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

 

 

Planning Opportunities Under the New Estate and Gift Tax Law

Recent post summarizing Gift and Estate Tax changes at the National Law Review by Lowndes, Drosdick, Doster, Kantor & Reed, P.A. – read on: 

On December 17, 2010 Congress enacted a new tax law which changes the federal gift, estate and generation-skipping transfer (“GST”) taxes currently in effect. However, the new law is only effective for the next two years, through December 31, 2012. The new law reinstates the lifetime exemptions for the estate, GST and gift taxes and increases the amount of the exemptions to $5,000,000 per person with a top tax rate of 35%.

The law provides new opportunities for clients. The increased gift tax exemption allows for clients to make tax-free gifts of their estate which might otherwise be taxable. The new gift tax provisions allow someone who has already made taxable gifts totaling $1,000,000 during his or her life to have an additional $4,000,000 of gift tax exemption available for use during his or her life. This is an immediate planning opportunity for clients who may wish to take advantage of the tax law changes.

The new law may also alter many clients’ estate plans. For example, assume a client’s estate plan is drafted to provide that the estate is to be divided into a family trust and a marital trust with the family trust being funded with the maximum estate tax exemption and the marital trust being funded with the amount, if any, of the estate that exceeds the exemption amount. Thus, under current law, the family trust would be funded with the first $5,000,000 of the estate (or the entire estate depending on the value of the estate) with the possibility that no portion of the estate would pass into the marital trust. Given the increased exemption, this may or may not be what a client would want to happen.

Many clients’ current estate plans include a family trust to ensure the use of the first spouse’s estate tax exemption because the prior law provided if the estate exemption was not used at the first spouse’s death it was lost. The new law provides for “portability” of the estate tax exemption. Thus, a surviving spouse may elect to add the deceased spouse’s unused estate and gift tax exemption to the surviving spouse’s exemption, thereby increasing the surviving spouse’s estate and gift tax exemption for transfers during life or upon death. For instance, if the first spouse dies and only used $2,000,000 of his $5,000,000 estate tax exemption, upon election, the surviving spouse would now be able to shelter $8,000,000 from estate and gift tax (the surviving spouse’s exemption of $5,000,000 plus the deceased spouse’s unused $3,000,000 of exemption).

The new law also applies to the estates of individuals who died in 2010 and who may wish to take advantage of some of the planning opportunities. If a family member passed away in 2010, you may want to discuss what planning opportunities are available related to the estate with your estate attorney.

While the new tax law is a step in the right direction, it only applies through December 31, 2012. Therefore, it is important to confirm your estate planning documents are drafted to address the changing tax law as well as to take advantage of the new opportunities that are currently available and may expire in two years. Even if your estate is below the new exemption amount, it is still important to make sure your estate plan is up to date to ensure your intent is carried out and to maximize all of the options available to you. 

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

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.

 

The Wrongful Distribution of Retirement Benefits to a Plan Fiduciary is Prohibited by ERISA Section 406(b)

This week’s featured bloggers at the National Law Review are from Cosgrove Law L.L.C.   In the ‘who knew’ category from Kurt J. Schafers:  the wrongful distribution of plan benefits to a Plan Fiduciary.  

Although the distribution of benefits to a plan participant is not a “transaction” as that term is used in Section 406(a), the wrongful distribution of benefits to a plan fiduciary is clearly prohibited conduct under Section 406(b). For example, inLockheed Corp. v. Spink, 517 U.S. 882 (1996), the plaintiff brought suit against his employer (administrator of his 401(k) plan) under Section 406(a)(1)(D) because the employer wrongfully allowed some of its employees to receive early retirement benefits that the plaintiff was unable to receive. Id. at 892-93. The respondent argued that the payment of benefits is not a “transaction” under Section 406(a). Id.at 892. In its holding, the Court agreed with the respondent, but made clear that its holding was strictly limited to the language of Section 406(a). Indeed, the Court clarified that “the payment of benefits is in fact not a ‘transaction’ in the sense that Congress used that term in § 406(a).” Id. at 892 (emphasis added).

