The National Law Forum

New Jersey Pharmaceutical Company Agrees to Pay $39 Million to Settle Alleged Anti-Kickback Violations

On January 9, 2015, the Department of Justice (DOJ) announced that pharmaceutical company Daiichi Sankyo, headquartered in New Jersey, agreed to pay the Government $39 million to settle claims that it violated the Anti-Kickback Statue and the False Claims Act (FCA) by allegedly incentivizing physicians to prescribe Daiichi drugs by providing kickbacks to those doctors. The drugs prescribed as a result of those alleged kickbacks were billed under the Medicare or Medicaid Program, and thus paid for, at least in part, by the government. This lawsuit was filed by former Daiichi sales representative Kathy Fragoules under the qui tam whistleblower provision of the FCA. Fragoules will receive an award of $6.1 million, which represents approximately 15 percent of the settlement amount, for exposing Daiicho Sankyo’s alleged illegal practices.

The qui tam lawsuit, originally filed on behalf of the government by Fragoules, claims that for a period of six years, from January 1, 2005 to March 31, 2011, Daiichi Sankyo allegedly devised a scheme to promote several of its drug products by offering monetary kickbacks to physicians that prescribed Daiichi drugs to their patients. The Physician Self-Referral Statue and the Anti-Kickback Statue prohibit anyone from knowingly and willfully offering, paying, soliciting, or receiving remuneration in order to induce business reimbursed under the Medicare or Medicaid programs. However, according to the government, Daiichi allegedly orchestrated kickback compensation to physicians in the form of speaker fees by allegedly funneling payment to health care providers through the Daiichi’s Physician Organization and Discussion programs known as PODs. In doing so, the government claims that Daiichi knowingly and willfully violated the FCA.

Physician drug ordering and prescribing decisions continue to be influenced by the drug industry. Last year, the DOJ reported billions in settlements in connection with the pharmaceutical industry arising out of violations of the Physician Self-Referral Statue and the Anti-Kickback Statue. The government also paid out millions in awards to individuals and whistleblowers that exposed these alleged illegal practices through the filing of qui tam lawsuits under the FCA. A whistleblower who files a case against a company that has committed fraud against the government, may receive compensation of up to 30 percent of the amount ultimately recovered by the government.

ARTICLE BY

Jonathan Tycko

Tycko & Zavareei LLP

A Primer on the Foreign Corrupt Practices Act

The conduct of your employees can implicate statutes other than the familiar federal and state fair employment laws, and an unwary employer can find itself subject to stiff fines and unwelcomed publicity by ignoring its compliance obligations under those statutes. For example, does your company conduct business abroad, and, if so, are you familiar with the Foreign Corrupt Practices Act (“FCPA”)? If you are an entity traded on an American exchange, incorporated under the laws of the United States, or acting while in the territory of the United States, or you are an individual who is an officer, director, employee, agent, or shareholder of such a company, are a citizen of the United States, or are a person acting in the United States, you are subject to liability under the FCPA. The FCPA prohibits giving or attempting to give anything of value to a foreign official in order to influence any act or decision of the foreign official in his or her official capacity or to secure any other improper advantage in order to obtain or retain business. The phrase “anything of value” has a very broad definition and includes even charitable contributions or gifts to family members of foreign officials, and bribes come in all shapes and sizes, often making them difficult to detect.

In recent years, the Securities and Exchange Commission(“SEC”) and Department of Justice (“DOJ”) have increased their focus on FCPA compliance, including securing a record $772 million fine against one company last year. Those agencies have also been increasingly targeting (or, at least, stated their intentions to increasingly target) individual actors, in addition to the increased enforcement against companies. This means that you and your employees are at risk under the FCPA in the event of a suspected or actual violation.

A robust FCPA compliance program can be a strong defense or prevention against FCPA issues. Compliance programs should be individually and narrowly developed and tailored to a company’s needs and risks. While there is no guaranteed checklist for an effective compliance program given the unique nature of companies, some hallmarks of an effective FCPA compliance program are:

A commitment from senior management and a clearly articulated policy against corruption;
Well-established and -disseminated codes of conduct and compliance policies and procedures;
Sufficient oversight, autonomy, authority, and resources for the program;
Risk assessment, resource allocation, and due diligence proportional to the type of activity or business opportunity, the particular country and industry sector, potential business partners, level and amount of government involvement, governing regulation and oversight of the activity, and exposure to customs and immigration in conducting the business;
Training and continuing advice throughout the company that clearly communicates, in the local language where appropriate, the policies and procedures, case studies, and practical advice for real-life scenarios individuals will encounter in their specific roles;
Disciplinary measures that are well publicized and clearly applicable to all levels of the organization;
Effective due diligence, review, and monitoring of transactions and dealings with third parties and vendors, as they are among the most common means through which violations take place;
Mechanisms that facilitate and encourage confidential reporting, such as hotlines or ombudspersons, and that properly document and evaluate actual and possible FCPA issues; and
Periodic testing, review, audit, and analysis of the effectiveness of the program to ensure it is the best program in place for your organization.

However, as employers with strong anti-discrimination and anti-harassment policies know, even the best written and most well-intentioned policies cannot guarantee insulation from liability or from investigation by the government of suspected/potential violations. In the event a company discovers a violation by its employees, the DOJ and SEC encourage self-reporting and cooperation by entities and individuals, and cooperation can facilitate and expedite any potential investigation by government authorities and possibly result in non-prosecution agreements and reduced penalties.

Conversely, failing to disclose known violations can result in harsher penalties, thus providing incentive to identify and self-report violations. For its part, the government has created incentives to increase the chances that if a company will not report violations, its employees will. The Dodd-Frank Act established a whistleblower program that rewards whistleblowers between 10-30% of total recovery when the recovery exceeds $1 million, giving financial incentive for individual employees to come forward with reports of FCPA violations. Another important consideration when developing FCPA compliance measures and programs is to ensure that the compliance program is independent of and given due weight in relation to business decisions. All too often, FCPA issues are not timely discovered when compliance programs are not properly implemented because of a perceived business cost, and companies and employees face crippling fines and punishment as a result.

In any event, companies that are navigating these waters would be wise to consult with experienced legal counsel familiar with the FCPA and the government agencies charged with its enforcement, both when developing any compliance program and when dealing with a suspected violation.

