As the recent Target and Neiman Marcus data breaches have made clear, cyber security is one of the top threats to business today.  These threats can be devastating to companies - damaging customer confidence, the company brand, and the bottom line by increasing costs through remediation costs, lost revenues and customers, litigation, and fines.  Governments and customers are now holding businesses accountable for inadequate protection of customer data.  

It has been reported that 24% of data breaches occur in retail environments and restaurants.  And the average total cost to a US company of a data breach is approximately $5.4 million.  There are 46 different state statutory schemes and a host of federal regulations that apply to the collection and storage of data and the prevention and reporting of a breach.  These rules often contradict.  An interstate or internet retailer, however, must comply with the laws of the states in which a customer makes a purchase.
 
While consultants, IT experts, insurance and security firms can be integral parts of a Data Protection plan, they are only players on the team.  In fact, many experts are engaging in breach event information sharing to assist each other in identifying and defending against cyberthreats.  Cyber security concerns are now part of doing business, and general counsel and C-Suite executives must be ready to guide their companies through these complex issues.  

Prevention
Prevention is the first step to minimizing cyber security liability.  The following steps can help minimize the cost and likelihood of security breaches:   
• Security measures before a breach.  Studies have found that having an incident response plan, establishing a strong security infrastructure, and appointing a Chief Information Security Officer can lower the costs of a data breach by approximately 50%.  
 Cyber-security audits.  Businesses should conduct regular cyber-security audits and limit the access of sensitive data by third parties and employees.  
• Cyber-security insurance.  Businesses should review insurance policies to determine whether and to what extent they are covered for cyber-security threats.  
• Encryption.  If a data breach occurs, encryption can help minimize liability.  

Notification
If a data breach occurs, businesses must immediately determine whether they have notification obligations under federal or state law.  Congress has yet to enact comprehensive federal law governing notification in the private sector, so businesses must conduct a state- and industry-specific analysis.  The following are examples of notification obligations: 
• Health Insurance Portability and Accountability Act and Health Information Technology for Economic and Clinical Health Act.  HIPAA requires covered entities to protect against reasonably anticipated threats or hazards to security.  The HITECH Act requires covered entities and business associates to notify the individuals whose protected health information was accessed no later than 60 days after the breach was discovered.  If the breach affects more than 500 individuals, the law also requires notification within 60 days after the breach was discovered to the US Department of Health and Human Services and the media.  
• Gramm-Leach-Bliley Act.  This act requires financial institutions to publicize their privacy policies and establish internal safeguards and procedures to protect customer information.  Related guidelines require covered financial institutions to notify customers whose personal information has been subject to unauthorized access or use if misuse of the customer’s information has occurred or is reasonably possible, unless law enforcement determines that notification will interfere with a criminal investigation.  
• Securities & Exchange Commission.  The SEC has issued guidance stating that publicly traded companies should report certain instances of cyber incidents.   
• State law.  Currently, 46 states, the District of Columbia, Puerto Rico, and the Virgin Islands have enacted laws requiring notification of security breaches involving personal information.  

Potential Litigation
Businesses should be ready for litigation if a data breach occurs.  Potential claims by private parties and the government include: 
 State-law claims.  Businesses could face suits under individual states’ consumer protection laws, tort and contract law, fiduciary requirements, and other cyber security rules.   
• FTC Safeguards Rule.  The FTC has brought numerous enforcement actions to address whether businesses security systems are reasonable and appropriate to protect consumer information.  
• SEC Enforcement Actions.  The SEC’s Division of Corporation Finance has taken the position that public companies should disclose their risk of cyber incidents.  Failure to disclose cyber security breaches or risks could lead to actions on security anti-fraud provisions like Rule 10b-5 or books and records violations under Rule 13b2-2.  

Conclusion
A business’s cyber-security obligations are too complex to address in this blog.  Regardless, it is critical for businesses to be prepared.  In house counsel are invited to join Polsinelli attorney Leon Silver and Kevin Morgan of Grant Thornton at DRI’s 2014 Retail & Hospitality Litigation and Claims Management Seminar, May  15, 2014 in Chicago at the Westin Chicago River North Hotel for a presentation titled “Cybersecurity and Data Governance:  The 21st Century Legal Issue.”

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Categories: Corporate America | Retail | Seminar

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Too Good Looking to Work Here

Posted on July 26, 2013 04:59 by Scott F. Gibson

Imagine the following scenario.  Your boss calls you in to the office, tells you that you have been a stellar employee, and then fires you because “you’re so darn good looking that I’m afraid I’ll have an affair with you.”

Your boss clearly failed to read the memo on “Best Employment Practices:  Staff Motivation.” But is your termination legal?
 
According to the recent decision of the Iowa Supreme Court, your boss can legally terminate you because he (or she) finds you irresistible, even if you have not engaged in flirtatious or inappropriate behavior. The decision to terminate was not based on gender (which would be discriminatory and illegal), but instead on your boss’s feelings (which are not prohibited by law, no matter how irresponsible the feelings might be).
 
The case involved dentist James Knight who fired his assistant Melissa Nelson, who he acknowledged had been an exemplary employee for 10 years.  Dr. Knight had developed an attraction to Ms. Nelson, and he (and, perhaps more importantly, his wife) believed that his attraction had become a threat to his marriage. 
 
The Court’s latest decision reinstated the result of its opinion reached in December 2012, which the Court withdrew after the decision received nationwide publicity and criticism.  
 

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Interpreting the Dodd-Frank Act

Posted on July 24, 2013 07:45 by Scott F. Gibson

The Dodd-Frank Act prohibits retaliation against whistleblowers who report company wrongdoing.  But a recent ruling of the Fifth Circuit Court of Appeal undercuts that protection by holding that employees who “blow the whistle” in-house are not statutorily protected from retaliation.

