NBA-CLS Newsletter Online

Welcome to the NBA-CLS Blog

NBA-CLS Blog — Wed, 13 Jan 2010 21:44:52 GMT

Introduction

The Commercial Law Section is one of twenty-one (21) sections of the National Bar Association ("NBA"). For six of the last seven years, the CLS has been named the NBA "Section of the Year." Among other things, the Section is committed to bringing its members together with in-house counsel at major corporations who seek to increase the diversity of their outside counsel ranks.

The Section's commitment to this objective began more than twenty (20) years ago. In 1987 a small group within the National Bar Association Commercial Law Section met to consider ways for NBA members in business practice to meet with institutional corporate clients for the purpose of developing professional relationships and to create opportunities for institutional entities to seek out, meet and refer outside legal matters to African-American attorneys. After months of intensive planning, this core group organized the first Corporate Counsel Conference in 1988 in Chicago, Illinois.

Throughout the years, the Corporate Counsel Conference has continued to grow in size, visibility and influence. Over the years, it is estimated that over 1,000 NBA Commercial Law Section members have connected with well over one hundred (100) different corporations and their representatives through the Corporate Counsel Conference. Many have formed long-standing mutually beneficial attorney-client relationships. The Corporate Counsel Conference has also served as a model for similar programs that have subsequently been created by other organizations. We look forward to many more years of connecting the talented members of the National Bar Association Commercial Law Section with corporations who recognize diversity as an essential component to any commitment to excellence.

Legal Notice and Disclaimer

The materials on this web site have been prepared by members and contributors to the National Bar Association Commercial Law Section Newsletter and are for general information purposes only. These materials do not, and are not intended to, constitute legal advice. These materials may be considered advertising in your state. The information on this web site is not privileged and does not create an attorney-client relationship with any of the attorneys referenced on this site.

You should not act, or refrain from acting, based upon any information at this web site. The information on this web site may not reflect the most current legal developments and is not guaranteed to be correct, complete or up-to-date. Information on this web site should not be taken as a promise or indication of future results. The National Bar Association Commercial Law Section does not endorse and is not responsible for any third-party content that may be accessed from its web site and does not recommend or endorse the use of any third-party’s services.

Users of this web site shall abide by all applicable federal, state, and local laws, including those pertaining to libel, slander, defamation, trade libel, product disparagement, harassment, invasion of privacy, and copyright and trademark infringement for all activity occurring in connection with the web site (including, but not limited to, accessing pages, downloading materials, etc.). By accessing the web site, you agree to be bound by the terms and conditions of all disclaimers on this web site which are to be governed by and construed in accordance with all applicable federal, state, and local laws, without giving effect to any conflict of laws principles.

Electronic Health Records May Reduce Malpractice Claims

NBA-CLS Blog — Wed, 23 Dec 2009 17:36:00 GMT

By Josephus Ollisoni[1]

As part of his economic recovery program, President Barack Obama wants to invest in converting paper health records to electronic health records (EHRs). Analyses of the potential benefits of such a conversion suggest that President Obama’s proposal has merit. “Errors will happen anytime you take a complex system and put human beings inside of it,” says Dr. Brent James, vice president of medical research and executive director of Salt Lake City’s Intermountain Institute for Health Care Delivery Research. “The notion that you can train doctors to completely avoid mistakes is just false."

This is especially true when dealing with emergency patient care. Emergency room patients do not have the opportunity to screen and evaluate emergency room doctors and staff and make an informed choice about whose hands they place their lives in, as they would when choosing a physician or surgeon under normal circumstances. Yet, emergency room treatment may be the most important and extreme medical attention a person ever receives. According to The Institute of Medicine, a non-profit organization chartered by the U.S. National Academy of Sciences, at least 1.5 million Americans fall prey to hospital error every year. The mistakes aren’t exactly minor, either. Between 40,000 and 100,000 people die every year because of shoddy work, including surgical mishaps and drug mixups. One big problem: hospital patients may get the wrong drug one time out of five, according to a study by Auburn University. The death toll from mistakes is at least as bad as that from car accidents or breast cancer, and may be as bad as that from strokes.

Hospitals can minimize the risk of errors by maintaining clear and consistent policies and procedures for record keeping, patient tracking, administering medications, and sanitation. Policies and procedures only work when followed up with training and enforcement. In a high stress environment, all of these elements are necessary to keep things running smoothly. Use of EHRs may help reduce paid malpractice settlements for physicians, according to a new study. The study, which appeared in the November 24, 2008, issue of Archives of Internal Medicine, showed a trend toward lower paid malpractice claims for physicians who are active users of EHR technology. This study was based at the Department of Ambulatory Care and Prevention of Harvard Medical School and Harvard Pilgrim Health Care.

Health care policymakers have touted the benefits of EHRs, which include preserving and documenting patient health care data, reducing medication errors, improving efficiency of care, and allowing surveillance and monitoring of care for research and quality improvement. “There is broad consensus that electronic health records are an essential foundation for the delivery of high quality care. As electronic health record adoption proceeds as a national health policy objective, some have wondered whether EHRs can help to prevent medical malpractice claims,” says Assistant Professor Steven Simon, senior author on the paper.

The study examined survey responses from 1140 practicing physicians in Massachusetts during 2005 concerning their demographic characteristics and the length and extent of their EHRs use. The physicians’ malpractice history was accessed using publicly available data from the Commonwealth of Massachusetts’ Board of Registration in Medicine. The study team compared the presence or absence of malpractice claims among physicians with and without EHRs, including only claims that had been settled and paid. Overall, 6.1% of physicians with EHRs and 10.8% of physicians without them had paid malpractice settlements in the preceding ten years. After controlling for potential confounding variables, there remained a trend favoring EHR use, although the result was not statistically significant. In a secondary analysis among EHR adopters, the authors found that 5.7% of more active users of their systems had paid malpractice settlements, compared with 12.1% of less active users. Small numbers of physicians in both groups led the authors to interpret the results with caution.

The investigators speculate that EHRs may decrease paid malpractice claims for a number of reasons. EHRs offer easy access to patients’ history, which may result in fewer diagnostic errors, improved follow up of abnormal test results, and better adherence to clinical guidelines. In addition, the clear documentation of care allowed by EHRs can bolster legal defenses if a malpractice claim is filed. If this link between EHR use and lower malpractice payments is confirmed in further studies, malpractice insurers may offer lower premiums for practices that use EHRs, and there would be further incentive for physicians to invest in an EHR system for their offices. For example, the federal government may offer subsidies for EHR adoption. Although conversion to EHRs has significant potential benefits, its use also raises concern among some physicians and patients about the privacy of EHRs. To allay that concern, proponents of the use of EHRs will have to demonstrate that EHRs can be kept confidential.

References

[1] Josephus Ollison is Founder and President of Emergency Patient Care and the Executive Director for the national conference on “Health Care - State of Emergency Forum” in conjunction with Minority Access. He previously served as Director of Corporate Affairs for The National Association for Equal Opportunity in Higher Education for Black Colleges and Universities and was the Development Officer for the AARP Foundation where he was honored by the AARP Foundation for his work with Medicare Part D, the prescription drug program for seniors and the NBA Legends of Basketball Katrina Relief Campaign. You can reach Mr. Ollison at ollisonj@aol.com and www.epcmember.com

Selecting and Presenting The 30(b)(6) Witness

NBA-CLS Blog — Sun, 22 Nov 2009 15:53:00 GMT

By Samuel S. Woodhouse, Esq.[1]

Imagine for a moment that you had to pick someone to answer a series of questions on your behalf. Who would you pick? What if you were bound by whatever answers that person would give on your behalf, would that change the person whom you would select? This is precisely the dilemma that lawyers and corporate clients face when selecting a corporate designee for a 30(b)(6) deposition. The selection of the 30(b)(6) corporate designee is one of the most important decisions that a lawyer and a client will make in a lawsuit. Therefore, this selection should be carefully considered and strategically made.

Rule 30(b)(6) of the Federal Rules of Civil Procedure allows an entire corporation to speak through one agent. A notice of deposition made pursuant to Rule 30(b)(6) requires the corporation to produce one or more individuals to testify with respect to matters set out in the deposition notice or subpoena. Marker v. Union Fid. Life Ins. Co., 125 F.R.D. 121, 126 (M.D.N.C. 1989). The corporation must not only designate a person to testify, but more importantly, prepare the person so that he or she can give complete, knowledgeable and binding answers on behalf of the corporation. Id. This is a critical aspect of Rule 30(b)(6).

Since the 30(b)(6) witness is speaking on behalf of the corporation, the “right” person must be selected. This person should not be selected merely because the person holds a particular position or title. This person should not be selected simply because he or she has been the point of contact at the company for the lawyer representing the company in the litigation. Instead, the person selected should be a person: (1) who presents well; (2) is knowledgeable about the subject matter (or can learn the subject matter); and (3) is friendly to the company’s interests (as opposed to a disgruntled employee or an employee who is indifferent to the company’s needs). Under Rule 30(b)(6), there is no distinction between the corporate representative and the corporation. See United States v. Taylor, 166 F.R.D. 356, 361 (M.D.N.C. 1996). As such, courts have consistently held that corporations must make a conscientious good-faith effort to designate the person having knowledge of the matters sought by the opposing party. Mitsui & Co. v. Puerto Rico Water Res. Auth., 93 F.R.D. 62, 67 (D.P.R. 1981).

A Rule 30(b)(6) designee is not required to give his or her personal opinions; he or she presents the corporation’s “position” on the topic. Brazos River Auth. v. GE Ionics, Inc., 469 F.3d 416, 433 (5th Cir. Tex. 2006). Because the corporation is not required to designate someone with “personal knowledge” to appear on its behalf, the lawyer and company have some flexibility about who they select to represent the company. See Reed v. Bennett, 193 F.R.D. 689, 694 (D. Kan. 2000). I, therefore, suggest that you put your best player in the game. Bear in mind, your best player may change depending on the subject matter. Carefully consider the subject areas listed in the notice of deposition and ask yourself: who is the best person to answer questions about each topic area? It may be that you need to designate more than one person because of the various topic areas identified. If there are five areas, perhaps Jane Doe is best for topics 1 and 3, and Bill Jones is best for topics 2, 4 and 5.

Remember your best free throw shooter may not be your best 3-point shooter, and your best 3-point shooter may not be your best defensive player. Tailor your selection to your specific needs. Keep in mind that if you designate more than one person as your 30(b)(6) witness, “each person” you designate is allowed to be deposed for seven hours. Rule 30(d)(2) of the Federal Rules of Civil Procedure provides that “[u]nless otherwise authorized by the court or stipulated by the parties, a deposition is limited to one day of seven hours.” The 2000 Advisory Committee Notes to this amendment provide that “[f]or purposes of this durational limit, the deposition of each person designated under Rule 30(b)(6) should be considered a separate deposition” regardless of the number of witnesses designated. See also Sabre v. First Dominion Capital, 51 Fed. R. Serv. 3d (Callaghan) 1405, No. 2001 U.S. Dist. LEXIS 20637 (S.D.N.Y. Dec. 12, 2001).

Since a corporation has a duty to present a knowledgeable witness for a 30(b)(6) deposition, it necessarily follows that the corporation has a duty to prepare its designee. See Taylor, 166 F.R.D. at 361. As such, a notice of deposition that designates topics for examination with reasonable particularity requires a corporation to produce a person or persons and to prepare them so that they can give complete, knowledgeable, and binding answers on behalf of the corporation. Given this, once the “right” person is selected, you must spend a sufficient amount of time preparing him or her for the deposition. You absolutely cannot meet with the witness two hours before the deposition and attempt to prepare him or her. There is simply too much at stake.

The prep session needs to be a long-term project where you roll up your sleeves and really work hard to prepare your witness or witnesses. I am reminded of a quote from the former heavyweight boxing champion Joe Frazier. He said: “You can map out a fight plan or a life plan. But when the action starts, you’re down to your reflexes. That’s where your road work shows. If you cheated on that in the dark of the morning, you’re getting found out under the bright lights.” If your witness is not prepared it will show during the witness’s deposition! In short, be purposeful in the selection of your 30(b)(6) witnesses, and prepare them well.

References

[1] Sam Woodhouse is the Founder and Managing Partner of The Woodhouse Law Firm. He represents major corporations in matters involving business-to-business litigation, business counseling, contract disputes and products liability lawsuits. Sam has an LL.M. in Trial Advocacy, and he has tried jury trials, non-jury trials and arbitrations in state and federal courts.

United States-Canada Cross-Border Transactions

NBA-CLS Blog — Sat, 25 Jul 2009 17:24:00 GMT

By Andrew S. Nunes, Esq.[1]

In this global economy, companies are doing more and more business in foreign jurisdictions. One of the first international jurisdictions in which many U.S. companies seek to do business is Canada. Attorneys for U.S. companies that have purchased, or have entertained purchasing, a Canadian company or have otherwise sought to establish a presence in Canada will be familiar with two important federal statutes – the Investment Canada Act (the “ICA”) and the Competition Act (the “CA”). Attorneys should be aware of recent amendments to these statutes which may impact on U.S. companies entering into cross-border transactions, directly or indirectly, involving Canadian entities.

