1, 2011, makes us one of a very small number of global firms that clearly articulates the importance of providing cost-effective services to our clients.

Among the principles that are integral to our covenant are that we will proactively offer our clients alternative fee structures; that we will provide budgets and estimates for each engagement and advise the client immediately if there may be material changes in cost; and that we will continuously work to become more cost-effective in the delivery of our services.

Our enrollment in legal project management certification was directly related to our value covenant. If Squire Sanders is going to live by these ambitious principles, our lawyers must understand project management and put it into practice. Unless law firms understand project management principles and put them into action, there is no way that they can thrive and deliver excellence while pursuing alternative fee structures and providing firmer budgets and estimates on hourly matters.

Project management is a well accepted technique in business and industry. It can be defined as the discipline of planning, organizing, securing, and managing resources to achieve a project’s goals within the constraints of scope, time, and budget. We are convinced that the time has come for its careful application to major legal matters, including large transactions and significant pieces of litigation.

Lawyers will benefit from project management tools because they can improve communication with their clients and focus on clients’ true needs, thereby reducing client risk and delivering greater value. Client will benefit because they can work with lawyers who put client business goals first, use creative ways to provide solutions to client challenges and ensure clients receive the best value for their investment in legal services.

There are many challenges involved in bringing the well-tested tools of project management into the legal world. For example, legal project managers must take into account client-imposed deal deadlines, due diligence requirements, opposing litigation counsel and their tactics, and deadlines and court calendars that are out of a lawyer’s or law firm’s control — but we believe that these obstacles can be overcome.

In our certification program, we will do assigned readings from six leading textbooks in the field of project management and answer a series of probing essay questions. We will focus on eight key issues that lawyers must understand in order to be effective project managers: setting objectives and defining the scope of a project; identifying and scheduling activities; assigning tasks and managing a team; planning and managing a budget; assessing risks; managing quality; managing client communication and expectations; and negotiating changes of scope. All along the way we’ll interact with Jim Hassett and his staff.

At a later stage of the course, we will apply project management concepts to an actual matter on our plates at Squire Sanders. For example, we might be asked to assume that the same situation would arise again but that this time the client insists on a fixed price at a lower total cost with better communication throughout. We will have to solve the problem with our new project management tools.

In that first conversation with Jim Hassett in January, we discussed Squire Sanders’ position in the vanguard of this emerging area and how to maximize the benefits to our clients. In future conversations, we will discuss the most efficient ways to make project management information accessible to other members of our firm so that each lawyer can determine the best way to apply these principles in his or her own practice.  We hope that the program and the certification will help our firm and our clients succeed in this rapidly changing world.

©Squire, Sanders & Dempsey All Rights Reserved 2011

 

 

Got Klout? Measuring Your Law Firm Social Media Efforts

Many thanks to our Business of Law guest blogger Kevin Aschenbrenner of Jaffe PR who provided some truly useful information on how law firms can gauge the effectiveness of their social media programs.  Read on….

One of the most frustrating aspects of actively working on law firm social mediaefforts is the feeling that you’re in a vacuum. You often can’t tell if anyone is listening. And, posting, “Do you think I’m awesome?” just won’t cut it.

This is why influence is such a hot topic in social media. Essentially, the more influence you have online the more likely it is that people will not only pay attention to you but also act on what you post. I talk more about influence in this blog post. Go ahead and read it. I’ll wait.

Welcome back. So, influence. It’s a good concept, but it’s a bit of a vicious circle – you need influence to have an impact online but you need to know what your influence is to use it to assess your law firm social media efforts. It makes my head hurt, too.

Or, it used to. Now there’s an online tool that will measure your influence. It’s called Klout (www.klout.com) and it ranks your online influence with a number out of 100. For an example, here’s a link to my Klout Score:http://klout.com/kevinaschenbren. As Klout Scores go, I’m not up there with Brian Solis (85) or Chris Brogan (84), but it’s respectable and, I’m within kissing distance of 50, which is the Klout Score required by a few hotels in Las Vegas in order to qualify for free upgrades (http://adage.com/digitalnext/post?article_id=146189).