ARTICLE BY

Radha Kulkarni

Gonzalez Saggio & Harlan LLP

Content Marketing for Law Firms with John McDougall

Listen as we speak this week with John McDougall, CEO of McDougall Interactive, on content marketing for law firms.

Nicole Minnis: Hi. This is Nicole Minnis again, with the National Law Review. I’m here today with John McDougall, president of McDougall Interactive and author of LegalMarketingReview.com.

We spoke last time about Authority Marketing and thought leadership for law firms, so be sure to check out a link to that podcast. But today, we’re going to be talking about content marketing for law firms. Welcome back, John.

John McDougall: How you doing?

Nicole: I am doing great. How are you?

John: Excellent.

Nicole: We had a great time last time. Tell me, why are eBooks and the top of the funnel calls to action important?

John: A lot of people with website marketing make the mistake of expecting customers to only call them on the phone or fill out a form. When you don’t have a top of the funnel call to action, like an eBook or a case study that’s downloadable, or a whitepaper, you miss a huge portion of the Internet that is casually surfing and could become a lead, but a more casual lead.

A ToFu offer, as we call it — not to be confused with soy products [laughs] — a ToFu offer, a top of the funnel offer, is, again, like an eBook, and it’s somewhere around 85 percent of the Web is looking at the top of the funnel. When you search the web, do you buy something from Amazon or hire a lawyer every time you search the web? You don’t.

You tend to, most of the time, you’re searching and looking for things. You’re in the early stage of the buyer’s journey. Eventually, you’re making bookmarks, and later you go back and hire someone or buy a product. It’s about 85 percent there.

Maybe another 10 percent, roughly, are at the middle of the funnel. In the middle of the funnel, you’re comparing one law firm to another, you’re in that comparison stage. At the bottom of the funnel, maybe only five percent of people using that free consultation form on the attorney’s site or calling the phone number, et cetera, going to the contact page.

That’s such a small percentage of Web visitors that you’re really missing, a huge amount, potentially as much as 95 percent of visitors, if you don’t offer some way for them to casually connect with you — signing up for your email newsletter or getting your eBook.

Nicole: Where are these ToFu calls, top of the funnel calls, most effective? Are we looking at a law firm home page or a blog page? Where will it have the most impact?

John: You want to put them consistently throughout your site, so definitely at the home page level, because that’s usually the most visited page. Not always, but often the most visited part of your site. You should have at least one top of the funnel, if not a top of the funnel, middle of the funnel and bottom of the funnel, like your phone number or consultation form, call to action, at the home page level.

Then, if you go into a practice area, like intellectual property law, you might want to have a little sidebar there with a call to action for an eBook or a whitepaper or something around that topic. Then, you go to the blog, and you’re reading the blog, either in the right sidebar you can put an irresistible offer to download maybe a collection of the blog posts into one PDF for printing.

Or, at the bottom of a blog post, that’s a very effective way, after someone reads something and they’ve been very engaged, to then put a nice little…maybe a banner or a nice graphic that sells them on the idea of filling out the form to get your eBook.

Nicole: Would you include these top of the funnel calls to action on a law firm publications page? To follow up, you wouldn’t limit it to just having a special page for all of their thought leadership?

John: Yeah. I think it’s good to have a resources section, definitely. After Google Hummingbird that looks even more deeply at Q&A content and natural language search for mobile — Google eats up that kind of content where you’re answering customers’ questions.

It’s great to have that on a blog. That’s one of the most typical places to put it. But sometimes you can have the resources, Q&A library also, and then you have the collection of eBook and podcasts and videos and links to lots of blog posts, and break up your thought leadership in an area like that.

I would say all of the above. There are different types of people that…some are going to like the blogs, some will like the resources area, some will like video, some will like podcasts, some will like the text posts. Break it up and put it throughout your content, and ideally make content top of the funnel calls to action to match the page they’re on.

If at some point you can get around to having 30 eBooks or an eBook for every practice area — it’s a pretty tall order, but, again, made easier through podcasting. One hour of podcasting can be turned into an eBook, and that’s pretty easy to do. You can get a nice cover design and go to each practice area and then have a top of the funnel call to action for each area. That’s the ideal.

Nicole: That way, you can cover all your bases, so to speak, in terms of who’s looking at your website and what they’re looking for.

John: Absolutely.

Nicole: Tell me, how can attorneys use content for their business development?

John: I’m not a business development expert for law firms, per se. But this has been a very hot topic recently, because we’re doing so much blogging for law firms and content marketing for law firms. I’ve been interviewing people for one of my sites, both Legal Marketing Review and AuthorityMarketing.com, and talking about these issues.

I interviewed a couple of different people specifically on business development, and time and time again they’re saying that they do like to have their attorneys make use of their own posts, if possible. It’s great if the attorneys have their own content to share when they’re pitching people and following up with potential customers.

But even if there’s a blog on the law firm’s site, and then an individual attorney, even if they didn’t write the post, they can share that content. You can share your newsletters and alerts and all different things.

But the more thought leadership content you have, the better off you are at reaching out to, say, a general council, and not annoying them with, “Hey, can we get together? I’d really like to work for you guys.” [laughs] Because that’s really salesy. That’s more old school marketing.

New school, inbound marketing is more, “Hey, Mr. or Mrs. General Council, I thought you’d really appreciate this blog post that we wrote, because I know you’re going through this particular issue with your company. I saw something on the news, and we have a post that really addresses just that issue. Just thought you might like to see this and that you might find it helpful.”

I’ve heard that a lot at the LMA conferences. I spoke recently at the LMA New England conference, and I’ve heard a lot of people talking about that in both my interviews and at conferences — that it’s a healthy way to extend that strategy we’re talking about, about SEO and content marketing and doing it for Google reasons. But there’s this great, of course, offline reason that lets you extend the value of that further.

Nicole: This content marketing that’s being produced by attorneys, is it trackable in terms of improving these sales? I was going to say they’re selling themselves, but I don’t mean to make it sound so silly. But attorneys are marketing their services, so is the content marketing trackable?

John: Absolutely not. No, I’m just kidding.

[laughter]

John: Here’s when it’s not trackable — when you don’t track it. It sounds really simplistic, but you would be amazed, actually shocked, if I told you how many people come to us and they have no tracking mechanism to see if it’s working. First, some people don’t even have something like Google Analytics installed on their site, if you can believe it in this day and age.