Investment Canada Act

(i) Threshold Amendments Under the ICA, an investment in a Canadian business (which includes all new business activities commenced in Canada and most acquisitions of control of existing Canadian businesses) by a non-Canadian is, subject to a limited number of exemptions, either “notifiable” or “reviewable.” If the applicable threshold for review is not exceeded, the transaction is merely “notifiable,” requiring only that a short notice be filed with the Investment Review Branch of Industry Canada. However, where the applicable review threshold is exceeded, the investment will be “reviewable,” requiring an application to, and the approval of, the Minister responsible for the ICA.

In the case of a direct acquisition of control of a Canadian business, this approval must be obtained before the parties complete the transaction. When they come into force, the recent amendments to the ICA will change the threshold for the review of direct acquisitions of control by World Trade Organization (WTO) investors (including American-controlled companies) — from Cdn$312 million based on book value of the assets of the business being acquired to Cdn$600 million based on the “enterprise value” of the subject business, with the threshold increasing to Cdn$1 billion over approximately a four-year period. The Canadian government’s view is that the combination of the higher dollar threshold and the new method of calculating value will reduce the number of foreign investments requiring review.

This it is expected will facilitate the speedy completion of cross-border transactions which previously might have been delayed and, possibly, denied, due to the need for a formal ICA review. (ii) “National Security” Test On the flip-side, the amendments to the ICA have also introduced a “national security” test for the review of transactions that in some cases may only have a very minor Canadian connection, allowing the Governor in Council to block transactions in the interest of protecting Canada’s national security.

Competition Act – Merger Provisions

(i) Threshold Amendments Under the CA, the parties to certain mergers must comply with the pre-merger notification obligations and mandatory waiting periods where both the “size-of-parties” and “size-oftransaction” monetary thresholds are exceeded. While the “size-of-parties” threshold will remain at Cdn$400 million, the amendments to the CA generally increase the “size-oftransaction” threshold from Cdn$50 million to Cdn$70 million. This threshold will be revised annually based on a formula tied to changes to the national gross domestic product. (ii) Process Amendments Previously, where the thresholds were exceeded, the parties would have to file a notification and wait either 14 or 42 days (depending on whether a short-form or long-form application was required) before closing the deal.

The amendments replace these waiting periods with a U.S. “second-request” type of process for merger notification and review. There will be an initial 30-day waiting period following the filing of a pre-merger notification. This waiting period can be extended by the Commissioner of Competition if, within the initial 30-day waiting period, she issues a “second request” notice requiring the production of additional information. Closing would be prohibited until 30 days after compliance with the Commissioner’s second request, however long that takes. The changes to the CA also establish the potential for administrative monetary penalties of up to Cdn$10,000 per day for failure to comply with the pre-merger notification regime.

While it is expected that the changes to the ICA will make more U.S./Canada cross-border transactions subject to one less hurdle, U.S. attorneys will want to carefully consider the potential application of the new “second request” process for mergers under the CA because it may make certain U.S./Canada cross-border transactions lengthier and more involved than they have been in the past.

References

[1] Andrew S. Nunes is a partner at the law firm of Fasken Martineau DuMoulin LLP where he is a member of the Business Law Department. Fasken Martineau DuMoulin LLP (www.fasken.com) is a Canadianbased full service law firm providing strategic advice in virtually all areas of business law and litigation. Andrew can be reached at 416.865.4510 or anunes@fasken.com.

Surviving the E-Discovery Adventure: Ethical Challenges

NBA-CLS Blog — Wed, 22 Jul 2009 16:11:00 GMT

By Robert R. Simpson and Leander A. Dolphin[1]

With even seasoned litigators just plain flummoxed by the e-discovery quagmire, there are serious ethical implications which must be understood, lest we place our clients, and our licenses, in jeopardy. Given the ever-growing body of law dealing with one ethical failure or another in the e-discovery context, it is crucial that in-house and outside counsel develop a firm grasp of the potential pitfalls in e-discovery and the best strategies for how such hazards can be avoided.

After the barrage of e-discovery seminars and articles, we assume the reader has a basic understanding of the e-discovery rules;[2] therefore, this article focuses on best practices in three areas where in-house and outside counsel may find themselves at odds: The initial hold letter, review and retrieval responsibilities, and escalating costs for privilege reviews. A common thread throughout these issues is the need for communication and cooperation between in-house and outside counsel to prevail over some of the ethical challenges they face in managing e-discovery.

The Initial Hold Letter

Communicate Before You Send Outside counsel eager to demonstrate their knowledge in the e-discovery area and to protect their interests may be inclined to shoot off a litigation hold letter to a client immediately after engagement (sometimes even in the engagement letter). This seems like a prudent thing to do after being thoroughly educated through countless e-discovery workshops, lectures, webinars, etc., right? Not so fast. Too often outside counsel lose sight of the fact that “the identification and preservation of potentially relevant information can be a complex undertaking.”[3] Before sending such a letter, did you advise the client it was coming? Did you discuss the scope of what should be preserved? Do you know the potential cost and business impact on your client to preserve everything in your letter? Do you know whether a similar letter/memorandum has already been sent internally that could potentially be in conflict with the notice you are sending?

Outside counsel should keep in mind that in many instances the inhouse counsel/client has been dealing with the key issues in the lawsuit before a complaint was filed; therefore, your client may be in the best position to identify the subject areas for purposes of preservation. Sending out a preservation notice without this insight and input from the client suggests that you have not tailored the notice to your client’s particular circumstance or case. In addition, we have seen preservation letters that ask clients to preserve far more than what is necessary for the lawsuit. This “everything- but-the-kitchen sink” type of preservation notice can be harmful for your client, and for various reasons, not the least of which are the likely extraordinary expense or interruption of your client’s business.[4]

An overly broad preservation notice also places the client in the difficult position of defending itself from having to preserve not only what opposing counsel may request, but also everything that its outside counsel mandated be preserved. The in-house lawyer also has some responsibility here. Knowing how overzealous some of your outside counsel can be, you should advise them during the initial engagement that you want to discuss preservation issues immediately. This needs to be done quickly because certain firms are encompassing preservation issues in their engagement letter. As you know, there is still a majority of cases where e-discovery issues are minimal or simply don’t play a role; you may be in the best position to know this because you have probably dealt with this issue pre-litigation.

Review and Retrieval

In-House and Outside Counsel Must Work in Harmony With the mounting pressure within legal departments to cut costs, many companies have decided to keep the search and retrieval function for relevant electronically stored information (ESI) inhouse. Although there is nothing inherently wrong with this approach, excluding outside counsel from understanding the search and retrieval process is problematic and may place in-house and outside counsel at odds.

Too often, outside counsel allow their clients to exclude them from the search and retrieval process in fear of placing a strain on the relationship. This is especially true where law firms allow senior associates to manage e-discovery issues with the client. How many associates (even partners) will be bold enough to tell the client that they must play a role in the search and retrieval process other than rubber stamping what in-house counsel has done? Unfortunately, outside counsel must take the risk of alienating good clients because the exposure is too great. After all, while a party to litigation has the duty to preserve, the oversight and accountability for ensuring preservation rests squarely on the shoulders of counsel. Indeed, in the seminal Zubulake case, the court held that “[c]ounsel must oversee compliance with the litigation hold, monitoring the party’s efforts to retain and produce the relevant documents.”[5]

Here, partnership between in-house and outside counsel is critical. Outside counsel cannot simply issue a litigation hold, and then rely on the representations of its client or in-house counsel regarding the client’s preservation efforts.[6] Rather, counsel must ensure: “(1) that all relevant information (or at least all sources of relevant information) is discovered; (2) that relevant information is retained on a continuing basis; and (3) that relevant non-privileged material is produced to the opposing party.”[7] In addition, the Federal Rules of Civil Procedure require that an attorney signing a disclosure or discovery response must certify “to the best of [her] knowledge, information and belief, formed after a reasonable inquiry” that the disclosure is “complete and correct as of the time it is made.”[8] In cases where in-house counsel is present, it is virtually impossible for outside counsel to meet these affirmative obligations without the cooperation and partnership of in-house counsel.

As evidenced by recent sanctions against both client and counsel in Qualcomm, Inc. v. Broadcom Corp.,[9] there is a lot at stake. In Qualcomm, a magistrate judge found that outside counsel had failed to properly search for and produce responsive documents during the course of discovery and that once they discovered that relevant documents existed, but had not been produced, they nevertheless continued to conceal the documents, while maintaining an argument based on false information to the court during the trial. In addition to levying an $8,568,633.24 monetary sanction against Qualcomm, the magistrate judge referred six of its outside lawyers to the State Bar of California for investigation into potential ethical violations.

Qualcomm is an extreme but cautionary tale, and we can all benefit from the unfortunate circumstances befalling the lawyers who litigated that case. While the conduct of Qualcomm’s attorneys seems outrageous, it is the apparently massive breakdown in communication between Qualcomm’s in-house and outside counsel that should serve as a clarion call to counsel who represent corporate clients. Clients and in-house counsel must act in good faith while cooperating with outside counsel to ensure proper adherence to the rules.

Cost vs. Conscience

The advent of e-discovery also has the consequence of forcing clients to pay their outside counsel extraordinary amounts of fees to review ESI. Given this economic climate, many clients simply cannot afford to pay six or seven figures for document review. Frankly, even in the best of times, clients will likely cringe at the sky-high costs of e-discovery document review by their attorneys. But we think that too many lawyers advise their clients that this is an absolute and necessary cost. We have heard many lawyers remark, “We can’t simply hand the documents over to opposing counsel without our review.” The response is simple: Yes, you can — after taking some necessary and appropriate precautions. Take, for example, one enormous and underutilized cost-saving procedure: the “quick peek” agreement. A “quick-peek” agreement is a cost effective method of shifting the costs of reviewing significant amounts of ESI to the opposing side.

This type of agreement allows the producing party to disclose ESI prior to a confidentiality or privilege review. This approach often presents a great deal of agitation for outside and in-house counsel. Some outside counsel believe that their ethical obligations to their clients to provide competent and diligent representation and to protect those clients’ confidential information are compromised.[10] Inhouse counsel and clients are concerned with the opposing party getting access to sensitive material and/or privileged information. It is true that quick peek agreements require “stringent guidelines and restrictions to prevent the waiver of confidentiality and privilege.” [11] To address these concerns, counsel should include a “clawback” provision in the quick peek agreement, and, if necessary, enter into a protective order.[12]

A clawback provision allows the producing party to pull back privileged documents, without waiving the asserted privilege. There is added protection in Federal Rule of Evidence 502, which provides protection in the event of inadvertent disclosure of privileged information. Without minimizing the concerns raised by the use of agreements and clawback provisions, these are strong cost-controlling vehicles, which, if done properly, can balance the competing need to manage costs and protect client confidences. This is another area where in-house and outside counsel must make sure they are on the same page. Employing a quick peek agreement and clawback provision is an important strategic tool, and while clients must appreciate their obligations to produce, outside counsel must appreciate a client’s need to control how much it spends in fees.

Concluding Thoughts

These are just a few areas where ethics and e-discovery overlap. The underlying theme in each of these areas is communication. Although this article focuses on the communication between outside and in-house counsel, you should also remember that communication with opposing counsel and the court, each with accompanying ethical issues, are also critical throughout the e-discovery process.

References

[1] Robert R. Simpson is a partner in the law firm of Shipman & Goodwin LLP, where he is a member of the Litigation Department. Attorney Simpson’s practice focuses on product liability, employment and business litigation. He is a member of The Sedona Conference Working Group on Electronic Document Retention & Production (WG1). He frequently lectures and counsels clients on e-discovery issues. Leander A. Dolphin is an associate at Shipman & Goodwin LLP. Attorney Dolphin practices in the areas of civil litigation, providing representation in general business and employment law litigation matters.
[2] There is a wealth of commentary on e-discovery and how to navigate the e-discovery rules. Excellent resources include the work of the Sedona Conference Working Group on Electronic Document Retention and Production (WG1); Steven A. Weiss, Ten Electronic Discovery Cases You Should Read, ABA Litigation (2007); and John M. Barkett, THE ETHICS OF E-DISCOVERY (2009) to name just a few.
[3] The Sedona Commentary on Legal Holds: The Trigger and the Process, A Project of the Sedona Conference Working Group on Electronic Document Retention & Production (WG1) (2007).
[4] Zubulake v. UBS Warburg, LLC, 220 F.R.D. 212, 217 (S.D.N.Y. 2003) (Zubulake IV) (“Must a corporation, upon recognizing the threat of litigation, preserve every shred of paper, every e-mail or electronic document, and every backup tape? The answer is clearly, ‘no.’ Such a rule would cripple large corporations….”).
[5] Zubulake v. UBS Warburg, 229 F.R.D. 422, 432 (S.D.N.Y. 2004) (Zubulake V).
[6] See, e.g., Phoenix Four, Inc. v. Strategic Res. Corp., No. 05 Civ. 4837 (H, 2006 U.S. Dist. LEXIS 32211, at *17 (S.D.N.Y. May 23, 2006) (“[c]ounsel’s obligation is not confined to a request for documents; the duty is to search for sources of information).
[7] Zubulake V, 229 F.R.D. at 432.
[8] Fed. R. Civ. Proc. R. 26(g); see also, Advisory Cmte. Notes (1983 Amendment) (noting that “Rule 26(g) imposes an affirmative duty to engage in pretrial discovery in a responsible manner that is consistent with the spirit and purposes of Rules 26 through 37”).
[9] Qualcomm, Inc. v. Broadcom Corp., No. 05cv1958-B (BLM), 2008 U.S. Dist. LEXIS 911 (S.D.Ca. Jan. 7, 2008) (imposing an $8,568,633.24 sanction against Qualcomm and referring six outside counsel to the State Bar of California for investigation of possible ethical violations).
[10] MODEL RULES OF PROF’L CONDUCT R. 1.1, 1.6 (2008).
[11] The Sedona Principles: Best Practices Recommendations & Principles for Addressing Electronic Document Production, cmt.10d (2007).
[12] Note also that not all jurisdictions endorse the use of quick-peek agreements, citing the voluntary disclosure of confidential and/or privileged information. Before entering into a quick-peek agreement, counsel should be familiar with the laws of the jurisdiction in which they practice. But see Fed. R. Evid. 502 advisory committee’s notes subdivisions (d) and (e) (providing that a court order will protect disclosures made pursuant to the order).