The narrow scope of Lockheed becomes clear upon a review of subsequent federal caselaw. See Armstrong, 2004 WL 1745774, at *10 (holding “payments to participants in accordance with plan terms not to be transactions within the meaning of [Section 406(a)]”); Owen v. SoundView Financial Group, Inc., 54 F.Supp.2d 305, 323 (S.D. N.Y. 1999) (holding that “ERISA’s “Prohibited Transaction” rules, see 29 U.S.C. §§ 1106(a) [ERISA Section 406(a)]…are not applicable to the payment of Plan benefits to a Plan beneficiary, because the beneficiary is not a “party in interest”). The limited scope of Lockheed is confirmed by the equally limited scope of Section 406(a). For instance, Section 406(a), entitled, “Transactions between plan and party in interest,” is plainly intended to govern only those transactions in which fiduciaries cause a plan to engage. Indeed, Section 406(a)(1) begins with the following language: “A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect. . . .” (emphasis added). Section 406(a)(1) then lists five narrow types of transactions in which a fiduciary should not cause a plan to engage. Courts have determined that the purpose of Section 406(a) is limited to “prevent[ing] plan fiduciaries from engaging in certain transactions that benefit third parties at the expense of plan participants and beneficiaries.” Armstrong v. Amsted Industries, Inc., 2004 WL 1745774, at *10 (N.D. Ill. 2004); Marks v. Independence Blue Cross, 71 F.Supp.2d 432, 437 (E.D. Pa. 1999).

The limited holding of Lockheed (and the subsequent federal court decisions) does not, however, apply in many cases. Indeed, a plaintiff’s prohibited transactions claim against a defendant may be brought under a completely separate ERISA provision: Section 406(b). This Section, entitled “Transactions between plan and fiduciary,” may more clearly apply to a defendant’s conduct. Importantly, unlike Section 406(a), Section 406(b) does not specifically limit which types of transactions apply to the Section. As such, the “transactions” contemplated under Section 406(b) are much broader in scope than those specifically set forth in Section 406(a). Moreover, rather than aiming to prevent plan fiduciaries from engaging in transactions that benefit third parties at the expense of plan participants and beneficiaries, Section 406(b) aims to prevent—among other things—plan fiduciaries from engaging in prohibited transactions for their own account. A plan fiduciary wrongfully using his or her power to obtain a higher distribution than is warranted, for example, obviously falls under the broad conduct contemplated under Section 406(b).

Finally, Section 408(c)(1) reads as follows:

Nothing in [ERISA Section 406] shall be construed to prohibit any fiduciary from—

(1) receiving any benefit to which he may be entitled as a participant or beneficiary in the plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the plan as applied to all other participants and beneficiaries.

A plain reading of this Section establishes that Section 406 should be construed to prohibit a fiduciary from receiving a benefit that is computed and paid on a basis which is inconsistent with the terms of the plan as applied to all other participants and beneficiaries.

Copyright © 2011 Cosgrove Law, LLC.

Milestone or Millstone? Financing, that is.

The National Law Review included a great post  this week about the challenges for Milestone Financing  from Paul A. Jones of Michael Best & Friedrich LLP: 

As a lawyer, I’ve counseled many an entrepreneur, and even an occasional angel or venture investor, who thought so-called milestone-based financing rounds might bridge an especially irksome entrepreneur-investor gulf on valuation.  And, indeed, if you’ve been around the high-impact startup game awhile, you are bound to have seen some of these deals done.  You might even have seen some of them work out.  But as attractive as the idea of punting on valuation and/or funding timing pending the future achievement (or not) of some pre-defined milestone can be, more than a few words of caution are in order.

The kind of milestone financing I am talking about typically looks something like the following.  An investor agrees to put in some money up front, with the valuation thereof, and/or the provision of an additional sum of money, determined at some later time, when the company has (or has not) accomplished some defined milestone(s).  In theory, this structure can be a good mechanism for bridging otherwise intractable differences about valuation and funding requirements between entrepreneurs and investors.  In practice, though, this approach can be quite problematic.

The problems with milestone funding are basically as follows.  First, the parties too often leave the definition of what constitutes achieving the milestone subject to interpretation.  Some milestones are in fact hard to define with precision.  Beyond that, precision itself in terms of defining a milestone can be problematic if, as is often the case, success or failure in achieving a milestone can take forms not contemplated at the beginning of the enterprise.  Second, and particularly where the milestone is more distant in time, market conditions can change so that one party or the other inevitably ends up feeling like they are being held to a deal that no longer makes sense.  Finally – and this, for me, is the biggest issue with milestone funding – is that what seem like the best/most pressing milestones today might be overtaken by events before they are achieved.  Most technology-based startups evolve rapidly: what looks like the best use of limited resources at, say, the first closing of a milestone financing, might look like a less than optimal use of resources a day, week, month or quarter later.  But with a milestone financing clock ticking, the various parties – founders, managers and investors – can find themselves with confused and conflicting priorities.  At best, in this situation, you will have a serious management distraction on your hands.

Milestone financing structures can be good tools in the right situations.  Considering the real world risks, however, they should be considered as if not last at least late-in-the-day resorts.  And, when used, both sides should be careful to pick milestones that can be achieved sooner, rather than later, and defined, appropriately, with precision.  And then everyone should still cross their respective fingers that the business – technology, markets, competition, etc. – stays reasonably stable at least until the milestone is achieved.