Is it trackable? It’s trackable if, number one, you take the 10 minutes to take the snippet of code from Google Analytics and put it onto every page of your site and embed the code. That’s really easy to do, but it is still amazing to us that we see people not doing it.

Number two, and this is a really big point I’d like to make, is that, with the goal tracking on your website, for example, if someone fills out the form for a free consultation, it should be set up so that they hit the submit button and they go to a “Thank You” page.

Some programmers like to make it tricky so that it doesn’t even need to produce a “Thank You” page, and there are ways to track that. But we prefer to have a traditional “Thank You” page, so yourlawfirm.com/thankyou.html kind of thing.

Then, you need to set that up in Google Analytics to register as what is called a “goal conversion”. You can do that also with phone tracking, with the free consultation forms, you can do it with your eBook signups, you can do it with the email newsletter signups.

You can do it even if you want to set up a goal conversion to track in Google Analytics if someone just views your “about us” page or an attorney’s bio page. There are all different things you can set up. But, again, it really only works if you take the time to set those up.

It’s so beautiful, and it sounds so geeky of me, but it’s so beautiful to go into Google Analytics and see basically the numbers. You can actually see, OK, last year in November, say, we got 18 leads, but this year in November we got 37 leads or 87 leads, and they came from these channels, from SEO, from social media, from Google paid ads, from email marketing.

You can track all the different channels they came from, and then you can see which lead forms or eBooks were downloaded. You can get a really good picture of the amount of leads coming in. Then, it goes a step further if you start to do lead scoring and lead nurturing.

Very briefly, lead scoring is when you’ll let your agency know, now that you’re tracking these leads in great detail, you let your agency know that, “These leads are good and these leads are bad”, or even feed back into Google Analytics the data on what the value of those leads were.

You can plug in, “This lead generated a million dollars in a mesothelioma case for the firm, and a $400,000 profit”, or whatever it might be. You can even go that far, if you want, to tell the agency that, “These are good leads. These are bad leads. They’re worth this much.” You could feed that back into the system.

Then, you can make better determinations on what keywords and what channels are driving the best quality leads, not just the most leads. Then, lead nurturing, or marketing automation is when you’re getting so many leads that you can’t even follow up manually with everyone.

Say you’re getting a thousand eBook downloads a month, or even 300. You would want to have a trigger mechanism to automatically say, “Hey, thanks for downloading the eBooks.” Send another email a few days later, “Hey, you might like this case study.” Another few days later, you might say, “Would you like a free consultation?”

You can set up a work flow in something like HubSpot or Eloqua, Pardot, to use marketing automation to send these automated emails so that people feel like, “Wow, I downloaded this eBook, next thing you know they’re giving me other ideas.”

But the salespeople don’t have to, every single eBook that gets downloaded, manually do it. That’s where you can take the tracking and Google Analytics, and then extend it with nurturing those people that are coming to your site.

Nicole: If we’re talking about a law firm or an attorney who’s starting from scratch, how much of this data do you think needs to be collected before they can really start to implement changes for their marketing strategy, or implement their marketing strategy at all?

John: I think it’s almost immediate. Once you start to get a few days or a few weeks of data, you can start to make assessments. But it does get a lot better when you have year-over-year data. If you’re looking at, again, November of 2014 versus November of 2013, or all of 2013 versus 2014, in terms of what channels drove traffic, the amount of leads per channel — it really gives you data to show where you’re headed and how things are improving or not.

We do something called conversion rate optimization, where we look at the data in Analytics, and we say, “You know what? Barely anybody is going to our about us page,” or, conversely, “Everybody goes to the about us page.” Usually, they’re the second most visited page on a website.

If there are pages that are hit very consistently, you want to go and fix up those pages and make them even better. Conversely, if there’s a page on your site that nobody ever goes to, but you think it’s really valuable, you can then go make more links to that page or make calls to action that highlight that content. You can definitely, very quickly get data from Google Analytics to go and make very practical changes to your site.

Nicole: These are all great ideas and strategies for attorneys and marketing professionals at law firms. Thank you so much, John, for sharing your thoughts on this topic today.

John: Absolutely. I appreciate you having me.

Nicole: No problem. We hope to have you back another time. Thanks so much for listening.

Register now! Only one more week until the 22nd Annual Marketing Partner Forum – January 21-23, Rancho Palos Verdes, California

When

January 21-23, 2015

Where

Rancho Palos Verdes, CA

Register now!

Join us in January as a newly re-imagined Marketing Partner Forum returns to Terranea for a three day summit on collaborative strategies in business development.

The Forum continues to be the premier event for marketing partners, managing partners, in-house counsel and senior-level marketing and business development professionals who want to sharpen their knowledge about the emerging trends and forces shaping the legal business and the impact on law firm business development client service and client relations.

Set against the backdrop of the Southern California sun, attendees will meet for a series of dynamic workshops designed to test one’s ability to approach, engage and close new business with a faculty of leading general counsel and industry icons.

Unlock your business development potential or refine time tested techniques as you network and forge new partnerships with some of the most powerful professionals in the business.

Why should you attend?

• Learn practical takeaways – Depart the event with scalable takeaways that best prepare you for (r)evolutionary change on the horizon

• Hear about compelling new topics – Participate in a number of brand new topics, including how to advance your career across the C-suite, fostering collaboration between professional development and business development, and more.

• Network with a purpose – And enjoy the fresh air, as Thomson Reuters proudly introduces the Marketing Partner Forum Mixer for all attendees.

• Peer to Peer learning – Through a number of interactive seminars and workshops that ask attendees to collaborate and compete

• Great keynote presentation – Eric Siegel, Ph.D., former Columbia University professor and best-selling author of Predictive Analytics: The Power to Predict Who Will Click, Buy, Lie or Die discusses the science and strategy of predictive marketing.

• Meet the legal industry’s New Competition, as Marketing Partner Forum welcomes the Legal New Wave from Silicon Valley and beyond.

Who Should Attend

Heads of Marketing and Business Development for law firms
Managing Partners

Online Behavioral Advertising: Industry Guides Require Real Time Notice When Data Are Collected or Used for Personalized Ads

WHAT’S COVERED?