But I digress. I’ve found Klout very helpful as a sort of diagnostic tool for my social media efforts. It’s not perfect and I quibble with some of the other information you get in your report, but it’s not a bad guidepost.

To find out your Klout Score:

  • Go to www.klout.com and type in your Twitter handle.
     
  • To see your entire report, I suggest creating an account. It’s free and gives you access to additional data and it will also ensure your score is refreshed regularly.
     
  • You can increase the accuracy of your Klout Score by linking your Facebook and LinkedIn accounts.
     
  • Check back periodically to see how your Klout Score is doing.

And, if you really want to have fun with your online influence, check out Empire Avenue (www.empireavenue.com). I’ll leave you to explore that one on your own.

© Copyright 2008-2011, Jaffe PR

One of the most frustrating aspects of actively working on law firm social mediaefforts is the feeling that you’re in a vacuum. You often can’t tell if anyone is listening. And, posting, “Do you think I’m awesome?” just won’t cut it.

This is why influence is such a hot topic in social media. Essentially, the more influence you have online the more likely it is that people will not only pay attention to you but also act on what you post. I talk more about influence in this blog post. Go ahead and read it. I’ll wait.

Welcome back. So, influence. It’s a good concept, but it’s a bit of a vicious circle – you need influence to have an impact online but you need to know what your influence is to use it to assess your law firm social media efforts. It makes my head hurt, too.

Or, it used to. Now there’s an online tool that will measure your influence. It’s called Klout (www.klout.com) and it ranks your online influence with a number out of 100. For an example, here’s a link to my Klout Score:http://klout.com/kevinaschenbren. As Klout Scores go, I’m not up there with Brian Solis (85) or Chris Brogan (84), but it’s respectable and, I’m within kissing distance of 50, which is the Klout Score required by a few hotels in Las Vegas in order to qualify for free upgrades (http://adage.com/digitalnext/post?article_id=146189).

But I digress. I’ve found Klout very helpful as a sort of diagnostic tool for my social media efforts. It’s not perfect and I quibble with some of the other information you get in your report, but it’s not a bad guidepost.

To find out your Klout Score:

  • Go to www.klout.com and type in your Twitter handle.
     
  • To see your entire report, I suggest creating an account. It’s free and gives you access to additional data and it will also ensure your score is refreshed regularly.
     
  • You can increase the accuracy of your Klout Score by linking your Facebook and LinkedIn accounts.
     
  • Check back periodically to see how your Klout Score is doing.

And, if you really want to have fun with your online influence, check out Empire Avenue (www.empireavenue.com). I’ll leave you to explore that one on your own.

© Copyright 2008-2011, Jaffe PR

Beware of Fiduciary Duties to Creditors Different for Corporations and LLCs

Posted yesterday at the National Law Review by Jennifer Feldsher, Robb Tretter and Jonathan P. Gill of Bracewell and Giuliani details about a recent ruling in Delaware concerning creditors of LLC’s  which contradicts widespread assumptions and runs contrary to common commercial practice: 

In a recent decision, CML V, LLC v. Bax, et al., C.A. No 5373-VCL (Del. Ch. Nov. 3, 2010), the Delaware Court of Chancery held that, unlike Delaware corporations, creditors of an insolvent Delaware limited liability company cannot bring derivative actions against the members or managers of the company unless they specifically contract for such rights. The decision effectively precludes creditors of insolvent limited liability companies from suing members and managers for breaches of fiduciary duties owed to the company, unless they amend the company’s limited liability operating agreement to provide directly that such duties are owed to creditors.

The Chancery Court noted that the ruling contradicts widespread assumptions held by both academics and the Delaware courts themselves. In fact, this ruling runs contrary to common commercial practice, in which the form of an entity, whether a corporation, limited liability company or limited partnership, is most often selected for tax or corporate control reasons, with the expectation that the general tenets of the Delaware corporate law apply.