© MICHAEL BEST & FRIEDRICH LLP

Ninth Circuit Holds that Repayment for Training is Not an Illegal 'Kick-Back'

Judd H. Lees of William Kaster recently posted at the National Law Review information about a  recent 9th Circuit case involving the repayment of training costs for employees: 

Many employers provide expensive training to new employees only to see the newly trained employees disappear after a short tenure.  In order to recoup the costs associated with upfront training, some employers require repayment of training costs on a graduated scale based on the tenure of employment.  In Gordon v. City of Oakland, the Ninth Circuit Court of Appeals determined that such a written agreement did not violate the Fair Labor Standards Act as an unlawful kick-back.

In Gordon the City of Oakland’s police department required officers to repay a portion of their training costs if they voluntarily left the City’s employment before completing five years of service.  If they left prior to one year of employment, the departing officer owed 100 percent of the training costs and the percentage dropped by 20 percent every year until no repayment was required for a separation after five years of employment.  The written training reimbursement agreement was signed by employee Gordon.  Gordon resigned after completing her second year of service and received her full paycheck.  However, the City withheld her accrued unused vacation and compensatory time off as partial payment for the training costs and also served her with a demand for the remaining training costs which were not covered by the withheld amounts.

Gordon filed a lawsuit alleging that the City’s action violated the federal Fair Labor Standards Act.  Specifically, Gordon alleged that there was no legal difference between deducting the entire sum from her paycheck and directly demanding payment of the sum after receiving her paycheck.  Both resulted in a negative sum for her last week of work and therefore violated the minimum wage requirement of the FLSA.

The district court disagreed and held that the issuance of a paycheck exceeding the minimum wage amount complied with the FLSA and that the subsequent demand was, indeed, a distinction with a difference.  On appeal to the Ninth Circuit, the Court agreed and held that the City was free to both deduct a portion of the training costs and seek repayment of the remaining training costs as “an ordinary creditor” and that the agreement to repay the training costs did not constitute a kick-back under the FLSA.

Employers who choose to rely on such a repayment plan should note the following.  First, the employee signed a written agreement which provided the basis for recoupment of the training costs.  Second, and most importantly, the employer made sure that the employee’s last paycheck met the minimum wage requirements and did not subtract the entire amount due.  The Court suggested that its holding may have been different had the paycheck fallen below the minimum wage requirements.  Employers are cautioned to ensure that any and all deduction from wages are expressly agreed to ahead of time by the employee since both state and federal law require this.  In addition, if an employer contemplates satisfying such “loans” from final paychecks, this also needs to be specifically set forth in the agreement.  The wiser alternative is to make sure that the final paycheck at least results in payment of minimum wages for the final week accompanied by a demand for payment of the remaining amounts.

© 2002-2011 by Williams Kastner ALL RIGHTS RESERVED

Yes, It’s Data Privacy Day

Here’s some news – it’s Privacy Day !  The National Law Review was alerted to this news by Emily Holbrook of the Risk Management Monitor – read on: 

It may surprise you, as it did me, to learn that today is Data Privacy Day, an “international celebration of the dignity of the individual expressed through personal information.” But Data Privacy Day also highlights the need for individuals to protect their data and how they can go about doing so.

There are many organizations out there that aim to help individuals protect their personal information and help businesses comply with data protection laws and regulations. The Online Trust Alliance is one such organization, whose mission is to create an online trust community, promoting business practices and technologies to enhance consumer trust globally. They recently released their “2011 Data Breach Incident Readiness Guide” to help businesses in breach prevention and incident management.

According to their newest guide, the true test for organizations and businesses should be the ability to answer key questions such as:

  1. Do you know what sensitive information is maintained by your company, where it is stored and how it is kept secure?
  2. Do you have an incident response team in place ready to respond 24/7?
  3. Are management teams aware of security, privacy and regulatory requirements related specifically to your business?
  4. Have you completed a privacy and security audit of all data collection activities, including cloud services, mobile devices and outsourced services?
  5. Are you prepared to communicate to customers, partners and stockholders in the event of a breach or data loss incident?

With the White House, members of Congress, Commerce Department and the FTC calling for greater privacy controls and breach notifications, self-regulation by businesses is becoming more and more important.

Google, one of the supporters of Data Privacy Day and the initiatives of The Privacy Projects is hosting a public discussion on privacy later this afternoon with representatives from the Electronic Frontier Foundation, the FTC and the National Institute of Standards and Technology scheduled to attend. If you can’t stop by Google’s DC office for this event, don’t worry — it will be captured on video and posted to YouTube soon after.