The Family Medical Leave Act

NBA-CLS Blog — Sat, 03 Jan 2009 17:03:00 GMT

By Patrick E. Beasley, Esq.[1]

The Family Medical Leave Act of 1993 (hereinafter referred to as “FMLA” or “the Act”) has been considered a milestone for employee rights since its inception in 1993; however, employers and employees alike have complained about abuses of the Act. Employers argue that many workers are taking time off for maladies that the FMLA was never created to cover and that workers are taking the 12 weeks of leave intermittently, rather that in blocks of time—making scheduling and staffing difficult to say the least. Employees counter by stating that employers are making it increasingly difficult to qualify for leave. Additionally, workers also cite instances in which employers resorted to retaliatory tactics, including terminating the employment of workers who elected to take FMLA leave.

No matter what position one takes, most employers and employees agree that many of the Act’s provisions are difficult to interpret. This article addresses the following key questions: (1) which employers are covered by the FMLA; (2) which employees are eligible for leave under FMLA; (3) under what circumstances can an eligible employee take leave pursuant to the FMLA; and (4) what constitutes sufficient notice to the employer of an employee’s intent to take leave under the Act.

Which Employers are Required to Provide Leave Pursuant to FMLA?

The Family Medical Leave Act requires an employer with 50 or more employers to provide its full-time employees the opportunity to take 12 weeks of unpaid leave during any 12- month period to care for a child after a birth or an adoption, to recuperate from the employees’ own serious medical condition, or to care for a family member with a serious health ailment without the fear of losing their job. 29 U.S.C. § 2601(b) (2004). According to the latest data available to the Department of Labor, nearly 13 million workers took FMLA leave in 2005.

The provisions of the FMLA apply to any person engaged in commerce with 50 or more employees within 75 miles of the worksite for each working day during each of the twenty 20 or more calendar weeks in the current or preceding calendar year. 29 C.F.R § 825.104(a) (1995). In counting employees for FMLA purposes, employers must include employees that are on leave, including FMLA leave and disciplinary suspensions; however, employees that have been laid off are not included in this tabulation. 29 C.F.R. § 825.105(b) (1995). The term employer for FMLA purposes also encompasses one who acts “directly or indirectly in the interest of an employer to any of the employees of such employer.” 29 C.F.R. § 825.104(d) (1995). This interpretation of the term employer leaves little doubt that corporate officers throughout an organization’s chain of command can be individually liable for violation of the FMLA.

Employee Eligibility

An employee is eligible for FMLA leave if he or she has worked for an employer for at least 12 months and has been employed for a minimum of 1,250 hours of service with such employer during the previous 12-month period. Additionally, the employee must work at a worksite where 50 or more “employees are employed by the employer within 75 miles that worksite.” 29 C.F.R. § 825.110 (1995). Employees not eligible for FMLA leave are federal civil service employees, certain medical care providers employed by the Department of Veterans Affairs, and teachers employed by the Department of Defense who teach abroad. 29 C.F.R. § 825.109 (1995). The determination of whether an employee is eligible for FMLA protection must be made as of the date leave commences. 29 C.F.R. §825.110 (1995).

Leave Provisions of the FMLA

An eligible employee’s “FMLA leave entitlement is limited to a total of 12 work weeks of [uncompensated] leave during any 12-month period” for any of the following: 1) the birth of a child and care of an infant; 2) the placement and care of an adopted or foster child; 3) a serious health condition “that makes the employee unable to perform one or more of the essential functions of his or her job”; or 4) the care of a spouse, child or parent with a serious health condition. 29 C.F.R. § 825.200(a) (1995).

As one might expect, the leave provisions of the FMLA have been a source of confusion as well as the basis for lawsuits. The employer has the sole responsibility for determining whether the need for leave is a FMLA qualifying event. Manuel v, Westlake Polymers Corp., 66 F.3d 758, 762 (5th Cir. 1995). Additionally, the employer is permitted to choose any of the following periods as the 12-month period in which the 12 weeks of leave entitlement occurs: 1) the calendar year; 2) any fixed 12-month “leave year,” such as a fiscal year, a year required by state law or a year starting on an employee’s “anniversary” date; 3) the 12-month period measured forward from the date any employee’s first FMLA leave begins; or 4) a rolling 12-month period measured forward from the date an employee uses any FMLA leave. 29 C.F.R. § 825.200(b) (1995).

Notice to the employer is required by the Act. If the need for leave is foreseeable, the employee must give a minimum of 30 days notice. A foreseeable event is one such as an expected birth or planned medical treatment. 29 C.F.R. § 825.302(a). When the event triggering the need for FMLA leave is unforeseeable, the employee should provide the employer with as much notice “as practicable” in the context of his or her specific case. 29 C.F.R. § 825.303). The critical inquiry “is whether the information imparted to the employer is sufficient to reasonably apprise it of the employee’s request to take time off for a serious health condition. Manuel, 66 F.3d at 764. Not only must the notice of leave be timely, it also must be sufficient to put the employer on notice of a FMLA qualifying condition. To be sufficient the notice need only inform the employer of the duration of the requested leave and state a reason/ condition that would trigger protections under the FMLA. Manuel, 66 F.3d at 762.

Interestingly enough, the notice provided does not have to be written, nor does the employee have to specifically mention the Act for the provisions of the FMLA to be invoked. The Fifth Circuit has stated that the Act does not specify the form of notification required for foreseeable leave, nor does it provide guidance concerning the notice requirements for unforeseeable leave. The employer has the sole responsibility for determining whether the underlying reason for the leave qualifies under the Act. Manuel, 66 F.3d at 761. Employers should be especially cognizant of this fact since they are responsible for notifying the employee of any event that may be FMLA qualifying.

An employer is not simply required to take the “word” of an employee that leave under the Act is needed. A employer may request orally or in writing that the employee provide medical certification for leave requested under the Act for both foreseeable and unforeseeable leave. 29 C.F.R. § 825.305(b). In the event that FMLA leave is required because of a serious health condition, the employee may be required to get certification from as many as three different physicians if the veracity of the health condition is doubted as qualifying for FMLA purposes. 29 U.S.C.§ 2613(d).

While abuses of the Act do occur, employers should find solace in the facts that there are many protections in the Act that prevent misuse and that having a thorough understanding of these protections can greatly minimize the economic impact that FMLA leave has on an organization. Conversely, employees can find comfort that the protections of the Act, in most cases, are invoked by the mere request for leave by the employee if the basis of the request is a FMLA triggering event. Moreover, Congress is actively seeking to expand the breadth of protections offered by the FMLA to provide employees with protections not contemplated a decade ago.

References

[1] Patrick E. Beasley is a member of the NBACLS Newsletter Editorial Board and can be contacted at patrickbeasley@mac.com.

Authenticating E-Discovery: A Manifest for ESI

NBA-CLS Blog — Mon, 22 Dec 2008 15:37:00 GMT

By Maurice A. Bellan, Esq.[1] and W. Damon Dennis, Esq. [2]

As a practitioner, you may have read a few articles and even attended a CLE course concerning electronic discovery and the effect it has on a company’s responsibility to maintain, safeguard and produce electronically stored information (“ESI”). You may be familiar with your clients’ obligations to maintain ESI, but do you understand how ESI can be used as evidence in a particular case?

Discovery involving ESI, such as emails, PDF files, spreadsheets and other electronic information, has become increasingly routine in federal courts. No longer is electronic discovery used solely in complex civil litigation cases involving the largest global corporations. It is now used in all types of cases, including simple contract disputes and negligence actions. Electronic discovery has received so much attention it led to the December 2006 amendments to the Federal Rules of Civil Procedure.

How do the amendments alter your approach to litigation? To be more direct, imagine that, during discovery, you found the smoking gun, e.g., an e-mail that could be dispositive of claims asserted against your client. What is your next move? Does it comply with the new amendments to the Federal Rules? The latter question has many litigators scratching their heads.

Traditionally, you would file a motion for summary judgment citing to an affidavit that attaches the e-mail as an exhibit. However, in a recent lengthy decision concerning this very situation, the District of Maryland’s Chief Magistrate Judge Paul W. Grimm issued an opinion in Lorraine v. Markel American Insurance Co., 241 F.R.D. 534 (D.Md. 2007), holding that such actions are not enough. Judge Grimm specifically set forth common issues concerning the admissibility of ESI by illustrating the consequences litigants should avoid when proffering ESI as evidence in federal court.

Lorraine v. Markel American Insurance Company

In Lorraine, the parties were engaged in litigation over disputed terms of an arbitration agreement that was entered in June 2006. Plaintiffs subsequently brought an action in the District Court of Maryland to enforce a private arbitrator’s award finding that the damage to their yacht, the Chessie, was caused by a lightning strike in May 2004 while the yacht was anchored in the Chesapeake Bay. The arbitrator found that lightning was the cause of the damage, but limited the award to $14,100. Plaintiffs brought the action to enforce the arbitrator’s finding, but also to set aside the limits placed on the award, claiming the arbitrator exceeded his authority. Defendant/Counter-Plaintiff Markel American Insurance Company counterclaimed to enforce the arbitrator’s award (including its damage limitation) in full.

After discovery, Plaintiffs filed a motion for summary judgment, and Defendants filed a response in opposition as well as a cross motion for summary judgment. The court denied both motions because neither party supplied any evidentiary foundation to support the various ESI that it sought to have entered into evidence. Instead, each party simply attached the ESI as exhibits to its motion – a method that most practitioners have done and continue to do.

Rather than simply denying both parties’ motions, Judge Grimm took the opportunity to discuss how ESI should be proffered pursuant to the Federal Rules of Evidence. In doing so, he identified five broad evidentiary considerations that arise whenever ESI is offered as evidence: Is the ESI relevant as determined by Rule 401; If relevant under 401, is it authentic as required by Rule 901(a); 1. If the ESI is offered for its substantive truth, is it hearsay as defined by Rule 801, and, if so, is it covered by an applicable exception; 2. Is the form of the ESI that is being offered as evidence an original or duplicate under the original writing rule, or, if not, is there admissible secondary evidence to prove the content of the ESI; and 3. Is the probative value of the ESI substantially outweighed by the danger of unfair prejudice or one of the other factors identified by Rule 403, such that it should be excluded despite its relevance.

1. Relevance of ESI

Judge Grimm first examined the special relevance concerns for ESI evidence. The basic rule of relevance does not set a significantly high threshold, requiring only that the proffered evidence tends to make the existence of any material fact “more or less probable that it would be without the evidence.” Fed. R. Evid. 401. Establishing that ESI has at least minor relevance to a material issue in the case is generally not difficult.

2. Authenticity of ESI

Once the proponent of ESI evidence establishes the evidence’s relevance, he or she must show the ESI’s authenticity under Rules 901 and 902. Authentication requires a prima facie showing that the evidence is what it purports to be, and, although this is not a severe burden, it does raise issues unique to electronic evidence. Judge Grimm discussed how certain methods of authentication operate when applied to ESI. For example, Rule 901(b)(4) allows for authentication by “[a]ppearance, contents, substance, internal patterns, or other distinctive characteristics, taken in conjunction with circumstances.” This method has unique applications in the context of ESI. First, courts allow authentication under Rule 901(b)(4) using “hash values” or “hash marks” when making electronic documents. Hash values are numerical identifiers that can be inserted into electronic documents to create “distinctive characteristics” that can satisfy this rule. Another way Rule 901(b)(4) can be used to authenticate ESI is through the evidence’s metadata. Metadata is the automatically recorded information describing the history and statistics of a given document. Judge Grimm pointed out that the use of metadata is not always conclusive because of the risk of third party access to ESI on networked systems; however, he noted that metadata can be a useful source of distinctive characteristics.

3. Authentication of Particular Types of ESI

In general, authentication of ESI requires careful attention to the type of evidence proffered because courts apply differing standards depending on the form of the ESI.