Background

According to the decision, JetDirect Aviation Holdings, LLC was highly leveraged and had volatile cash flows and internal control deficiencies. In April 2007, CML V, LLC loaned JetDirect approximately $34 million. Subsequently, in late 2007, JetDirect’s board of managers undertook four major acquisitions allegedly without the benefit of current information on the company’s financial condition. JetDirect defaulted on its loan obligations to CML in June 2007 and was insolvent by January 2008, at which time JetDirect’s managers began liquidating some of JetDirect’s assets, including selling certain assets to manager controlled entities. CML alleges that such sales were approved by JetDirect’s board without an adequate review of the fairness of such transactions and, thus, breached fiduciary duties owed indirectly to CML. Such duties are indirect because at the juncture of insolvency creditors, rather than the company’s equity holders, become the residual stakeholders.

Each of JetDirect’s operating subsidiaries eventually commenced bankruptcy cases and CML brought claims both directly against JetDirect on account of JetDirect’s defaults under the loan and derivatively against JetDirect’s mangers for breach of fiduciary duties owed to CML. The derivative claims were based on allegations that JetDirect was either in the zone of insolvency or insolvent by April 2007, thus, the managers owed fiduciary duties to its creditors, including CML, and the managers breached those duties. The alleged fiduciary duties breached by the managers were (i) their duty of care, by approving the 2007 acquisitions while “lacking critical information relating to JetDirect’s financial condition,” (ii) their duty of loyalty, by acting in bad faith when “failing to implement and monitor an adequate system of internal controls” and (iii) their duty of loyalty by “benefiting from self interested asset sales.” JetDirect’s mangers moved to dismiss CML’s derivative claims against them, arguing that CML lacks standing to bring derivative suits under the LLC Act.

The Chancery Court’s Decision

In ruling that the creditors of a limited liability company lack standing to bring an action in right of the limited liability company against its members and managers for breaches of fiduciary duties or otherwise, the Chancery Court held that the plain language of Section 18-1002 of the LLC Act, entitled “Proper Plaintiff,” only allows a member or an assignee of an interest in such limited liability company to bring a derivative claim.

The Chancery Court went on to distinguish the rights of creditors of insolvent Delaware corporations from the rights of creditors of insolvent limited liability companies. The Court acknowledged that a combination of Section 327 of the DGCL and case law have provided creditors of insolvent Delaware corporations with standing to bring derivative claims against directors on behalf of the corporations for breaches of fiduciary duties.1 However, in CML, the Court determined that no such right exists for a creditor of a limited liability company given that the language of Section 18-1002 of the LLC Act is exclusive to “a member or assignee of a limited liability company interest,” while the language of Section 327 of the DGCL is not exclusive to shareholders of the corporation, but simply dictates the qualifications required to be met by shareholders instituting derivative suits.

In support of its decision, the Chancery Court recognized that the LLC Act provides flexibility so that creditors may negotiate certain rights and protections for themselves. Consistent with other recent cases, the Court notes that “LLCs are creatures of contract, designed to afford the maximum amount of freedom of contract, private ordering and flexibility to the parties involved.”2 Creditors can protect themselves through the covenants, asset liens, and other negotiated contractual protections customarily contained in a loan agreement and can also bargain for express contractual rights in the borrower’s LLC agreement. Such rights may include, among other things, (i) penalties and other consequences for members triggered by the occurrence of specific events, (ii) personal liability of members for the debts of the limited liability company, and (iii) creation or expansion of fiduciary duties of members and managers to preserve assets for creditors, which would be triggered by insolvency.

Take-Aways for Creditors of LLCs

Unlike rights afforded to creditors of Delaware corporations, creditors of Delaware limited liability companies are barred from bringing claims based upon breaches of fiduciary duties by the members or mangers of such companies unless, among other things, they amend the LLC agreement to directly provide for them. Thus, in order to fully protect themselves, creditors of limited liability companies will need to bargain for specific rights in the loan agreement or demand amendments to the borrower’s LLC agreement as a pre-condition to extending credit or making a loan.