Online behavioral advertising (OBA) has become a very common tool for commercial websites. OBA can be defined as follows:

the collection of data online from a particular computer or device regarding web viewing behaviors over time and across Web sites for the purpose of using such data to predict preferences or interests and to deliver advertising to that computer or device presumed to be of interest to the user of the computer/device based on observed Web viewing behaviors.

OBA might be implemented by use of cookies directly on a company’s website by the company itself. Or it might occur through technology embedded in ads from other parties displayed on the company’s site. Either way, the operators of commercial websites need to be aware when OBA is occurring on their sites and should be taking steps to provide greater transparency about OBA occurring on their sites.

WHAT’S THE CONCERN?

While the use of OBA is largely unregulated by law in the U.S. at this time, its spread has generated concern among privacy advocates. Of particular concern is the gathering of data about consumers without their knowledge where such information is supposed to be anonymous but advances in technology make it more and more possible to link that information to individuals (not just devices) through combination with other information. Examples can include information about health conditions and other sensitive information gleaned by watching the sites a user visits, the searches he/she conducts, etc. Key characteristics of OBA include that it is: (a) invisible to the user; (b) hard to detect; and (c) resilient to being blocked or removed.

In an effort to stave off government regulation of OBA in the United States, the Digital Advertising Alliance (DAA), a consortium of the leading advertising trade associations, has instituted a leading set of guidelines. Based on standards proposed by the Federal Trade Commission, the DAA Self-Regulatory Program is designed to give consumers enhanced control over the collection and use of data regarding their Internet viewing for OBA purposes.

WHAT’S REQUIRED?

The key principles of the DAA’s guides are to provide greater transparency to consumers to allow them to know when OBA is occurring and to provide the ability to opt out. For commercial website operators that allow OBA on their sites, the compliance implications are as follows:

First Party OBA. First Parties are website operators/publishers. If a company simply gathers information for its own purposes on its own site, it is generally not covered by the guidelines. However, as soon as the First Party allows others to engage in OBA via the site, it has a duty to monitor and make sure that proper disclosures are being made and even to make the disclosures itself if the others do not do so, including assuring that “enhanced notice” (usually the icon discussed below or a similar statement) appears on every page of the First Party’s site where OBA is occurring.
Third-Party OBA. Third parties are ad networks, data companies/brokers, and sometimes advertisers themselves, who engage in OBA through ads placed on other parties’ sites. These Third Parties should provide consumers with the ability to exercise choice with respect to the collection and use of data for OBA purposes. (See below on how to provide recommended disclosures.)
Service Providers. These are providers of Internet access, search capability, browsers, apps or other tools that collect data about sites a user visits Service Providers generally are expected to provide clear disclosure of OBA practices which may occur via their services, obtain consumer consent for such practices, and provide an easy-to-use opt-out mechanism.

HOW TO COMPLY

Generally, Third Parties and Service Providers should give clear, meaningful, and prominent notice on their own websites that describes their OBA data collection and use practices. Such notice should include clear descriptions that include:

The types of data collected online, including any PII for OBA purposes;
The uses of such data, including whether the data will be transferred to a nonaffiliate for OBA purposes;
An easy to use mechanism for exercising choice with respect to the collection and use of the data for OBA purposes or to the transfer of such data to a nonaffiliate for such purpose; and
The fact that the entity adheres to OBA principles.

In addition, “enhanced notice” should appear on each and every ad (or page) where OBA is occurring. The “enhanced notice” means more than just traditional disclosure in a privacy policy. It means placement of a notice on the page/ad where OBA is occurring. The notice typically is given in the form of the following icon (in blue color) which should link to a DAA page describing OBA practices and providing an easy-to-use opt-out mechanism:

online behavioral advertising

The icon/link should appear in or around each ad where data are collected. Alternatively, it can appear on each page of a website on which any OBA ads are being served. It is normally the duty of the advertisers (Third Parties) to deploy the icon. However, if they fail to do so, then the operator of the site where the OBA ads appear has the duty to make appropriate real-time disclosures about OBA on each page where OBA activity is occurring, including links to the DAA page describing OBA practices and providing an easy-to-use opt-out mechanism.

ENFORCEMENT

The DAA is taking its OBA guidelines seriously. It has issued sets of “compliance warnings” to many major U.S. companies. While DAA has no direct authority to impose fines or penalties, its issuance of a ruling finding a violation of its guidelines could create a tempting target for the FTC or plaintiffs’ class action lawyers to bring separate actions against a company not following the DAA guidelines. For all these reasons, operators of websites employing OBA (either first party or third party) should pay heed to the DAA Guidelines.

ARTICLE BY

Ed Chansky

David A. Wheeler

Greenberg Traurig, LLP

Determining How to Structure Your Family Farm Business, P.2

In our last post, we began looking at the issue of business planning within the context of a family farm business. We’ve already spoken about the importance of appropriately structuring a family farm business because of the potential tax consequences. Between the various forms of business structure, tax applications vary considerably. Although this is a big issue to plan for, here we’d like to talk briefly about the way structuring a farm business can impact ownership and management of a family farm.

There are a variety of business structures one can utilize for a family farm. Four general forms are: sole proprietorship; general partnership; corporation; and limited liability company. Which one is selected depends on the needs and goals of the business and those involved in it.

Some of the things that need to be taken into consideration when structuring a business, other than tax issues, are:

How many family members are involved in the business?
Is there a desire to share ownership with children or siblings?
Is shared management appropriate?
Should ownership of the business be separate from its management?
Is there a desire to limit liability among owners?

These, of course, are only preliminary questions that should be considered when selecting a business structure. Sole proprietorships and partnerships are relatively easy to set up compare to corporations and limited liability companies, though the latter two forms carry their own benefits while the former carry certain risks.

Each family has unique dynamics, of course, and what is appropriate for one family may not be appropriate for another. In addition, the needs of a family business can change over time, and this should also be considered. Ultimately, each family farm business needs to come up with a business arrangement that is appropriate for its needs. Working with experienced professionals in forming such a plan is important, including an experienced business attorney.

Source: Agri-View, “Is farm business planning part of your New Year’s Resolutions,” Troy R. Schneider, Dec. 31, 2014.

To read part 1, click here.