A. E-mails - Particular issues are important when authenticating e-mail evidence. Circumstantial evidence of the sender’s e-mail address in the document indicates that the named sender was the source of the e-mail; however, the sender’s address alone is not conclusive because of potential outside access to the sender’s e-mail account. Similarly, the contents of an email may provide distinctive characteristics in the form of unique information known only to the sender and recipient. Judge Grimm listed the methods of authentication most frequently used for e-mails as: (1) testimony by a witness with personal knowledge; (2) expert or fact finder comparison with authenticated examples; (3) distinctive characteristics, including circumstantial evidence; (4) trade inscriptions; and (5) certified copies of business records.

B. Website Postings - The main concern with authenticating website postings is the difficulty of attributing website content to the sponsor of the website rather than to a third party. Some factors that assist a court in finding that a website posting is properly authenticated include: the length of time the information was posted, whether it remains posted for the court to verify, whether the owner has published such information elsewhere, whether others have cited that website as the source of the information, and whether the information is of the sort usually found on the website. Judge Grimm listed the methods of authentication most frequently used for website postings as: (1) testimony by a witness with personal knowledge; (2) expert testimony; (3) distinctive characteristics; (4) public records; (5) system or process capable of producing a reliable result; and (6) official publications.

C. Text Messages and Chat Room Content - Text and chat room messages are similarly difficult to attribute to a specific party. Factors to consider in authenticating these types of ESI include: evidence that an individual used the screen name in question in chat rooms, evidence that the person using the screen name identified himself in the chat room, evidence that the individual had information given to the person through the screen name, and evidence from the person’s computer showing use of the screen name. Judge Grimm listed the methods most likely to be used in authenticating chat room and text messages as: (1) testimony by a witness with personal knowledge; and (2) circumstantial evidence of distinctive characteristics.

D. Computer Stored Records and Data - Electronic records are now a common method of data storage for businesses. Most courts tend to be lenient in authentication requirements for such records; however, some courts have begun to require a showing of the accuracy and reliability of computer records before allowing them to be authenticated. At least one court has adopted an 11-step foundation for computer records, which establishes the reliability of the computer system, the business’s data input procedure, and the witness’s knowledge of the record output. Given the wide disparity between standards employed by various courts, it is best to be prepared to authenticate computer records by the most stringent requirements. Judge Grimm listed the methods most likely to be used in authenticating computer records as: (1) testimony by a witness with personal knowledge; (2) expert testimony; (3) distinctive characteristics; and (4) system or process capable of producing a reliable result.

E. Computer Animation and Computer Simulations - Computer animations are generally admitted if authenticated by “testimony of a witness with personal knowledge of the content of the animation and upon a showing that it fairly and adequately portrays the facts and that it will help to illustrate the testimony given in the case.” Computer simulations are treated as a form of scientific evidence. Therefore, they are only admissible upon a showing that the computer is functioning reliably and that the input used to produce the simulations is also reliable. Judge Grimm listed the methods most likely to be used in authenticating computer animations and simulations as: (1) testimony by a witness with personal knowledge; and (2) testimony of an expert witness.

F. Digital Photographs - Original digital photographs may be authenticated by a witness with personal knowledge of the scene depicted. If the evidence is a digitally converted image, authentication may require testimony about the reliability of the process used to convert the image by a witness with personal knowledge of the technical process. Digitally enhanced photographs are images in which features of the original scene are altered (for example, shadows removed, colors enhanced). To authenticate a digitally enhanced image, a proponent will have to present proof that the process produces reliable and accurate results, which implicates the standards for scientific evidence under Rule 702.

G. ESI and Hearsay - Once ESI evidence is authenticated, a party must address its potential exclusion under the hearsay rule. Under Rule 801, hearsay is a statement made by a declarant offered to prove the truth of the matter asserted. ESI evidence often raises the question of whether the evidence is a “statement.” Some courts have held that writings produced by machines are not statements and cannot be hearsay. Furthermore, nonassertive electronic evidence, such as an image from a website used to show the appearance of the website on a given date, is not a “statement” and, therefore, is not hearsay. Statements found in electronic evidence have been found to satisfy the definition of “admissions by party opponents” if offered against that party, and, thus, they are admissible as non-hearsay under Rule 801(d)(2).

Statements contained in electronic evidence may also be admissible as hearsay exceptions. Statements in e-mails can be admissible as present sense impressions, excited utterances, and as evidence of a then-existing state of mind, so long as the requisite elements of those exceptions are met. Rule 803(6) allows an exception to the hearsay rule for records kept in the ordinary course of business. Some courts require all contributors to an e-mail chain to have written pursuant to a business duty. In other cases, courts have been more lenient and have admitted e-mail chains absent proof of actual alteration. Given the different standards for admitting electronic records under the business record hearsay exception, Judge Grimm recommended that a lawyer obtain a stipulation of genuineness or else be prepared to establish the exception under the most rigorous requirements.

4. ESI and The Original Writing Rule: Rules 1001-1008

For purposes of the original writing rule, courts generally admit computer generated documents without distinguishing between originals and duplicates. Rule 1004 provides that, even if the content of a document is at issue, the content may be proved by secondary evidence if the original is lost, destroyed, or unobtainable. This rule is particularly important with regard to ESI because of the ease and frequency with which electronic records are lost or destroyed. Rule 1006 allows for the use of summaries, which is especially important for cases involving often voluminous ESI.

5. ESI and Balancing Probative Value Against Unfair Prejudice: Rule 403

Rule 403 applies to all questions of admissibility; however, there are certain types of ESI for which the balance of probative value against the risk of unfair prejudice is particularly important. First, when evidence such as an e-mail or website posting contains highly offensive language that is likely to provoke an emotional response, it may be inadmissible as overly prejudicial. Second, when computer animations pose a high risk that the jury may confuse them with the actual events at issue in the case, they may be inadmissible. Third, when summaries of voluminous computer records are offered under Rule 1006, they may be inadmissible if the effect of the summary is to create unfair prejudice. Finally, Judge Grimm pointed out that if a court has serious concerns as to the accuracy of information contained in electronic evidence, a court may use Rule 403 as a means of excluding the evidence as overly prejudicial.

Conclusion

With the ever-burgeoing reliance on electronic communications, it is not surprising that the onus has never been greater for companies to track and store electronic records. Likewise, it is not surprising that electronic records are increasingly finding their way into the courtroom. In his decision, Judge Grimm outlines how ESI can be used as evidence and provides details about the standards for using different types of ESI in a courtroom. While the rules covered in this article apply to all forms of evidence, Judge Grimm’s opinion identifies the unique concerns that are raised for electronic evidence. If properly followed, you should avoid the possible pitfalls associated with failing to authenticate ESI as evidence.

References

[1] Maurice A. Bellan is a Partner in Saul Ewing LLP’s Litigation Department. He has served as lead counsel in federal, state and administrative court actions involving trademark infringement, employment discrimination, whistleblower claims, environmental waste, real estate and contract disputes. He represents the transportation, manufacturing, environmental, temporary staffing and government contracting industries. Mr. Bellan can be reached at 410.332.8683 and mbellan@ saul.com.
[2] W. Damon Dennis is an Associate in Saul Ewing LLP’s Litigation Department. He concentrates his practice on commercial and other litigation. He has experience handling cases in a wide range of areas, including general complex litigation, real estate litigation, business torts and contract disputes. Mr. Dennis can be reached at 410.332.8725 and ddennis@saul.com. (Kathryn L. Doran, a 2007 summer associate, also contributed to this article).

Hurricane Damage: Ensuring Expected Business Profits

NBA-CLS Blog — Thu, 25 Sep 2008 14:59:00 GMT

By Donald O. Johnson, J.D., LL.M., CPCU [1]

Hurricane Ike recently caused extensive property damage in Galveston and Houston, Texas and other areas on the Gulf Coast. The damage to commercial properties and utility service providers interrupted business for many large and small companies, causing a loss of expected profits and an increase in business expenses. Some companies will be able to recover some or all of these lost profits and extra expenses because they purchased insurance coverage that protects their expected profits and reimburses them for extra expenses. Other companies that had not obtained the appropriate coverage, unfortunately, have to bear the losses themselves, which sometimes will result in business closings.

This article briefly identifies some of the relevant insurance coverage products that risk adverse companies can purchase to protect their profits and to ensure the recovery of extra expenses incurred to mitigate damage to their property and, if necessary, to continue their business operations in other locations until their damaged property is repaired or replaced.

Commercial Property Insurance

The primary and most frequently purchased coverage that insured businesses will look to for compensation after a hurricane has damaged their property is their commercial property insurance coverage. It typically covers damage to covered property caused by wind, rain that enters an insured’s property as a result of wind damage, and mold that ensues from that rain damage. Basic commercial property coverage will pay the lesser of either the cost to repair the damaged property or the actual value of the damaged property as of the date of the loss. Because of inflation and other factors, this recovery may not be sufficient to replace property that is a total loss. To ensure that a business recovers enough money to replace property that is a total loss, businesses can purchase replacement cost coverage, which pays the insured the amount necessary to replace the damaged property.

Commercial property policies do not cover flood damage, which is damage caused by high tides and rising water levels. To cover flood damage, businesses have to look to flood insurance policies if they have purchased such policies. Commercial property policies also do not cover a business’s lost profits unless the policies contain additional business interruption coverage.

Business Interruption Insurance

Business interruption insurance protects an insured from the loss of profits if the loss resulted from damage to covered property caused by a covered peril. In the case of a hurricane, the covered perils include wind, rain that enters an insured’s property as a result of wind damage, and mold that ensues from said rain damage. This coverage pays a business for profits loss from the date of the hurricane loss or some other specified waiting period until the date on which the business could resume business if the insured exercised due diligence in repairing or replacing the damage that caused the interruption of business. Business interruption insurance and the other additional coverages addressed in this article often are added to a commercial property policy with a policy endorsement.

Contingent Business Interruption Insurance

Contingent business interruption insurance is similar to business interruption coverage with the exception that it protects an insured against the loss of its expected profits resulting from an interruption of its business caused by damage to the property of one of its suppliers (e.g., electricity supplier) if the damage to the supplier’s property was caused by a covered peril (e.g., wind).

Rental Income Insurance

Rental income insurance is tailored to businesses that own rental property. It covers lost rental income caused by damage to the insured’s rental property by a covered peril.

Extra Expense Insurance

Extra expense coverage reimburses an insured for the extra expense that the insured incurs to continue its business operations during the period that it takes to restore its business operations to normal after a covered interruption of the insured’s business operations. For example, extra expense coverage would cover the cost of leasing a building in which the insured can conduct business operations during the period of restoration.

Increased Cost of Code Compliance

In some jurisdictions, a property owner who is repairing property that has been damaged beyond a specified extent must repair the property so that it complies with the jurisdiction’s current building code even if the property did not comply with that code before it was damaged. Increased cost of code compliance coverage pays the extra cost to the insured to meet the current building code. Without this coverage, the insurer is obligated to pay only the amount required to return the covered property to the condition it was in when it was damaged by a covered peril.

Event Cancellation Insurance

Businesses that have scheduled a profit-generating event, such as a conference or an entertainment event, can purchase event cancellation insurance, which will pay the insured’s lost profits if the event is cancelled because of a covered peril (e.g., hurricane, earthquake, etc.).

Exclusions, Conditions and Potential Coverage Disputes

To recover under any of the foregoing commercial property coverages or other similar coverages, the policy must cover the property at issue, the damage must be caused by a covered peril, none of the coverage exclusions can apply, and the insured must comply with all of the material policy conditions. Policy conditions include providing timely notice of claim, submitting a sworn proof of loss, cooperating with the insurer’s requests for documentation of the cause and amount of the loss, and submitting to an examination under oath if the insurer requests one.

Potential Valuation Disputes

Beyond potential coverage disputes, sometimes insureds and insurers cannot agree about the valuation of the claimed losses. Valuation disputes sometimes are determined by an appraisal conducted by two independent appraisers and an umpire if the policy contains an appraisal clause and if the insured or the insurer demands an appraisal. Other times, valuation disputes, along with causation and other coverage disputes, are resolved in court through declaratory judgment actions and breach of contract actions.

Conclusion

It is not yet clear to what extent businesses whose property was damaged and whose business operations were interrupted by hurricane Ike had the extended property coverages discussed in this article, but it is safe to say that those that did have the best chance of being profitable in 2008 and 2009.

References

Bell Atlantic v. Twombly: The Dawn of a New Pleading Standard?

NBA-CLS Blog — Mon, 22 Sep 2008 15:49:00 GMT

By Antoinette Morgan, Esq.[1] and Brian Telfair, Esq.[2]

The Supreme Court’s decision in Bell Atlantic v. Twombly, 127 S. Ct. 1955 (2007), may very well mark the end of Rule 8(a) of the Federal Rules of Civil Procedure’s rigid notice pleading standard. No longer will a complaint containing indistinct allegations survive a Rule 12(b)(6) motion to dismiss for failure to state a claim; instead, a complaint must now contain allegations that “nudge [a plaintiff’s] claims across the line from conceivable to plausible.” Id. at 1974.