_____________________
1 See CML V, 6 A.3d at 240, citing N. AM. Catholic Educ. Programming Found, Inc. V. Gheewalla, 930 A.2d 92, 101 (Del. 2007); see also § 320 DGCL

2 CML V, 6 A.3d at 249 (quoting Travel Centers of Am., LLC v. Brog, 2008 WL 176987, at *1 (Del.Ch. Apr. 3, 2008) (quoting In re Grupo Dos Chiles, LLC, 2006 WL 668443, at *2 (Del.Ch. Mar. 10, 2006)); see also Kelly v. Blum, 2010 WL 629850 (Del. Ch. Feb. 24, 2010).

© 2011 Bracewell & Giuliani LLP

Crisis in Egypt: The Economical Repercussions

Two articles posted yesterday at the National Law Review address two key issues related Egypt to which impact the U.S. – Trade and the amount of foreign aid the U.S. sends to Egypt.  The Risk Management Monitor highlights some of the business issues impacted by the turmoil:  

The crisis in Egypt can soon turn from a political uprising to an economic catastrophe and humanitarian emergency if things don’t return to normal operation soon.

Shipping

In the port of Alexandria, among others, army tanks stand guard to ensure no one enters the area. Good plan, except that hardly anything is going out, including exports that are crucial to the country’s economy. Though reports claim that some ports are closed, the Suez Canal is apparently open to shipping traffic. Shipping companies, however, are hesitant to enter the area. If the Suez Canal should close, it would not only spell disaster for a country already in serious turmoil, but it would also mean a worldwide shipping disruption.

Production Plants

  • Nissan: the automaker suspended operations Sunday until February 3rd.
  • Unilever: the multinational corporation’s offices in Cairo have been closed since January 28th.
  • General Motors: the car maker’s plant near Cairo has not produced vehicles since January 28th with production estimated to resume Friday, February 4th.
  • Lafarge SA: the a French building materials company has temporarily stopped operations due to the situation. The company has six production sites in Egypt, six quarries and 62 ready-mix plants and employs 8,172 Egyptian workers.
  • Heineken NV: the Dutch brewer has halted operations and told its 2,040 employees in Egypt to stay home.

Tourism

The nation’s tourism sector has taken a huge hit that is expected to last for some time.

Foreigners are struggling to flee the country, tour and cruise companies are seeing cancellations and a growing list of Western and Arab nations are sending in flights to evacuate their nationals. The tourism sector is vital for Egypt — and is among one of the four top sources of foreign revenue for the country.

Tourism accounts for 5 to 6% of the country’s GDP, while Cairo International Airport is the second largest airport in Africa, after Johannesburg, handling 15 million tourists per year.

Call Centers and Online Retail

Egypt is home to numerous call centers and IT outsourcing companies. But little can be done when the government cuts internet access throughout the entire nation. Microsoft is just one of the 120 companies in Cairo’s Smart Village, an area built for major multinational and local, high-tech companies.

Asked about the situation in Egypt, Microsoft said in a written response to a query that it “is constantly assessing the impact of the unrest and Internet connection issues on our properties and services. What limited service the company as a whole provides to and through the region, mainly call-center service, has been largely distributed to other locations.”

Hewlett-Packard is another company with operations in the Smart Village. They have asked their employees there to stay home. Though President Obama has urged the Egyptian government to restore internet access, little has changed for fear that protesters will use social networks to organize further riots. For a country that has taken pride in its growing outsourcing and call center business, the suspension of internet access is taking a huge toll.

All of the above have affected financial markets worldwide. And with a “million man march” planned for tomorrow in the Arab world’s most populous nation, little is expected to change in the near future.

Risk Management Magazine and Risk Management Monitor. Copyright 2011 Risk and Insurance Management Society, Inc. All rights reserved.