Senator McCain Renews Focus on Ending Cost-Plus Contracts

A longtime and well-known proponent of defense acquisition reform, Senator John McCain assumed the chairmanship of the U.S. Senate Armed Services Committee (“SASC”) on January 6. Sen. McCain has been particularly outspoken concerning cost overruns on major systems procurement projects. He has characterized the “cost-plus” contract structure as among the key causes of these overruns, and has described implementing a ban on “cost-plus” contracts as among his top three priorities for the 114th Congress (along with countering cyber-threats and addressing sequestration).

Sen. McCain’s antipathy toward cost-plus contracts is nothing new: during the 2008 presidential campaign, he made waves in the contracting community by declaring during a debate with then-Senator Barack Obama that “particularly in defense spending, which is the largest part of our appropriations – we have to do away with cost-plus contracts. We now have defense systems [in which] the costs are completely out of control. So we need to have fixed-cost contracts.”

Sen. McCain renewed his criticism of cost-plus contracts in a recent public appearance: “I’m continuing to try to ban them [a]ll. . . If you don’t ban them, here’s what happens: [contractors] come in with a lowball contract, so they can get the contract, and then . . . the costs mount.” By way of analogy, the veteran lawmaker highlighted the faulty incentives he believes are created by such an arrangement: “If you had a roof that leaked would you ask a guy to come and fix it with a cost-plus contract?!”

At the time of Sen. McCain’s 2008 high-profile criticism of cost-plus contracts, many experts in the contracting community expressed skepticism that an outright ban was desirable or even possible. They posited, for example, that cost-plus contracts can be the best tool for the job in certain circumstances, such as high-risk research and development projects where the requirements (and thus the expected costs) are ill-defined. A prominent contracting official even contended, as summed up by one think tank’s analysis of the issue, that “contractors would simply not bid on high-risk endeavors . . . if they were operated under fixed-priced contract structures.”

While the merits of cost-plus contracts remain a subject of vigorous debate, the Arizona senator’s SASC chairmanship and his party’s control of the Senate better position him to pursue this issue in 2015. In addition, other key stakeholders appear favorably disposed toward defense acquisition reform. Representative William “Mac” Thornberry, the new chairman of the U.S. House Armed Services Committee, has been studying the issue and collaborating with industry on recommendations. Additionally, Ashton Carter, President Obama’s pending nominee to be the next Secretary of Defense, is a former chief acquisitions official at the Pentagon and a proponent of reform.

Acquisition reform figures to play a prominent role in Carter’s upcoming confirmation hearing, although the most likely forum for a specific proposal on cost-plus contracts is the FY2016 National Defense Authorization Act (“NDAA”). One factor to watch as the NDAA process gets underway is whether Sen. McCain is able to build bipartisan support in Congress – and identify key allies across the aisle, and across the Hill – for the reform or elimination of cost-plus contracts. Outgoing SASC Chairman Carl Levin, who co-authored a symposium-style report on defense acquisition reform with Sen. McCain in October 2014, has retired from Congress. Also recently departed from the Hill is Representative Henry Waxman, whose proposal to require agencies to minimize cost-plus contracts passed the House in 2008.

It thus remains uncertain how Sen. McCain plans to realize his vision of ending cost-plus defense contracting. However, given the emphasis that the new SASC chairman has consistently placed on the issue, cost-plus contracts will likely remain a prominent topic within the broader and seemingly dynamic context of acquisition reform in the 114th Congress.

ARTICLE BY

Scott L. Glabe

Jennifer L. Plitsch

Kathy Brown

Covington & Burling LLP

Recent Trends in ESOP Litigation — Employee Stock Ownership Plan

There has been a lot of attention in the world of employee ownership plans to the 2014 Supreme Court Decision in Fifth Third Bancorp v. Dudenhoeffer. In that case, the Court ruled that “the law does not create a special presumption favoring ESOP (Employee Stock Ownership Plan) fiduciaries. Rather, the same standard of prudence applies to all ERISA fiduciaries, including ESOP fiduciaries, except that an ESOP fiduciary is under no duty to diversify the ESOP’s holdings.” This ruling overturns the so-called Moench rule that has been applied to plan fiduciaries for certain 401(k) plans investing in company stock and ESOPs. Moench gave a presumption of prudence to plan fiduciaries unless they knew or should have known the company was in dire financial circumstances.

As important as this ruling is, it actually has very little if any impact on the vast majority of ESOPs, over 95% of which are in closely held companies. The ruling is far more important for public companies with 401(k) plans or ESOPs that offer company stock as an investment choice.

First, it is important to distinguish between a statutory ESOP and what courts came, by a rather tortured logic, to call ESOPs—namely any defined contribution plan that had company stock in it. ESOPs were created as part of ERISA in 1974 and given not just the right but the requirement to invest primarily in employer securities. ESOPs were specifically created to encourage employers to share ownership with employees, and over the years Congress has given these plans a number of special tax benefits. Because fiduciaries are required to invest primarily in employer stock, standard fiduciary obligations concerning diversification in retirement plans would be impractical. The Moench presumption was created in a case involving a statutory ESOP.

The large majority of “stock drop” cases, however, have not involved statutory ESOPs, but 401(k) plans that either allowed employees to invest in company stock and/or matched in company stock. Some of these plans required fiduciaries to offer company stock; others made it optional. Defense attorneys argued that these plans were actually “ESOPs” too and were subject to the Moench presumption. Most district and circuit courts bought that argument, although some applied it only when company stock was required. That, I think, was unfortunate and inappropriate. 401(k) plans were never meant to be vehicles for sharing corporate ownership. They are intended to be safe, cost-effective retirement plans. ESOPs are a specific statutory creation with a specific set of rules and purposes.

When reading the Supreme Court decision, as well as the arguments made before the Court, it is also clear that the justices were thinking entirely of public companies. There is virtually no discussion of ESOPs in closely held companies, and the key tests that the Court now requires plaintiffs to meet in stock drop cases largely do not apply to privately held companies. Since the original Moench decision in 1995, we at the National Center for Employee Ownership have only found two cases in closely held companies that were decided even in part based on that presumption.

The Court’s decision in the Fifth Third case laid out three key hurdles for plaintiffs to overcome to prevail. The first states that it is insufficient to argue that fiduciaries should be able to outguess the market based on publicly available information. The second issue is whether decisions to sell company stock in light of inside information could be prudently taken in light of their potential impact on the prices of company stock. Fiduciaries are also not obligated to violate securities laws. Finally, the Court said plaintiffs must allege a reasonable alternative course of action.