Rule 8(a) of the Federal Rules of Civil Procedure provides that a complaint must contain a short and plain statement of the claim showing that the pleader is entitled to relief. Fed. R. Civ. P. 8(a). Under Rule 12(b)(6), a court has the authority to dismiss a complaint if it fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). However, the liberal pleading standard afforded by Rule 8(a) meant that motions to dismiss were granted sparingly.

The respondents in Twombly were subscribers of local telephone and high speed internet services. They sued regional telephone service monopolies, called Incumbent Local Exchange Carriers (“ILECs”) alleging violations of Section 1 of the Sherman Act, which prohibits every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.” 15 U.S.C. § 1. The respondents alleged that the ILECs: (1) engaged in parallel conduct in their respective service areas in an attempt to restrain any competitors, and (2) agreed to refrain from competing with one another, as indicated by their refusal to pursue attractive business areas in contiguous markets. Twombly. at 1955.

The U.S. Supreme Court overruled the decision of the Court of Appeals for the Second Circuit, which denied the petitioners’ motion to dismiss, and the High Court upset a pleading standard that was over 50 years old. Conley’s “No Set of Facts” Standard Conley v. Gibson, 355 U.S. 41 (1957), was the foremost decision interpreting Rule 8(a) of the Federal Rules of Civil Procedure and the proper standard for dismissing a complaint for failure to state a claim upon which relief may be granted. In Conley, the Court articulated the now well-known standard for a complaint to survive a Rule 12(b)(6) motion to dismiss: “a complaint should not be dismissed for failure to state a claim unless[3] it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Id. at 45-46.

In Conley, African-American railroad workers brought a class action suit against their union seeking to compel the union to represent them fairly in protection of their employment rights under a contract entered into by the union and the railroad. This contract gave the workers protection from discharge and loss of seniority. Id. at 43. The defendants sought dismissal of the complaint on the ground that it failed to state a claim upon which relief could be granted. Id. Specifically, the defendants argued that the complaint did not allege specific facts in support of plaintiffs’ allegation that the defendants discriminated against the workers. Id. at 47. The Court rejected this argument, holding that the Federal Rules require only that the plaintiff give the defendant “fair notice” of plaintiff’s claim and the grounds for the claim. Id. The Court went on to hold that, “a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Id. at 44-45. This standard meant that motions to dismiss under Rule 12(b)(6) were rarely granted, even in the face of poorly drafted complaints having little merit.

Conley Revisited

In one sense, the Twombly Court criticized Conley’s ”no set of facts” standard. In another it seemingly qualified the standard. For instance, the Court’s analysis of Conley began by citing numerous federal court cases which have criticized Conley’s standard. See, e.g., Twombly at 1969. The Court went on to hold that Conley’s “no set of facts” formulation is “best forgotten as an incomplete, negative gloss on an accepted pleading standard.” Id. at 1969.

The Court cautioned that its decision in Conley is often misread. The Court noted that the Conley decision should not have been read literally, because a literal meaning would lead to the conclusion that “a wholly conclusory statement of claim would survive a motion to dismiss whenever the pleadings left open the possibility that a plaintiff might later establish some ‘set of [undisclosed] facts’ to support recovery.” Id. at 1968. Instead, Conley’s “no set of facts” language should be read to mean that “once a claim is adequately stated, it may be supported by showing any set of facts consistent with the allegations in the complaint.” Id. at 1969 (emphasis added). In other words, the Court stated that the “no set of facts” standard “described the breadth of opportunity to prove what an adequate complaint claims, not the minimum standard of adequate pleading to govern a complaint’s survival.” Id.

In Twombly, the High Court retired the long-standing “no set of facts” standard and set forth what some would consider a heightened pleading standard. The Court held that, in order to survive a motion to dismiss, a plaintiff must plead sufficient facts to state a claim for relief that is plausible on its face. Twombly’s decision means that a plaintiff’s complaint will be scrutinized more closely in the face of a motion to dismiss in order to determine whether the complaint contains allegations that “nudge [the plaintiff’s] claims across the line from conceivable to plausible.” Id. at 1974. Applying this new formulation, the Court held that the petitioners’ acts, as alleged by the respondents, could have been individual business decisions by each petitioner, and the complaint did not contain additional allegations demonstrating that the petitioners had formed any type of agreement or conspiracy.

In reaching its decision, the Court recognized the predicament of defendants who were forced to incur the costs of discovery in order to defend a claim where the complaint contains nothing more than naked allegations; and not until after incurring such costs was a defendant given a reasonable opportunity to move for dismissal of the claim by way of summary judgment or by other means. The Court stated, “[w]hen the allegations in a complaint, however true, could not raise a claim of entitlement to relief, ‘this basic deficiency should . . . be exposed at the point of minimum expenditure of time and money by the parties and the court.’” Id. (citing 5 Wright & Miller § 1216, at 233-34). The Court further noted that defendants may be forced to settle even “anemic” claims to forego the rising costs of discovery. Id. This concern becomes especially relevant in the age of electronic discovery, where expenses may rise exponentially by the close of discovery.

Undoubtedly, the Court ushered in a stricter standard by which courts must judge the sufficiency of a complaint. No longer will it suffice to argue that a groundless claim should be spared in the face of a motion to dismiss because the basis of the claim will be revealed through discovery. Instead, a plaintiff’s complaint must show an entitlement to relief at the outset. Id. at 1967. However, the Court was careful to caution that it is not holding plaintiffs to a “heightened fact pleading of specifics.” Id. at 1974. Instead, the Court was merely holding plaintiffs to the same standard required by Rule 8(a)—that a plaintiff plead “enough facts to state a claim for relief that is plausible on its face.” Id.

The dissent disagreed with this characterization. Dissenting Justices Stevens and Ginsburg argued that the majority’s opinion in fact impermissibly held a plaintiff to a higher pleading standard than is required by the Federal Rules’ liberal notice pleading standard. Specifically, the dissent argued that the majority took issue with the respondent’s complaint not because it failed to put the petitioners on notice as to their claims, but because the majority was not satisfied that the petitioners collectively formed an agreement in violation of the Sherman Act. Id. at 1984. The dissent cautioned that such a standard goes to the issue of proof, not to the issue of notice. Id. In turn, the majority criticized the dissent for what it called the dissent’s oversimplification of the Federal Rules. The majority cautioned that while the Federal Rules eliminated the need for plaintiff to set forth the specific facts upon which he bases his claims, “Rule 8(a)(2) still requires a “showing,” rather than a blanket assertion, of entitlement to relief.” Id. at 1965 n.3.

Applying Twombly

Immediately after the Twombly decision, the lower courts began scrambling to apply the new standard in ruling on Rule 12(b)(6) motions to dismiss. One of the most perplexing issues for the courts is the scope of Twombly’s decision. For instance, courts have been forced to consider the argument that Twombly’s pleading standard is limited to antitrust cases. See, e.g., Phillips v. County of Allegheny, 2008 U.S. App. LEXIS 2513 (3d Cir. 2008); Barber v. Allied Oil & Supply, Inc., 2008 U.S. Dist. LEXIS 7227 (W.D. Mo. 2008); IFAST v. Alliance for Telecommunications Industry Solutions, Inc., 2007 U.S. Dist. LEXIS 80080 (D. Md. 2007); Brown v. Sweeney, 526 F. Supp. 2d 126 (D. Mass. 2007).

Although an antitrust claim was the backdrop of the Court’s decision in Twombly, the Court did not expressly limit its holding to antitrust cases. The most obvious evidence of this is its complete abrogation of the “no set of facts” standard. The Court did not announce that Conley’s formulation was no longer a proper standard by which to rule on motions to dismiss in antitrust cases, but instead ruled that ‘no set of facts’ is no longer a proper standard at all. See Twombly at 1969. A number of courts have reached this conclusion, see Phillips, 2008 U.S. App. LEXIS 2513; Barber, 2008 U.S. Dist. LEXIS 7227, while others have refused to decide the issue. See, e.g., IFAST at *10 (incorporating Twombly’s language, but cautioning that it was not making any comment as to whether Twombly’s pleading standard applies generally to all civil litigation).

Unless the Supreme Court provides guidance as to the scope of its decision in Twombly, federal courts in each circuit will undoubtedly reach their own decision about Twombly’s impact. As applied to all civil cases, the implications of Twombly are far-reaching. A plaintiff will no longer be permitted to rely on naked allegations with the hope that discovery will reveal relevant facts to that demonstrate that plaintiff is entitled to relief. Instead, a plaintiff must plead enough facts in the complaint to safely nudge his claims across that newly-drawn line from conceivable to plausible. One thing is clear, based on over 1,000 cases that cited Twombly in the six months after the opinion was issued, the impact of Twombly will be the subject of litigation for many years to come.

References

[1] Antoinette Morgan is an associate at LeClairRyan in Richmond, Virginia. She focuses her practice on defending product designers, manufacturers and sellers against alleged product defects. Ms. Morgan may be reached at Antoinette.Morgan@leclairryan.com.
[2] Brian Telfair is a shareholder at LeClairRyan in Richmond, Virginia. His practice is principally devoted to defending product designers, manufacturers and sellers against damage claims arising out of alleged product defects, malfunctions or failures. He has defended insurance companies, automobile manufacturers, chemical companies, pharmaceutical companies, fast food companies and gas appliance manufacturers in a variety of matters. Mr. Telfair may be reached at Brian.Telfair@leclairryan.com.
[3] Justice Stevens anticipated this confusion, stating “[w]hether the Court’s actions will benefit only defendants in antitrust treble-damages cases, or whether its test for sufficiency of a complaint will inure to the benefit of all civil defendants, is a question that the future will answer.” Twombly at 1988 (Stevens, J., dissenting).

Minority-Owned Law Firm Provides a Bridge for United States Companies Doing Business in Sub-Saharan Africa

NBA-CLS Blog — Mon, 25 Aug 2008 17:27:00 GMT

As an emerging market, Africa offers many opportunities for companies looking to extend their business in an area with twenty percent (20%) of the world’s total land mass, a population of 900 million people (14% of the world total), and a plethora of mineral resources. The continent appropriately has been called a “gentle giant” and a “sleeping beauty” in recent times. Herbert Igbanugo, Esq., the founder of Igbanugo Partners Int’l Law Firm, PLLC (Igbanugo Partners), has expanded the services that his law firm provides to companies that do business in Sub-Saharan Africa. Igbanugo Partners is the largest and most diverse minority-controlled law firm in the United States practicing international trade law with a narrow focus on Sub-Saharan Africa. It serves U.S. corporate clients that do business with companies and governments in Sub- Saharan Africa and institutional clients with U.S. investments and/or operations.

In February 2009, Mr. Igbanugo and his colleagues plan to open Igbanugo, Udenze, and Co in Abuja, the capital city of Nigeria. They chose Nigeria as their first operating base in Sub-Saharan Africa because it has a population of over 140 million eager consumers. Igbanugo Partners, however, understands that, in today’s global economic environment, no law firm can establish offices in every jurisdiction in which its clients do business in Sub-Saharan Africa. The firm has addressed this limitation by establishing strategic professional relationships with experienced Sub-Saharan Africa law firms and consulting firms that have members who have held high-ranking positions and who are well versed in the trade laws of the member nations of the African Union, the New Partnership for Africa’s Development, the Economic Community of West African States, the Common Market for Eastern and Southern Africa, the Southern African Development Community, the Economic Community of Central African States and the East African Community. The firm believes that its attorneys’ ability to quickly assemble a competent legal team in the major commercial centers of Sub-Saharan Africa is unsurpassed.

Among others, Igbanugo Partners’ practice areas also include: (1) the U.S. Foreign Corrupt Practices Act and most of the unilateral anti-bribery conventions or initiatives applicable to U.S.-based multinational corporations operating overseas; (2) management of local counsel in Sub-Saharan Africa; (3) lobbying Sub-Saharan Africa government and agencies; (4) infrastructure development; (5) financial brokerage services; (6) consulting services; (7) site security training; and (8) United States and Sub-Saharan Africa immigration services.

References

The following internet link provides access to Igbanugo Partners’ Sub- Saharan Africa brochure: http://www.igbanugolaw.com/news/docs/SubSaharanAfrica.pdf. Mr. Igbanugo can be contacted by telephone at 612-746-0360 or by email at higbanugo@igbanugolaw.com.

On the Verge of Expanding Protections for Disabled Employees

NBA-CLS Blog — Mon, 25 Aug 2008 17:00:00 GMT

By Warren E. Buliox, Esq.[1]

The Americans with Disabilities Act (“ADA” or the “Act”) prohibits discrimination in employment on the basis of a disability or perceived disability. According to many, the Act, while by its nature noble, has fallen far short of its original promise to “provide a clear and comprehensive national mandate for the elimination of discrimination against individuals with disabilities.” Presently, one of the greatest hurdles employees face in bringing an ADA claim is establishing that they have a condition that qualifies for coverage. According to at least one study, over 97% of all claims brought under the ADA result in dismissal. Many have attributed this to narrow Supreme Court interpretations regarding what constitutes a disability, as defined under the ADA.