 

Agencies Issue Additional FAQs on Health Care Reform and the Mental Health Parity Act

Recent featured guest blogger at the National Law Review Penny C. Wolford of Ford & Harrison LLP – brings to our attend the recent actions by Departments of Health and Human Services, Labor and Treasury regarding the implementation of the the Patient Protection and Affordable Care Act (“health care reform”) and the Mental Health Parity and Addiction Equity Act.  Of most note to employers is: 

Right before the holidays, the Departments of Health and Human Services, Labor and Treasury issued additional Frequently Asked Questions (FAQs) regarding implementation of the Patient Protection and Affordable Care Act (“health care reform”) and the Mental Health Parity and Addiction Equity Act. The guidance of most note to employers is as follows:

1. Automatic Enrollment in Health Plans: The agencies clarified that the automatic enrollment requirement of health care reform does not become effective until the agencies issue regulations on the requirement. The Department of Labor indicated that it intends to issue regulations on the automatic enrollment requirement sometime before 2014.

2. 60-Day Prior Notice Requirement for Material Modifications: Health care reform requires group health plans to provide notice of modifications to participants no later than 60 daysprior to the date on which the modification becomes effective. The agencies clarified that group health plans are not required to comply with the 60-day advance notice requirement until standards for the requirement are issued by the agencies.

3. Dependent Coverage of Children to Age 26: Health care reform prohibits group health plans from making distinctions based upon age in dependent coverage. (For example, charging a higher premium for adult children than for minor children would be a prohibited distinction.) The agencies clarified that health care reform does not prohibit distinctions based upon age that apply to all coverage under the plan. Therefore, in answer to the specific question posed in the FAQs, the agencies determined that it is permissible for a group health plan that normally charges a co-payment for physician visits that do not constitute preventive services, to charge a co-payment to individuals age 19 and over, including employees, spouses, and dependent children but waive the requirements for those under age 19.

4. Grandfathered Health Plans: The agencies clarified that a fixed amount cost-sharing, other than a co-payment, that is based on a percentage-of-compensation formula, will not cause a plan to lose grandfathered plan status as long as the formula remains the same as that which was in effect on March 23, 2010, even though the actual cost-sharing may change as a result of a change in the employee’s compensation.

5. Mental Health Parity Act: The agencies issued several answers to questions on the Mental Health Parity Act, including: (a) confirming that a small employer exempt from the Act is an employer with 50 or fewer employees; (b) stating that a contracting health care provider can request and is entitled to receive the plan’s criteria for medical necessity determinations; and (c) explaining that plans can apply for the increased cost exemption under the Act if costs under the plan have increased at least 2 percent in the first year that the Act applies to the plan (the first plan year beginning after October 3, 2009), or at least 1 percent in any subsequent plan year (generally, plan years beginning after October 3, 2010.) The exemption lasts for one year and allows the plan to be exempt from the requirements of the Act for the following year. Plans can apply for the cost exemption by following the exemption procedures described in the 1997 Mental Health Parity Act regulations.

6. Wellness Programs: Along with health care reform and the Mental Health Parity Act, the agencies also addressed a few FAQs on HIPAA and wellness programs. Most notably, the Department of Labor explained that under health care reform, the maximum reward that can be provided under a HIPAA wellness program will increase from 20% to 30%. The increase will not occur under health care reform until 2014. However, the agencies intend to propose regulations using regulatory authority under HIPAA to raise the percentage for the maximum reward that can be provided under a HIPAA wellness program to 30% before the year 2014.

Employers’ Bottom Line

The agencies continue to define the landscape of health care reform even for the first round of requirements that have already gone into effect or will be going into effect for employer‑sponsored plans beginning on or after the first plan year following September 23, 2010. Employers should keep an eye out for additional guidance and make a good-faith effort to comply with existing guidance with an understanding that additional adjustments may be necessary as further guidance and clarifications are issued.

© 2011 Ford & Harrison LLP

FDA Commissioner Margaret Hamburg Key Note Speaker NYSBA Annual Meeting Food, Drug & Cosmetic Law Section Lunch Jan 27th

The National Law Review would like to you know that the New York State Bar Association Food, Drug & Cosmetic Law Section is featuring FDA Commissioner Margaret Hamburg MD as their luncheon keynote speaker on Thursday January 27th as part of the NYSBA’s Annual Meeting being held at the Hilton New York in New York City from Jan 24th-29th. The lunch will be held on Thursday January 27th in the Trianon Ballroom on the 2nd floor. For Tickets and More Information, Please Click Here