In ESOPs in closely held companies, fiduciaries have few options that could form the basis for plaintiffs arguing a plausible course of action. First, the law requires that ESOPs be primarily invested in company stock. Second, the only liquidity options are a company buy-back of shares, which is probably impractical if the company is already in financial distress, or a sale of the company. But a fire sale like that would mean an even lower price for plan participants. As noted in more detail below, none of the presumption of prudence cases has concerned closely held companies, probably because of these issues. Also note that Dudenhoeffer distinguished between relying on inside information to sell company stock (which it classified as illegal insider trading and thus not required by the duty of prudence) and refraining from buying more company stock (which might be a fiduciary violation). The purchase of shares by an ESOP is already subject to substantial statutory and case law requirements, and this decision is unlikely to change the way these cases are contested.

As a result of all this, the prudence presumption has so far not been an issue for closely held ESOP companies in court, and it is likely to continue not to be as plaintiffs would have a hard time indicating what fiduciaries should have done. Instead, cases will continue to focus, as they have been before where there are alleged problems, on the initial sale price of the shares of the ESOP, which is determined by the trustee and relies on an outside appraiser. It is possible that the Dudenhoeffer decision may embolden the plaintiffs’ bar to initiate more lawsuits, but we would expect that to continue to be primarily in public companies.

Beyond ***Fifth Third*—ESOPs Law for the 97%**

Valuations

The 97% of ESOP companies that are closely held will not be much affected by the Supreme Court decision, but the last 25 years of litigation on ESOPs reveals some important trends that should be considered.

In an analysis by the NCEO of the 224 decisions courts have made on ESOPs in closely held companies between 1990 and 2014, we found that many of the suits involved plan management issues, such as failing to make distributions. The most significant issues, however, concerned valuation, indemnification, and fiduciary duties.

The valuation decisions are mixed. Courts have focused more on process than outcome. Some processes are clearly unacceptable, such as not hiring an independent appraiser or influencing an appraiser’s report. Several key best practices have emerged. A recent settlement between the Department of Labor and GreatBanc Trust in a valuation case (Perez v. GreatBanc Trust Co., 5:12-cv-01648-R-DTB (C.D. Cal., proposed settlement agreement filed June 2, 2014) set out terms for GreatBanc to follow in future engagements that does a good job of summarizing the trends in the courts.

Key points in the settlement included:

Trustees must be able to show that they vetted the independence and qualifications of appraisers carefully.
Trustees must show that they have assessed the reasonableness of financial projections given to the appraiser. Some valuation advisors include disclaimers in their engagement agreements that the DOL reads as too broad, in that read literally the valuation advisor can rely on any information it receives from the plan sponsor company without inquiring as to its reasonableness, no matter how unreasonable the information. The use of these disclaimers will not absolve the trustee of responsibility and the trustee should document how the appraisal firm has analyzed just how reliable projections are.
The trustee should consider how plan provisions, such as those relating to puts, diversification, and distribution policies, might affect the plan sponsor’s repurchase obligation.
The trustee should consider the company’s ability to service the debt if projections are not met.

Documentation should be detailed. While documentation of the valuation analysis may appear to be burdensome, making the effort to document the valuation review process at the time of the transaction can only benefit the valuation advisor and the trustee in later years.

Indemnification

The other significant legal development for closely held company ESOPs in recent years concerns indemnification, ironically also in the case involving Sierra Aluminum and GrratBanc. In Harris v. GreatBanc Trust Co., Sierra Aluminum Co., & Sierra Aluminum ESOP, No. 5:12-cv-01648-R (C.D. Cal. Mar. 15, 2013), a district court ruled that GreatBanc could be indemnified for its role as the ESOP fiduciary. The decision is significant in that it occurred in the one circuit (the Ninth) that has taken the position that indemnification should not be allowed, especially in a 100% ESOP. In Johnson v. Couturier, 572 F.3d 1067 (9th Cir. 2009), the court ruled that ESOP plan assets were not distinguishable from company assets. If plaintiffs prevailed but the company’s indemnification had paid out millions in legal fees to defendants (as was the case here), the plaintiffs would have a very hollow victory. In that same circuit, in Fernandez et al. v. K-M Industries Holding Co., No. C 06-7339 CW (N.D. Cal. Aug. 21, 2009), a court that an indemnification agreement did not apply in the case of a 42% ESOP because if alleged ERISA violations concerning an improper valuation were sustained, the indemnification would harm the value of participant stock.

These decisions seemed to make indemnification largely moot, but in the GreatBanc case the court ruled that regulations (29 C.F.R. § 2510.3-101(h)(3)) of ERISA Section 410 state that in the case of an ESOP, the plan’s assets and the company assets are treated as separate. In Couturier, the Harris court said, the company had already been liquidated and was thus no longer an operating company. The court also distinguished this case from Couturier in that in Couturier, plaintiffs had already shown likelihood to prevail on fiduciary charges, something that could not be said of this case. Finally, the Couturier case involved no exceptions for breaches of fiduciary duty, as was the case here, but only for “gross negligence” and “willful misconduct.”

Other courts in other circuits have not weighed in on this issue. Certainly a good argument can be made that if indemnification means that plaintiffs will lose a substantial amount of a settlement agreement because there is no money to pay, it seems compelling indemnification should not apply. That would not be the case if the company had other available assets. In any event, ESOP advisors now caution clients that indemnification may have limited value and that they should rely primarily on adequate fiduciary insurance.

Conclusion

In recent years, the Department of Labor has been more aggressive in pursuing what it perceives as valuation abuses in ESOP companies. While there have been a few more court cases and settlements per year than normal, a typical year finds only a handful of these out of the 6,500 or so ESOPs in closely held companies. A comprehensive study by the NCEO found that the default rate on leveraged ESOPs (those that borrow money to buy stock, which most do) is just .2% per year, way below other LBOs. If valuations really were routinely excessive, this number would be higher as the debt burden would be unrealistic.

Other ESOP litigation has been relatively mundane, focusing either on administrative errors or the occasional fraudulent behavior. Indemnification could become a more important issue, but companies can (and should) resolve that with proper fiduciary insurance.