In light of the Supreme Court’s stance on this issue, Congress has jumped into action. On June 25, 2008, the House of Representatives passed a major civil rights bill (presently coined the “ADA Amendments Act of 2008”) that, if enacted, would significantly expand protections for people with disabilities. The bill, which passed in the House 402 to 17 (and is likely to pass through the Senate in similar fashion), would overturn several Supreme Court decisions and mark a new direction in ADA jurisprudence — a direction which, according to many, captures the original intent of the ADA.[2]

Under the current law, a disability is defined as a physical or mental impairment that substantially limits one or more major life activities. (i.e., seeing, walking, carrying, etc.) 42 U.S.C. § 12102(2). According to the Supreme Court, to be substantially limited in a major life activity, an individual must “have an impairment that prevents or severely restricts the individual from doing activities that are of central importance to most people’s daily lives.” Toyota Motor Mfg., Kentucky, Inc. v. Williams, 534 U.S. 184, 198, 122 S. Ct. 681, 691 (U.S. 2002). This means, in part, that the impairment’s impact must be permanent or long term. Id. (Citations omitted.) The impairment must also “presently” impact a major life activity. In other words, impairments that might, could or would substantially limit major life activities if mitigating measures are not taken do not count. Sutton v. United Air Lines, Inc., 527 U.S. 471, 482-83, 119 S. Ct. 2139, 2146-47 (U.S. 1999). Accordingly, impairments which can be corrected through medication, devices (i.e. eyeglasses, hearing aids, etc.), or other measures do not substantially limit a major life activity. See id.

The new bill, which expressly denounces the Supreme Court rulings in Toyota, Sutton and their companion cases, attempts to reinstate the broad scope of protections the ADA was originally designed to afford. To start, it flatly rejects the Supreme Court’s holding that an impairment must “severely restrict” a major life activity and provides that the term “substantially limits” simply means “materially restricts,” a less demanding standard. It also rejects the idea that an impairment must be permanent or long term by providing that a disability would qualify for coverage even if it is episodic or in remission, so long as it substantially limits a major life activity when active. This means that impairments such as epilepsy, multiple sclerosis and certain types of cancers (which have been traditionally excluded from coverage) would come under the purview of the ADA.

In addition, the bill almost entirely eliminates the notion that a disability, for purposes of the Act, dissipates when an individual takes steps to accommodate or ameliorate the effects of an impairment, by providing that the use of corrective measures such as, but not limited to, medications, prosthetics, hearing aids, mobility devices and other medical equipment should NOT be considered in an analysis on whether an impairment substantially limits a major life activity.[3] Significantly, the new bill also expands on the concept of what constitutes a major life activity. In addition to codifying a non-exhaustive list of major life activities (such as seeing, hearing, concentrating, learning, breathing, etc.), the bill goes as far as including “major bodily functions” (e.g., immune, nervous, respiratory, reproductive and circulatory systems) into the definition of major life activities. This is especially significant because conditions like cancer, which in some circumstances has been excluded from ADA coverage in light of the fact that it affects bodily functions (i.e., normal cell growth) more than traditional life activities such as seeing, walking, working, breathing, etc., would be guaranteed coverage under the Act.

So what does all of this mean for employers? Very simply, this translates into more litigation and headaches for employers who are not careful in their dealings with individuals with impairments. Employers should take steps to ensure that managers and other decision-makers are fully aware of the breadth of this new bill, should it be enacted into law. The bottom line is that the significantly expanded definition of what constitutes a disability for purposes of the Act will result in: (i) more plaintiff lawyers bringing ADA claims; and (ii) more cases surviving summary judgment. The focus will turn from whether an employee has a disability (which in the past has proved to be a significant hurdle for plaintiffs) to whether an employee was actually subjected to discriminatory treatment. Outside of litigation, the new bill, if enacted, would also likely result in more employees making accommodation requests, which, on occasion, may serve as a precursor for failure to accommodate claims.[4]

References

[1] Warren E. Buliox, Esq. is a third year associate with the Employment Law Group at the Milwaukee, Wisconsin, office of Gonzalez, Saggio & Harlan, LLP. He represents employers in employment litigation and advises management on all aspects of employment relations.
[2] The author first published this article in a Gonzalez, Saggio & Harlan client advisory. Since then, the bill was signed into law. It will become effective January 1, 2009.
[3] Notably, contact lens and eye glasses may still be taken into consideration when doing a substantial limitations analysis.
[4] The definition of discrimination under the ADA includes failures to reasonably accommodate qualifying disabilities. Reasonable accommodations could range from the assignment of different or modified duties to permitting use of accrued paid leave or unpaid leave for treatment.

Agency Law Viewed Through the Lens of Insurance Brokers

NBA-CLS Blog — Fri, 25 Apr 2008 15:55:00 GMT

By Donald O. Johnson, Esq.[1]

Agency Law Is Part of the Legal Analysis in Many Commercial Law Transactions

Common law agency rules focus on the legal relationships between principals, agents and affected third parties. The introduction to the Restatement (Third) of Agency explains: "[T]he common law of agency encompasses the legal consequences of consensual relationships in which one person (the 'principal') manifests assent that another person (the 'agent') shall, subject to the principal’s right of control, have power to affect the principal’s legal relations through the agent’s acts and on the principal’s behalf." Restatement (Third) of Agency at 3 (2006). These common law rules of agency play an important role in the analysis of laws governing many aspects of commerce in the United States, such as the Uniform Commercial Code and corporate governance laws. They play an especially important role in the analysis of insurance broker liability — a role that the remainder of this article examines.

Insurance Brokers Are Necessary Participants in Most Commercial Insurance Transactions

The insurance industry has developed a broad array of insurance policies that provide coverage for the wide range of significant risks that commercial entities constantly face. Such policies include: commercial property, business interruption and extra expense, inland marine, commercial general liability, excess liability, umbrella liability, directors and officers liability, errors and omissions liability, employment practices liability, products liability, products recall, and fidelity policies. Because of the proliferation of the types of policies available in the insurance market and the various coverage limitations and exclusions that these policies contain, insurance brokers are necessary participants in most businesses’ purchase of commercial insurance.

Insurance brokers have specialized knowledge about the insurance products on the market and about the insurance companies offering those products. Businesses that use brokerage services give insurance brokers substantial information about the risks that they face. Consequently, insurance brokers frequently play a significant role in, among other things, identifying the type of policies that a business wants, negotiating the terms and conditions of coverage with insurance companies, selecting one or more insurance companies to write the coverages, collecting premiums from insureds, and notifying insurance companies about property and business interruption losses suffered by insureds and liability claims made against insureds.

Insurance Brokers Are Different Than Insurance Agents

Although some people mistakenly use the terms “insurance broker” and “insurance agent” interchangeably, an insurance broker’s relationship with an insurance applicant or the named insured generally is different than an insurance agent’s relationship with such parties. Insurance brokers usually represent the insurance applicant or the insured, not insurance companies. They are not employed by insurers, although they may receive commissions from insurers based on their placement of insurance with those companies. In contrast, insurance agents represent insurance companies. Insurance agents usually are employed by insurers who pay them a salary and who may pay them a commission based on their insurance sales. These distinctive relationships sometimes are imposed by state statute. For example, California Insurance Code § 33 defines “insurance broker,” stating: “‘Insurance broker’ means a person who, for compensation and on behalf of another person, transacts insurance other than life with, but not on behalf of, an insurer.” See also Cal. Ins. Code § 1623 (West 2008). California Insurance Code § 31 defines “insurance agent,” declaring, in pertinent part: “‘Insurance agent’ means a person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life insurance.” In some states, the distinction is the product of state common law.

The various names used in the insurance industry to refer to different types of insurance brokers contributes to the confusion that people outside of the industry often have about the distinction between insurance brokers and insurance agents. For example, among other designations, some insurance brokers are called “independent insurance agents” and some others are called “surplus lines agents.” An independent insurance agent is a synonym for an insurance broker who deals with multiple insurers admitted to sell insurance in the state for typical risks but who, as noted, is independent of all of the insurers. Asurplus lines agent is an insurance broker who deals with insurers that the state department of insurance has not admitted to sell insurance in the state but that sells insurance for risks for which there is no normal insurance market available in the state at issue. The confusion caused by the sometimes overlapping terminology used to refer to insurance brokers and insurance agents and the underlying agency relationships between insurance brokers and the parties with whom they deal can have significant legal consequences when insurance brokers become involved in litigation commenced by dissatisfied insurance applicants, insureds, additional insureds, insurers, or third parties.

The Dual Agency Problem - Analysis of the Particular Purpose of the Broker’s Act

Notwithstanding the fact that statutes in some states and the common law in some other states pronounce that insurance brokers are agents of insurance applicants and insureds, agency law may cause a different result in some situations. As the Supreme Court of South Dakota recently concluded, “[s]tatutes regulating licensing and defining agents, brokers and solicitors, are not intended to change or to exclude the general laws of agency.” North Star Mut. Ins. Co. v. Rasmussen, 734 N.W.2d 352, 361 (S.D. 2007) (internal quotation marks and citations omitted) (“Rasmussen”); see also Oakland- Alameda County Coliseum, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburg, P.A., 480 F. Supp. 2d 1182, 1196 (N.D. Cal. 2007) (“an agency relationship can exist outside the formal provisions in the [California] Insurance Code”).

Based on agency law, the vast majority of states, if not all, recognize the concept of dual agency; namely, that an insurance broker can be an agent of the insurance applicant or the insured for some purposes (e.g., negotiating policy terms) and the agent of the insurer for other purposes (e.g., collecting and transmitting premiums). See, e.g., Astenjohnson v. Columbia Cas. Co., 483 F. Supp. 2d 425, 462 (E.D. Pa. 2007) (applying Pennsylvania law) (“Astenjohnson”). The Astenjohnson court summarized the applicable agency principles, which, essentially, are the same in all states:

21. “The basic elements of agency are ‘the manifestation by the principal that the agent shall act for him, the agent’s acceptance of the undertaking and the understanding of the parties that the principal is to be in control of the undertaking.’” 22. Apparent authority is the “power to bind a principal which the principal has not actually granted but which he leads persons with whom his agent deals to believe that he has granted,” for instance where “the principal knowingly permits the agent to exercise such power or if the principal holds the agent out as possessing such power.” 23. If a court determines an individual or entity is an agent of another, the actions and knowledge of the agent are binding on that person, the principal. Id. at 461 (internal citations omitted); see also Restatement (Third) of Agency §§ 1.01, 2.01, 2.03, 3.03, 7.03 (2006).

Given that, under agency law, an agent’s actions and knowledge bind the principal, agency law analysis is critical in insurance coverage cases in which an insurance broker’s actions play a significant part in a dispute between the insurance applicant or insured and the insurer about the existence of coverage for a particular loss or claim. Whichever party the court determines is the principal with respect to the broker action in question will be bound by that action. See, e.g., L.A. Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co., 67 Cal. Rptr. 3d 917, 923-24 (Cal. Ct. App. 2007); Matter of Temple Constr. Co. v. Sirius Am. Ins. Co., 40 A.D.3d 1109, 1111 (N.Y. Sup. Ct. App. Div. 2007). The agency question also is important in claims brought against an insurance broker because the answer will determine whether an insurance applicant, an insured, an insurer, or a third party potentially has a cause of action against the broker.[i]

Actions by Insurance Applicants and Insureds Against Insurance Brokers

The typical causes of action that insurance applicants or insureds bring against insurance brokers include breach of contract and negligence actions for: (1) failure to procure requested insurance; (2) failure to procure the appropriate insurance; (3) failure to provide the insurer with timely notice of a claim or a suit; (4) failure to provide accurate information about the insurance applicant in the application for insurance; and (5) failure to investigate the financial stability of the insurer.[ii]

Potential Broker Defenses to Actions by Insurance Applicants and Insureds

Potential defenses to the above-mentioned actions that insurance applicants or insureds sometimes bring against insurance brokers include establishing that: (1) no coverage for the insurance claim would have existed under the requested policy even if the broker had procured it (i.e., the broker can raise the same coverage defenses that the insurer could have raised if the policy had been issued); (2) the requested coverage was unavailable in the insurance market; (3) the broker did not assume a duty to advise the insurance applicant about which coverages to purchase and did not charge a fee for such service; (4) the broker was not the insurance applicant’s or the insured’s agent with regarded to the alleged wrongful act; (5) the insurance applicant or the insured was contributorily or comparatively negligent (e.g., supplied inaccurate information, failed to read the policy); and (6) the statute of limitations expired.[iii]

Determining Which Entity the Broker Represented With Regard to the Act in Question

Determining which entity the broker represented with regard to a particular action by the broker sometimes can be difficult. The determination depends upon a number of factors. Among other factors, courts consider: (1) the existence of a written contract detailing the broker’s duties and scope of authority; (2) communications between the broker and the applicant or insured and between the broker and the insurer; (3) the identity of the entity that hired and paid the broker for the services at issue; (4) whose interests the broker was trying to protect; (5) the nature of any past dealings between the broker and the insurance applicant or insured or between the broker and the insurer; (6) the complaining entity’s reliance, if any, on the broker to act in its behalf; and (7) any applicable state statutes concerning broker representation.