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

Wisconsin Tort Reform 2011: Governor signed the Omnibus Tort Reform Act

As posted on the National Law Review by Joseph Louis Olson and Adam E. Witkov of Michael Best & Friedrich LLP – implications of the Wisconsin Omnibus Tort Reform Act signed into law today by Wisconsin Governor Scott Walker:  

Governor Scott Walker signed the OmnibusTort Reform Act (the “Act”) today, January 27, 2011.  The Act addresses several areas of interest for Wisconsin companies.

Specifically, the Act:

Limits Punitive Damages.

  • Punitive damages are capped at to $200,000 or double the amount of compensatory damages, whichever is higher. The cap does not apply to lawsuits related to operating a motor vehicle while intoxicated.

Raises the Standards for Expert Testimony.

  • This Act adopts the standard set forth in Federal Rule of Evidence 702, also known as the “Daubert standard.” The Daubert standard allows the admission of expert testimony only if it is based on sufficient factors or data and is the product of reliable principles and methods.

Limits the Application of the Risk Contribution Theory.

  • This provision is a response to the Wisconsin Supreme Court’s 2005 decision in Thomas v. Mallett, 2005 WI 129, 285 Wis. 2d 236, 701 N.W.2d 523, where the Court permitted a case to proceed against seven paint manufacturers despite the fact that the plaintiff could not prove who made the lead-based paints that he claimed poisoned him as a child. The Act limits the holding in Thomas. If the claimant can not identify the specific product that allegedly caused the injury, a manufacturer, distributor, seller, or promoter of a product may be held liable only if all of the following apply: (1) the claimant proves: (a) no other lawful process exists for the claimant to seek any redress from any other person for the injury or harm; (b) that the claimant has suffered an injury or harm that can be caused only by a manufactured product chemically and physically identical to the specific product that allegedly caused the claimant’s injury or harm; and (c) that the manufacturer, distributor, seller, or promoter of a product manufactured, distributed, sold, or promoted a complete integrated product, in the form used by the claimant or to which the claimant was exposed, and that meets all of the following criteria: (i) is chemically and physically identical to the specific product that allegedly caused the claimant’s injury or harm; (ii) was manufactured, distributed, sold, or promoted in the geographic market where the injury or harm is alleged to have occurred during the time period in which the specific product that allegedly caused the claimant’s injury or harm was manufactured, distributed, sold, or promoted; and (iii) was distributed or sold without labeling or any distinctive characteristic that identified the manufacturer, distributor, seller, or promoter; and (2) the action names, as defendants, those manufacturers of a product who collectively manufactured at least 80 percent of all products sold in this state during the relevant production period by all manufacturers of the product in existence during the relevant production period that are chemically identical to the specific product that allegedly caused the claimant’s injury or harm.

Limits Strict Product Liability Claims.

  • Under the Act, Wisconsin is now in line with the majority of other states that have adopted the “reasonable alternative design” test instead of the broader “consumer expectation” test. Accordingly, a manufacturer will be liable for damages caused by the manufacturer’s product based on a claim of strict liability only if the injured claimant proves that the product was defective, the defective condition made the product unreasonably dangerous, the defective condition existed at the time the product left the control of the manufacturer, the product reached the user or consumer without substantial change, and the defective condition caused the claimant’s injuries. If the injured party’s percentage of total causal responsibility for the injury is greater than the percentage resulting from the defective condition of the product, the injured party may not, based on the defect in the product, recover damages from the manufacturer, distributor, seller, or any other person responsible for placing the product in the stream of commerce. If the injured party’s percentage of total causal responsibility for the injury is equal to or less than the percentage resulting from the defective condition of the product, the injured party may recover but the damages recovered by the injured party shall be diminished by the percentage attributed to that injured party.

Toughens State Rules Relating to Damages for Frivolous Claims.

  • In civil cases, a party or his or her attorney may be liable for costs and fees for actions that are done (1) in bad faith, solely for the purpose of harassing or maliciously injuring another; or (2) was without a reasonable basis in the law. If the offending party withdraws or corrects the improper conduct within 21 days of receiving the other party’s motion for fees, the court can decide whether to award actual costs taking into consideration the offending party’s mitigating conduct. If the offending party does not timely withdraw or correct the conduct, actual costs shall be awarded. If the decision is appealed and the appellate court affirms the award of fees, the offending party must also pay the attorney fees incurred in the appeal.  

In addition to the tort reform provisions outlined above, the Act includes several health care related provisions previously discussed in a client alert dated January 10, 2011, also available here.

© MICHAEL BEST & FRIEDRICH LLP