The future for company stock in public company retirement plans, mostly 401(k) plan, is far less certain. There has been a steady decline in how many companies offer this and how much those that do rely on it. Even for advocates of employee ownership, however, this is not necessarily a bad thing. Good ESOP companies have secondary diversified retirement plans—in fact, ESOP companies are more likely to have a diversified retirement plan than other companies are to have any plan. That is a best practice we strongly encourage.

ARTICLE BY

Corey Rosen

The National Center for Employee Ownership

SEC Charges Chilean Citizens With Insider Trading Concerning Tender Offer for Chilean

The Securities and Exchange Commission recently filed suit in the US District Court for the Southern District of New York, alleging that defendants, Juan Cruz Bilbao Hormaeche and Thomas Andres Hurtado Rourke, both Chilean citizens, illegally traded on material non-public information that Abbott Laboratories was interested in purchasing CFR Pharmaceuticals, S.A., a pharmaceutical company headquartered in Chile.

According to the complaint, on March 10, 2014, CFR’s Board of Directors met to consider Abbott’s offer to purchase CFR; Bilbao, then a member of the board, participated by telephone. After the meeting, between March 12, 2014 and May 7, 2014, Bilbao allegedly directed his business associate, Hurtado, to place trades purchasing more than $14 million in American Depository Shares (ADSs) of CFR in a US brokerage account maintained in the name of a British Virgin Islands company for the benefit of Bilbao. The SEC further alleges that based on knowledge of confidential information, Hurtado purchased 35,000 ADSs of CFR for $707,710. On May 16, 2014, Abbott announced a definitive agreement to acquire CFR, and on September 23, 2014, Abbott completed the tender offer. According to the SEC, Bilbao tendered his ADSs to Abbott on or before September 23, 2014, and saw a profit of more than $10.1 million. The SEC further alleges Hurtado tendered his ADSs to Abbott for a profit of about $495,000.

The SEC sued defendants for illegally trading on insider information. The SEC alleges that the nexus to the United States is the initial purchase of the ADSs through US-based brokerage accounts. The SEC seeks an order freezing defendants’ assets, an order requiring defendants to repatriate funds obtained from the alleged illegal activities, a final judgment that defendants violated the securities laws, and an order directing defendants to disgorge any illegal gains and to pay civil penalties.

Complaint, SEC v. Hormaeche, No. 14-cv-10036-RJS (S.D.N.Y. Dec. 22, 2014).

ARTICLE BY

Emily Stern

Zachary D. Denver

Katten Muchin Rosenman LLP

California Labor Laws for the New Year

If only the Beatles’ call to “Let it Be” was heard by the California Legislature. Instead, employer regulation is on the rise again. In 2014, 574 bills introduced mentioned “employer,” compared to 186 in 2013. Most of those 500-plus bills did not pass, and several that did pass were not signed into law by the governor. One veto blocked a bill that would have penalized employers for limiting job prospects of, or discriminating against, job applicants who aren’t currently employed.

A sampling of significant new laws affecting private employers, effective Jan. 1, 2015, unless otherwise mentioned, follows.

Shared Liability for Employers Who Use Labor Contractors

AB 1897 mandates that companies provided with workers from a labor contractor to perform labor within its “usual course of business” at its premises or worksite will “share with the labor contractor all civil legal responsibility and civil liability” for the labor contractor’s failure to pay wages required by law or secure valid workers compensation insurance, for the workers supplied.

The law applies regardless of whether the company knew about the violations and whether the company hiring the labor contractor (recast by the new law as a “client employer”) and labor contractor are deemed joint employers. This liability sharing is in addition to any other theories of liability or requirements established by statutes or common law.

The client employer will not, however, share liability under this new law if it has a workforce of less than 25 employees (including those obtained through the labor contractor), or is supplied by the labor contractor with five or fewer workers at any given time.

A labor contractor is defined as an individual or entity that supplies, either with or without a contract, a client employer with workers to perform labor within the client employer’s usual course of business, unless the specific labor falls under the exclusion clause in AB 1897. Excluded are bona fide nonprofits, bona fide labor organizations, apprenticeship programs, hiring halls operated pursuant to a collective bargaining agreement, motion picture payroll services companies and certain employee leasing arrangements that contractually obligate the client employer to assume all civil legal responsibility and civil liability for securing workers’ compensation insurance.

This bill is a significant expansion of existing law—which is limited to prohibiting employers from entering into a contract for labor or services with a construction, farm labor, garment, janitorial, security guard or warehouse contractor—if the employer knows or should know that the agreement does not include sufficient funds.

In light of the new law, labor services contractor engagements should be evaluated with an eye toward limiting the risk of retaining non-compliant contractors, including indemnity, insurance, termination provisions and compliance verification protocols.

Wage and Hour Changes

California’s $9 hourly minimum wage is due to increase to $10 Jan. 1, 2016. Defeated by the California Legislature, however, was a bill to raise the hourly minimum wage to $11 in 2015, $12 in 2016, $13 in 2017 and then adjust annually for inflation starting in 2018.

Undeterred, several municipalities have increased their respective minimum wage for companies who employ workers in their jurisdiction. For example, employees who work in San Francisco more than two hours per week, including part-time and temporary workers, are entitled to the San Francisco hourly minimum wage, which increased Jan. 1 from $10.74 to $11.05 and will increase to $12.25 by May 1. Hourly minimum wages also increased Jan. 1 in San Jose ($10.30).

The minimum wage will increase in Oakland March 2 ($12.25) and in Berkeley Oct. 1 ($11). Many other cities have either enacted, or have pending, minimum wage laws.

Federal minimum wage continues to lag behind California, but no longer for federal contractors. President Obama issued Executive Order 13658 in 2014 which established that workers under federal contracts must be paid at least $10.10 per hour. This applies to new contracts and replacements for expiring federal contracts that resulted from solicitations issued on or after Jan. 1, 2015, or to contracts that were awarded outside the solicitation process on or after Jan. 1, 2015. There are prevailing wage requirements for many state and local government and agency contractors as well.

Employers should monitor each of the requirements, including those in the jurisdiction in which they do business, to assure compliance.

Paid Sick Days Now Required

Effective July 1, AB 1522 is the first statewide law that requires employers to provide paid sick days to employees. The new law grants employees, who worked at least 30 days since the commencement of their employment, the right to accrue one hour of paid sick time off for each 30 hours worked—up to 24 hours (three days) in a year of employment. Exempt employees are presumed to work a 40-hour normal workweek; but, if their normal workweek is less, the lower amount could be used for accrual purposes.