The Astenjohnson case illustrates the application of some of these factors in determining who a broker represents in a particular situation. In that case, the insured contended that an asbestosis exclusion in its commercial liability policies was inapplicable because the exclusion was ambiguous and the insured did not understand its alleged function when it purchased the policies. With respect to the broker’s negotiation of the policy provisions, the insured alleged that broker was the agent of the insurer. Astenjohnson, 483 F. Supp. 2d at 461-62.

The court disagreed, observing that the insured hired the broker to obtain the best available coverage for it, placed minimum restrictions on the broker’s insurance acquisition efforts, and trusted the broker to represent the insured’s best interest in the broker’s dealings with insurers. Id. at 462. The court, therefore, concluded that the broker was the insured’s agent during the negotiations for the placement of the policies and that the broker’s knowledge and understanding of the policies, including the asbestosis exclusion, was imputed to the policyholder. Id.

Conclusion

Insurance applicants and insureds often rely upon insurance brokers to help them obtain adequate insurance coverage, submit claims to insurers. and provide other services. Although state statutes and case law may indicate that insurance brokers represent insurance applicants and insureds, as opposed to insurance companies, the common law of agency — and, especially, the principle of dual agency — may change that result in particular situations.

Therefore, when insurance applicants, insureds, insurers, insurance brokers, and/or third parties become involved in insurance coverage litigation in which an insurance broker’s actions play a key role, these parties and their counsel should evaluate the facts of the case and the law of the relevant jurisdiction carefully to determine the scope of the duties and obligations, if any, that the insurance broker owed to the complaining party and the likelihood that that party can establish that the insurance broker breached its duty to, or contract with, the complaining party. In other areas of law in which agency law principles will impact the result of a legal dispute, the parties and their counsel should undertake a similar principal/agent analysis.

References

[1] Donald O. Johnson, J.D., LL.M., CPCU is an attorney at D. O. Johnson Law Office, PC. He represents clients in insurance coverage and other commercial litigation. He also is General Counsel of the National African-American Insurance Association (a/k/a NAAIA), a member of the Chartered Property and Casualty Underwriters (CPCU) Society’s Diversity Committee, and a Director of the Society’s District of Columbia Chapter. Additional information about Don can be obtained at www.dojlaw.com.

[i] This article focuses on potential broker liability to insurance applicants and insureds. It should be noted, however, that some broker actions can make them liable to insurers (e.g., failure to remit premiums). Courts, occasionally, also hold brokers liable to third parties for breach of contract under a third-party beneficiary theory. See e.g., Flattery v. Gregory, 498 N.E.2d 1257 (Mass. 1986).
[ii] Some states, such Florida, consider the relationship between an insurance broker and an applicant or insured to be a fiduciary relationship, which gives rise to a heightened duty of care on the part of the broker, and recognize a claim against brokers for breach of fiduciary duty. See e.g., Moss v. Appel, 718 So. 2d 199, 202 (Fla. Dist. Ct. App. 1998). Other states, such as Maryland, do not recognize a separate tort action for breach of fiduciary duty. See Teamsters v. Willis Corroon Corp. of Maryland, 802 A.2D 1050, 1052 n.1 (Md. 2002).
[iii] Some states have specific statutes of limitations that pertain to insurance brokers. See, e.g., R.I. Gen. Laws § 9-1-14.1 (2008); 735 Ill. Comp. Stat. Ann. 5/13-214.4 (West 2008).

Ethics and Litigation: Ignore Professional Rules of Conduct at Your Peril

NBA-CLS Blog — Sat, 22 Mar 2008 15:43:00 GMT

By Devarieste Curry, Esq.[i]

“A lawyer, as a member of the legal profession, is a representative of clients, an officer of the legal system and a public citizen having special responsibility for the quality of justice. . . . As advocate, a lawyer zealously asserts the client’s position under the rules of the adversary system.”[ii] In asserting the client’s position under the rules of the adversary system, complying with ethical rules is as important as is complying with procedural rules. Litigators thus should not interpret the responsibility to advocate zealously on behalf of their clients as a license to ignore applicable rules of conduct.

The Rules sometimes create tension between zealous advocacy and compliance, but a commentary to the Rules emphasizes a lawyer’s duty to follow the Rules. For example, Rule 1.3 – Diligence – provides that “A lawyer shall act with reasonable diligence and promptness in representing clients.”[iii] The commentary to the Rule delineates the boundary within which the lawyer should operate, noting that “[a] lawyer should . . . take whatever lawful and ethical measures are required to vindicate a client’s cause and endeavor.”[iv] While “[a] lawyer must also act with commitment and dedication to the interests of the client and with zeal in advocacy upon the client’s behalf[,] [a] lawyer is not bound . . . to press for every advantage that might be realized for a client.”[v]

Recent cases suggest that either lawyers are woefully ignorant of the requirements of the rules or do not fully appreciate the seriousness with which state bars and courts view a breach of the rules. See, e.g., Qualcomm, Inc. v. Broadcom Corp., 2008 U.S. Dist. LEXIS 911 (Jan. 7, 2008), vacated in part and remanded by Qualcomm, Inc. v. Broadcom Corp., 2008 U.S. Dist. LEXIS 16897 (S.D. Cal. Mar. 5, 2008);[vi] Gordon Partners. v. Blumenthal, 244 F.R.D. 179, 191 (S.D. N.Y. 2007) (A court has authority to impose sanctions on a party for discovery misconduct “under its inherent power to manage its own affairs or under Rule 37 of the Federal Rules of Civil Procedures.”).[vii] The range of sanctions for violating the Rules is broad, including referring the offending lawyer to the state bar for disciplinary action.

Qualcomm illustrates the peril of elevating zealous advocacy over compliance with the Rules. To be sure, skillful litigators may try to argue that the Judge in Qualcomm got it wrong, or that the ethical rules discussed in this article are not applicable. Irrespective of whether one agrees with the conclusions reached in Qualcomm, the facts of the case serve as a useful backdrop for emphasizing the importance of a litigator making the Rules a critical part of her toolbox and for discussing Rules that should be of concern to any litigator as she seeks to balance her responsibilities for zealous advocacy with her responsibilities as an officer of the legal profession and as a public citizen having a special responsibility for the quality of justice.

In Qualcomm, a patent infringement action, the Judge imposed an $8.5 million sanction on Qualcomm for “its monumental and intentional discovery violations.”[viii] She also sanctioned six of its “retained lawyers” and referred six lawyers to the California State Bar for appropriate investigation and possible disciplinary actions.[ix] The sanctions followed litigation in a suit in which Qualcomm alleged that Broadcom infringed its patent. Broadcom asserted as an affirmative defense that the patents were unenforceable because Qualcomm had participated in industry activities that resulted in a waiver of its rights to the contested patents (hereinafter “waiver activities”). It sought information during discovery to confirm its view. The conduct of Qualcomm’s counsel during discovery and trial contravened several of the Rules.[x]

Qualcomm produced two 30(b)(6) corporate designees without having performed the due diligence required by the Model Rules. The first designee had been “prepared” for her deposition, but counsel for Qualcomm had not searched her computer for any relevant documents or emails or provided her with information to review. Not surprising, she testified that Qualcomm had not participated in the critical waiver meeting. When Broadcom impeached her with a document showing the contrary, Qualcomm offered another 30(b)(6) deponent. Qualcomm’s counsel did not search the witness’ computer for relevant documents or take any other action to prepare him.

Presenting the corporate designees for depositions without having searched their computers for relevant documents or emails and without having provided them other documents to review raises the question of whether the lawyer met the basic obligation to serve the client competently, as required by Model Rule 1.1 – Competence – which provides that: “A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for representation.” Noting that major litigation normally requires more preparation than would a matter of lesser complexity, Comment 5 of the Rule provides that competence requires inquiring into the problem; following methods and procedures competent practitioners customarily follow; and preparing adequately. Even a junior litigator should know that preparing a corporate designee for deposition or trial should include a search of the designee’s files, including computer files, and a review of relevant documents with the designee.

Competence includes the lawyer’s ability to spot issues and ask the right questions. To comply with electronic discovery requirements, lawyers need to work with information technology specialists and other experts to understand the responding party’s computer system and how data is maintained and stored. See Zubulake v. UBS Warburg, LLC, 217 F.R.D. 309, 324 (S.D.N.Y. 2003).

A lawyer’s obligation to probe the witness about documents and to review documents with the witness as components of deposition preparation also flows from Rule 1.3, which requires lawyers to “act with reasonable diligence and promptness in representing clients.” As noted earlier, inherent in acting with diligence is a “commitment and dedication to the interest of the client.”[xi] The interest of the client includes making sure the client representative has been thoroughly prepared; being aware of and thoroughly familiar with all relevant documents, including potentially damaging documents; and having a plan for handling such documents. Destroying or unreasonably denying access to potentially damaging documents should not be a part of any plan. There would have likely been a very different outcome in Qualcomm had Qualcomm legitimately contested production of the documents at issue in the case. This could have been done, for example, through a motion to quash or limit production of the requested documents on the basis of attorney-client or work product privileges, or because of the duty to maintain client confidences. Legitimate concerns about protecting confidential documents could have been addressed by a protective order.

Qualcomm’s response and tactics in responding to written discovery suggest that it did not seek to withhold the documents legitimately. Counsel’s failure to produce the documents thus violated the Rules and leads to the ineluctable conclusion that their failure to search employees’ computers prior to producing corporate designees for deposition was by design.[xii] Even after Broadcom attempted to impeach the second 30(b)(6) corporate designee with a document showing an email address for a Qualcomm official who would have participated in waiver activities, Qualcomm apparently made no concerted effort to search for requested documents.[xiii]

Rather, as the case progressed, Qualcomm became increasingly aggressive in asserting that it had not participated in the critical waiver activities. For example, Qualcomm filed in court an expert declaration stating that there were no corporate records to indicate its participation in waiver activities. Further, arguing that the appearance of a Qualcomm official’s email address on the waiver group list did not establish receipt of any waiver-related information or other participation with the waiver group, Qualcomm filed various pleadings in court arguing that the “facts demonstrate” Qualcomm had not participated in the waiver meetings.[xiv]

Qualcomm’s lack of diligence went further. During preparation of a witness for trial, counsel discovered an email that seemed directly responsive to a document request. Afterwards, he searched the client’s computer and discovered 21 additional emails, none of which counsel had produced in discovery. The trial team, however, decided not to produce the newly discovered emails to Broadcom, although the emails undermined Qualcomm’s argument that it had not participated in the waiver meeting. Moreover, Qualcomm did not conduct further investigations to determine if there were other emails that had not been produced.[xv] More troubling, a few days later counsel essentially misrepresented facts to the Court. At a sidebar discussion with the judge, counsel for Qualcomm argued that the list of email addresses used by Broadcom to try to establish waiver participation was “just a list of email addresses,” and that there was no evidence that Qualcomm had received emails. Not one of Qualcomm’s attorneys at the sidebar mentioned the discovery a few days earlier of the 21 emails.[xvi]

By failing to produce the requested documents and by arguing in Court that there were no documents to support Broadcom’s view of Qualcomm’s waiver activities, Qualcomm’s counsel breached their duty to the tribunal and to a non-client. Rule 3.3(a)(1) – Candor towards the Tribunal – provides that, “A lawyer shall not knowingly: make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer.” By not informing the Court during the sidebar of the newly discovered relevant documents, counsel for Qualcomm violated this Rule.[xvii] Given that counsel was aware of the discovery of 21 emails that had not been produced, counsel knowingly made a false statement of fact to the tribunal. “There are circumstances where a failure to make a disclosure is the equivalent of an affirmative misrepresentation.”[xviii]

Counsel not only made a false statement to the Court, they offered false evidence in violation of Section 3.3(a)(3) of the Rule, which provides that “[a] lawyer shall not knowingly offer evidence that the lawyer knows to be false.” When Qualcomm’s counsel filed declarations and memoranda asserting that there was no evidence to demonstrate its participation in the waiver activities, it offered false evidence.[xix] Even if counsel argues that Qualcomm insisted that they offer the evidence, this section prohibits the lawyer from offering evidence he knows to be false, regardless of the client’s wishes.[xx]

By strictly enforcing this Rule, lawyer regulatory agencies demonstrate their commitment to making lawyers recognize and honor their duties as officers of the Court as well as the agencies’ commitment to regulating conduct that would undermine the system of justice.

Rule 3.4(a) provides that a lawyer shall not “unlawfully obstruct another party’s access to evidence or unlawfully alter, destroy or conceal a document or other material having potential evidentiary value.” Section 3.4(d) of the Rule provides that in pretrial procedure, a lawyer shall not “fail to make reasonably diligent effort to comply with a legally proper discovery request by the opposing party.” It is difficult to imagine more blatant violations of this Rule. Assuming for the sake of argument that Qualcomm’s counsel had a good faith basis for not searching further and producing documents after Broadcom confronted the second corporate designee with a document showing that the name of a Qualcomm official was on the email list of waiver participants, counsel could not be given that benefit of the doubt after the trial witness’ computer was searched and over 20 relevant documents were discovered. Rather than make an effort to comply with their ethical and procedural obligations, counsel, in the words of the Court, continued their “gamesmanship.”