An employer may cap accrual at 48 hours (six days) and also may limit the use of paid sick days in a year to 24 hours. Unused paid sick days normally carry-over from year to year, though no carry-over is required if 24 hours of paid sick days is accrued to the employee at the beginning of a year. No payout is required at termination of employment.

The paid sick days may be used for the employee’s own health condition or preventative care; a family member’s health condition or preventative care; if the employee is a victim of domestic assault or sexual violence; and stalking. “Family member” means a child, regardless of age or dependency (including adopted, foster, step or legal ward), parent (biological, adoptive, foster, step, in-law or registered domestic partner’s parent), spouse, registered domestic partner, grandparent, grandchild or siblings.

The law applies to all employers, regardless of size, except for a few categories of employees that are not covered—such as those governed by a collective bargaining agreement that contains certain provisions, in-home supportive services providers and certain air carrier personnel.

Employers must keep records for at least three years, a new workplace poster is required and employers are barred from retaliating against employees who assert rights under this new law.

Failure of an employer to comply with AB 1522 can result in significant monetary fines and penalties in addition to pay for the sick days withheld, reinstatement and back pay if employment was ended, and attorneys fees and costs.

Employers should beware to integrate city specific paid sick leave laws with the new state law. For example, the pre-existing San Francisco paid sick day law has some provisions that are similar and some that are different from AB 1522. As a general rule, where multiple laws afford employee rights on a common topic, the employee is entitled to the law benefits that favors the employee most.

Discrimination Law and Training Requirements Expanded

AB 1443 amends the California Fair Employment and Housing Act (FEHA) to make its anti-discrimination, anti-harassment and religious accommodation provisions apply to unpaid interns. It also amends FEHA’s anti-harassment, and religious belief or observance accommodation provisions, to apply to volunteers. This new law appears to respond to, and trump, courts that have not classified these workers as employees and, in turn, found them not eligible for legal protections afforded to employees.

Prior law requires the California Department of Motor Vehicles to commence issuing special drivers licenses in January to applicants who meet other requirements to obtain a license, but cannot submit satisfactory proof of lawful presence in the United States. AB 1660 amends FEHA to prohibit discrimination against holders of these special drivers licenses; adverse action by an employer because an employee or applicant holds a special license can be a form of national origin discrimination. Employer compliance with any requirement or prohibition of federal immigration law is not a violation of FEHA.

Since 2006, employers of 50 or more employees have been required to provide supervisors with two hours of classroom or other effective interactive anti-sexual harassment training, every two years. New supervisors are to receive the training within six months after they start a supervisory position. This is commonly known as “AB 1825” training.

In apparent response to societal concerns about the impacts of bullying in general, AB 2053 requires that AB 1825 training include a component on abusive conduct prevention. Under the new law, abusive conduct means “conduct of an employer or employee in the workplace, with malice, that a reasonable person would find hostile, offensive and unrelated to an employer’s legitimate business interests.

Abusive conduct may include repeated infliction of verbal abuse—such as the use of derogatory remarks, insults and epithets; verbal or physical conduct that a reasonable person would find threatening, intimidating or humiliating; or the gratuitous sabotage or undermining of a person’s work performance. A single act shall not constitute abusive conduct, unless especially severe and egregious.”

The new law does not make abusive conduct unlawful in and of itself, but it’s common for plaintiffs’ counsel to try, in attempts to win cases, to tether abusive behavior by a supervisor to conduct that is alleged to be unlawful.

SB 1087 requires farm labor contractors to provide sexual harassment prevention and complaint process training annually to supervisory employees and at the time of hire and each two years thereafter to non-supervisory employees. The new law also blocks state licensing of farm labor contractors who have been found by a court or administrative agency to have engaged in sexual harassment in the past three years, or who knew— or should have known—that a supervisor had been found by a court or administrative agency to have engaged in sexual harassment in the past three years.

Child Labor Laws Enhanced

AB 2288, the Child Labor Protection Act of 2014, accomplishes three things.

1. It confirms existing law that “tolls” or suspends the running of statutes of limitation on a minor’s claims for unlawful employment practices until the minor reaches the age of 18.

2. Treble damages are now available—in addition to other remedies—to an individual who is discharged, threatened with discharge, demoted, suspended, retaliated or discriminated against, or subjected to adverse action in the terms or conditions employment because the individual filed a claim or civil action alleging a violation of the Labor Code that arose while the individual was a minor.

3. For Class “A” child labor law violations involving minors at or under the age of 12, the required range of civil penalties increases to $25,000 to $50,000. Class A violations include employing certain minors in dangerous or prohibited occupations under the Labor Code, acting unlawfully or under conditions that present an imminent danger to the minor employee, and three or more violations of child work permit or hours requirements.

Immigration and Retaliation

Several new California laws involving immigration issues surfaced last year. All were premised on existing law that all workers are entitled to the rights and protections of state employment law regardless of immigration status, and that employers must not leverage immigration status against applicants, employees or their families.

This year, AB 2751 adds to and clarifies these existing laws.

For example, actionable “unfair immigration- related practices” now include threatening or filing a false report to any government agency. The bill also clarifies that a court has authority to order the suspension of business licenses of an offending employer to block otherwise lawful operations at worksites where the offenses occurred.

What’s Next?

Employers should consider how these new laws impact their workplaces, and then review and update their personnel practices and policies with the advice of experienced attorneys or human resource professionals.

*Originally published by CalCPA in the January/February 2015 issue of California CPA.

ARTICLE BY

Mark E. Terman

Drinker Biddle & Reath LLP

Like this:

Like this:

Like this:

When

Where

Why should you attend?

Who Should Attend

Like this:

WHAT’S COVERED?

WHAT’S THE CONCERN?

WHAT’S REQUIRED?

HOW TO COMPLY

ENFORCEMENT

Like this:

Like this:

Like this:

Beyond Fifth Third—ESOPs Law for the 97%

Valuations

Indemnification

Conclusion

Like this:

Like this:

Shared Liability for Employers Who Use Labor Contractors

Wage and Hour Changes

Paid Sick Days Now Required

Discrimination Law and Training Requirements Expanded

Child Labor Laws Enhanced

Immigration and Retaliation

What’s Next?

Like this:

Beyond ***Fifth Third*—ESOPs Law for the 97%**