Qualcomm’s counsel also arguably violated Rule 4.1 – Truthfulness in Statements to Others, which provides that a lawyer shall not knowingly “make a false statement of material fact or law to a third person.” The operative terms are “knowingly” and “material fact.” As discussed earlier, given counsel’s knowledge of the discovery of the 21 emails, the “knowingly” prong of this Rule is met. Further, as the Court observed, considering that the issue of whether Qualcomm participated in waiver activities during the contested time frame was crucial to the litigation, statements about that participation would constitute a material fact. Accordingly, Qualcomm’s counsel’s statement to Broadcom that it had no evidence to demonstrate that it participated in the waiver activities would constitute a violation of Rule 4.1. Finally, counsel’s acts and omissions constitute misconduct under Rule 8.4 – Misconduct, commonly referred to as the “catch all” Rule. Qualcomm’s counsel’s failure to inform the Court of the discovery of relevant documents and their argument in Court (including through the filing of declarations and motions) that Qualcomm had no records to support Broadcom’s assertion that the patents were unenforceable involved dishonesty and deceit or misrepresentations and also were prejudicial to the administration of justice.[xxi] Qualcomm’s failure to search for and produce relevant documents, and its failure to prepare its witnesses for depositions were prejudicial to the administration of justice.[xxii]

In conclusion, lawyers who ignore ethical rules face serious sanctions, up to and including disbarment.

References

[i] Devarieste Curry is a partner with McLeod, Watkinson & Miller in Washington, D.C. Currently a member of the Legal Ethics Committee of the District of Columbia Bar, she has served on the Bar’s Disciplinary System Study Committee and as Chair of its Practice Management Services Committee.
[ii] MODEL RULES OF PROF’L CONDUCT, Preamble (2002). Lawyers are governed by the ethics rules of the state in which they are licensed to practice. Because of the national applicability of this article, the ABA Model Rules, which serve as a model for the ethics rules of most states, are being used as a backdrop for my analysis.
[iii] To preserve space, the standard citation format is not being used when the Rules and their comments are referenced in the text.
[iv] MODEL RULES OF PROF’L CONDUCT R.1.2 cmt. 1 (2002) (emphasis added) (hereinafter “MODEL RULE”).
[v] MODEL RULE 1.3 cmt. 1.
[vi] The issues vacated and remanded do not affect the ethical issues discussed in this article.
[vii] Compare In re Jacalyn S. Nosek, Debtor, No. 02-46025, 2008 Bankr. LEXIS 1251 (U.S. Bankr. D. Mass., Apr. 25, 2008) (Court sanctioned two law firms and a partner of a firm for not being candid with the Court. MODEL RULES 3.3 and 3.4 implicated) with In re Matter of Adrian Edwards Cooper, 2008 S.C. LEXIS 84 (S.C. Mar. 10, 2008) (Lawyer disbarred for violating ethical rules governing competence, diligence, and candor to the Court and third party).
[viii] Op. at *63. ix Id. at *5.
[x] While I recognize that the Judge sanctioned Qualcomm and its attorneys for discovery abuses only, she discussed trial conduct that arguably breached ethical guidelines.
[xi] MODEL RULE 1.3 cmt. 1.
[xii] Retained and in-house lawyers were involved in the prosecution of the case. Rule 1.13 provides that a lawyer employed or retained by an organization represents the organization. If at any point counsel for Qualcomm believed that any Qualcomm officer or employee had committed any improper or unlawful act or omission that could be imputed to Qualcomm or that was likely to result in substantial injury to Qualcomm, counsel was obligated to take necessary action to protect the organization, including, but not limited to, reporting up the chain of command. See MODEL RULE 1.13 and commentary.
[xiii] That the corporate designee had not seen the particular document and, thus, could not be impeached by it does not excuse Qualcomm’s inadequate search.
[xiv] Op. at *12-13 & n.3.
[xv] Ultimately Qualcomm located more than 46,000 documents that had been requested but not produced in discovery. Id. at *23.
[xvi] Op. at *16-17.
[xvii] Id. Comment 1 suggests that a lawyer must balance her duty to maintain her client’s confidences with her duty of candor to the tribunal. It should be noted, however, that Rule 3.3(a)(1) unqualifiedly requires the lawyer to correct a false statement previously made. It does not provide a safe harbor in Rule 1.6, which requires lawyers to maintain confidences and secrets. State rules may provide that safe harbor. For example, Rule 3.3(a)(1) of the District of Columbia Rules of Professional Conduct requires lawyers to correct a false statement “unless correction would require disclosure of information that is prohibited by Rule 1.6.”
[xviii] MODEL RULE 3.3(a)(1) cmt. 3.
[xix] Obviously, the operative term on which analysis will turn in Rules 3.3(a)(1) and 3.3(a)(3) is “knowingly.” The facts suggest that the lawyer knowingly offered the false evidence. If a lawyer only reasonably believes the evidence to be false, under Rule 3.3(a)(3), the lawyer may offer it.
[xx] SEE MODEL RULE 3.3(A)(3) CMT. 5.
[xxi] MODEL RULE 8.4(C)(D).
[xxii] MODEL RULE 8.4(D).

Protecting Your Client’s Brands From Domain Name Theft and Scams

NBA-CLS Blog — Sat, 15 Mar 2008 00:27:00 GMT

By Debra Y. Hughes, Esq. [1] and David A. Bell, Esq.[2]

Why should you pay close attention now to domain name issues? In short, the right domain name is prime “virtual” real estate that can leverage a company’s visibility, and for this reason, domain names, especially <.com> domain names, are highly valued in today’s marketplace. For example, this past year, sold for $12 million, purportedly commanded $7.5 million, and was purchased in the $3 million range. Vodka.Com Domain Sells For $3 Million, DOMAINNEWS.COM (Dec. 16, 2006), at http://www.domainnews.com/aftermarket/0920061216/vod kacom-domain-sells-for-3-million/ (last visited July 2, 2007).

Because of the value attributed to domain names, cybersquatting and other illegal and unfair uses of trademarks on the web remain a source of major concern. Cybersquatting is nothing new, but certainly deserves the continued attention of brand owners and their counsel. Cybersquatters are buyers of domain names that incorporate another’s trademark, with a bad-faith attempt to profit from holding those domain names. According to a recent study of some of the world’s strongest brands by a leading trademark monitoring service, cybersquatting increased nearly threefold during 2006 alone, and by another thirty-three percent in 2007. MarkMonitor, Brandjacking Index (Apr. 30, 2007); MarkMonitor, Brandjacking Index (Winter 2007). This increase is due, in part, to the new trends in the domain name infringement arena discussed below.

Domain Name Tasting

A five-day grace period exists, during which a domain name registration may be rescinded, without the buyer (known as a registrant) incurring the usual registration fee. The listed purpose for this policy is to remedy typographical errors and the like that can occur during the registration process. However, some unscrupulous companies are using this grace period to test the marketability of certain domain names, many which consist of misspellings of company and brand names. The registrants track the amount of traffic received at those sites, and cancel the lesser visited domain names with no fee or penalty. Approximately four million domain names are tasted each day, and this practice is only increasing. National Arbitration Forum, Critics grow as “Domain Tasting” Becomes More Prevalent (Jan. 24, 2007), at http://www.adrforum.com/rcontrol/document/newsletters/D omainNews-Vol08No01.htm (last visited May 24, 2008) (noting comment of Jay Westerdal of Name Intelligence).

Domain Name Kiting

Some “domain name tasters” register domain names, drop them within the five-day grace period, then reregister them, and continue this approach in perpetual cycles. This activity, referred to as domain name kiting, provides domain name owners with an economic benefit, as they receive money when visitors to their websites click on advertising links therein. Not only do these sites crowd the Internet, but they also may cause various harms to brand name owners, including customer confusion, loss of goodwill, and loss of revenues.

Domain Name Spying

This development involves the practice of purchasing domains shortly after learning that an interested party checked their availability. Put another way, the companies that perform this activity monitor third parties’ searches for domain names that may contain new trademarks, and then purchase domain names containing those phrases before the rightful owners can obtain them. Some companies appear to make spying their entire business model; thus, this practice might not be as rare as you might expect.

Phishing

Some thieves operate by sending out emails to divert people to websites that appear very similar to companies’ true sites, but are instead phony sites used to obtain personal financial information. Banks and other companies in the financial sector are the most common targets of phishing schemes. In addition to stealing money and identifications, phishing has been dissuading many people from transacting business online, and it could lead to less business for some companies.

What Can You Do to Protect Your Client’s Brands From Such Attacks on the Internet?

Several steps may be taken to prevent cybersquatting, including:

1. Registering key domain names. A company can never own all possible domain names that incorporate its brands. However, companies should consider purchasing the obvious spellings and misspellings of its primary brands, with the extensions that are most commonly used and searched, namely .com, .net, and .org. If the company conducts business outside of the U.S., or is likely to do so in the near future, then also consider registering domain names with the appropriate “country code” extensions, such as .ca (for Canada), .cn (for China), .co.uk (for the United Kingdom), or .eu (for Europe). Use experienced intellectual property counsel to obtain Chinese domain names and keywords. The best offense is defensive registration.

2. Registering without hesitation. To avoid domain name spying, companies should register domain names of interest as soon as they learn that the domain names are available, and use only reputable companies to conduct searches.

3. Renewing domain names. Remember to prompt your client to renew the domain names it has acquired. Some companies configure their domain name settings to automatically renew the domains annually, or purchase them for years in advance to minimize the need for monitoring them. Also, make sure that any departing employee hands over access to company domain names.

4. Monitoring the Internet. Several services charge annual fees to monitor the Internet for possible infringement of key brands, and intellectual property counsel can assist with this process. There are also free websites that companies can use for searching for domain names incorporating your trademarks or company names, such as Namedroppers.com and Tldscan.com.

What Can You Do If a Third Party Has Already Registered a Valuable Domain Name?

Various enforcement tactics could be considered, including the following:

1. Sending a demand letter. Sending a cease and desist letter is a common, simple and cost effective method to acquire a domain name.

2. Offering to purchase the domain. Consider making an anonymous offer to the registrant to buy the domain name at issue. Concealing the company’s identity could improve the likelihood that the registrant will agree to sell for a reasonable amount.

3. Placing a backorder for the domain name. Another tactic is to consider placing a backorder to purchase the domain name, whereby the company can get in line to offer to purchase it. Typically, backordering services only charge a fee (and a relatively small one, at that) when the backorder is successful.

4. Filing an administrative complaint. A procedure governed by the Uniform Domain Name Dispute Resolution Policy (UDRP) allows for the filing of an administrative complaint to request that a domain name be transferred. This procedure is available in many instances of cybersquatting and, depending on the company’s goals, can be more cost-effective than proceeding with litigation. The most popular service providers for this procedure are The World Intellectual Property Organization (“WIPO”) and The National Arbitration Forum (“NAF”).

5. Filing a lawsuit. In some instances, the facts might warrant proceeding with litigation. For example, a California court recently enjoined a company from registering any domain names confusingly similar to Verizon’s trademarks, after the court reviewed the defendant’s domain name tasting, kiting, and other cybersquatting activities. Verizon Cal. Inc. v. Ultra RPM, Inc., No. 2:07-cv-02587-PA-CW (C.D. Cal. Sep. 10, 2007). Dell is also suing a handful of registrars for a variety of allegedly abusive domain name registration practices. Dell Inc. v. Belgiumdomains, LLC, No. 07-22674 (S.D. Fla. Oct. 10, 2007).

Additionally, note that, under certain laws, significant monetary damages may be awarded. For instance, under the Anti-Cybersquatting Consumer Protection Act of 1999, a company could be entitled not only to transfer of the domains at issue, but also treble damages, attorneys’ fees, and statutory damages of up to $100,000 per domain name. 15 U.S.C. §1125(d).

Conclusion

Companies are unlikely to prevent or stop all unfair and illegal activity on the Internet affecting their trademarks. Additionally, the vast size of the Internet and large scale of cybersquatting can be overwhelming. However, taking some of the steps listed above can be extremely useful in protecting valuable brands. As with all areas of the law, the most appropriate steps to take will vary depending on each scenario. Factors to consider include the importance of the domain name and brand to your client’s business, your client’s budgetary constraints, the timeframe by which your client desires to retrieve the domain name, the type of website content currently found at the domain name of interest, and the history and current behavior of the domain name registrant.

[1] Debra Y. Hughes is Assistant General Counsel for Wal-Mart Stores, Inc. In her current position, Ms. Hughes manages the company’s domain name portfolio, counsels business clients regarding a wide array of trademark, patent, copyright and publicity concerns, and manages the design and packaging review process for Wal-Mart’s private label products. She also is a member of the Internet Committee for the International Trademark Association.

[2] David A. Bell is an Associate in the Dallas office of Haynes and Boone where he concentrates his practice on trademark law. Mr. Bell manages clients’ comprehensive brand portfolios and prosecutes their trademarks before the United States Patent and Trademark Office. He also has unique experience helping his clients defend their trademarks on the Internet by addressing legal issues such as domain name abuse and keyword advertising.