The case, Asadi v. G.E. Energy (USA), LLC, holds that the plain language of the Act prohibits retaliation only against those employees who report company wrongdoing to the Securities and Exchange Commission. In-house whistleblowers are out of luck.

The ruling contradicts both the SEC rules and the decision of nearly every other court that has considered the question.  It also brings into question the effectiveness of carefully crafted corporate compliance programs.  



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Categories: Corporate America

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Class Action Deemed to Be Improperly Certified by Lower Courts


CHICAGO – (March 27, 2013) The Supreme Court this morning reversed the judgment of the Third Circuit Court of Appeals in the case of Comcast v. Behrend, an opinion in alignment with the position of DRI – Voice of the Defense Bar in its amicus brief filed in August of last year. The majority held that the class action in Comcast v. Behrend was improperly certified under Rule 23(b)(3). 

In this case, subscribers sued Comcast Corp. and various Comcast subsidiaries, alleging that Comcast monopolized Philadelphia’s cable market and excluded competition in violation of federal antitrust laws. To constitute a class, plaintiffs proffered an expert damages model that purported to prove each class member’s damages by evidence common to all. Comcast responded that the plaintiffs’ model was incapable of calculating damages for the class because it was based on several erroneous assumptions about the asserted claims, and indeed that common proof of damages is impossible given significant differences among the class members. The district court nonetheless certified the class.

Comcast sought review in the Third Circuit Court of Appeals, which affirmed the certification order after expressly declining to consider Comcast’s contentions. While the Third Circuit acknowledged that, “[t]o satisfy . . . the predominance requirement, Plaintiffs must establish that the alleged damages are capable of measurement on a class-wide basis using common proof,” it nonetheless insisted that “[w]e have not reached the stage of determining on the merits whether the methodology [offered by Plaintiffs] is a just and reasonable inference or speculative.” The court concluded that Comcast’s “attacks on the merits of the methodology” have “no place in the class certification inquiry.” 

In his dissent, Judge Jordan stated in part, “not only have Plaintiffs failed to show that damages can be proven using evidence common to the class, they have failed to show . . . that damages can be proven using any evidence whatsoever—common or otherwise.” 

The Supreme Court held that the Third Circuit erred in refusing to decide whether the plaintiff class’s proposed damages model could show damages on a class-wide basis. Under proper standards, the model was inadequate and the class should not have been certified. The vote was 5–4 with Justices Breyer, Ginsburg, Sotomayor and Kagan dissenting.

Citing the Federal Judicial Center’s Reference Manual on Scientific Evidence, the majority held that “’The first step in a damages study is the translation of the legal theory of the harmful event into an analysis of the economic impact of that event.’ The District Court and the Court of Appeals ignored that first step entirely.”

The Third Circuit’s approach to class certification would have allowed plaintiffs to obtain certification without showing a reasonable likelihood that they will be able to prove their class-wide claims (predominately) by common evidence. This would have significantly lowered class plaintiffs’ burden under Rule 23 and resulted in the certification of many more non-meritorious class actions.
Brief author Jonathan F. Cohn of Sidley Austin LLP, Washington DC, is available for interview or for expert comment through DRI’s Communications Office.
For the full text of the brief, click here.

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Last year Roy Fox got to thinking – what if NFL Head Coaches and brothers Jim Harbaugh (San Francisco 49ers) and John Harbaugh (Baltimore Ravens) ended up facing each other in the Super Bowl?  With that thought in mind, Fox went out and spent over $1,000 to file trademark applications for the terms “Harbowl” and “Harbaugh Bowl.”  The NFL was not pleased by Fox’s play.  Shortly before the 2012-2013 season began, the League contacted Fox with concerns that his trademarks could become confused with the NFL’s “Super Bowl” trademark.  The NFL then “encouraged” Fox to abandon his quest to have the marks approved.


Though Fox attempted to bargain with the League in return for this abandonment – requesting either his costs in pursuing the applications or other NFL goodies such as season tickets and autographed photos – he was stonewalled.  Eventually, after the NFL stated that it would to seek to recover its future legal costs incurred in opposing Fox’s filing, Fox withdrew the applications on October 24, 2012.

R. Polk Wagner, an intellectual property professor from the University of Pennsylvania Law School, isn’t so sure that Fox was required to abandon his quest, stating “[m]y view is that the league was being overly aggressive in their interpretation that his marks were confusingly similar to ‘Super Bowl.”  Still, Wagner opined that such a result was relatively common, noting that when individuals are faced with the prospect of a legal battle with a large, well-funded organization such as the NFL, “nine out of 10 times, the person backs away.”

As originally published at SportsLawInsider on January 25, 2013  Republished with permission
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It is not uncommon for plaintiffs to argue - and for some defense lawyers to agree - that individual life, health, or disability insurance policies cannot be part of an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974, 29 U.S.C. Section 1001, et seq. ("ERISA"). Not so. ERISA broadly provides that an employee welfare benefit plan can be funded "through the purchase of insurance or otherwise," 29 U.S.C. §1002(1), and makes no distinction between individual insurance and group insurance. Thus, benefits under an ERISA-compliant plan can be funded by one or more group or individual insurance policies, or a combination of group and individual insurance policies.

In the past year, there have been several federal district court decisions holding that programs involving individual disability insurance policies are governed by ERISA, even in some instances where the actual structure of the ERISA program expired before an insured filed a claim for benefits under the policy. This article will discuss two of those decisions - both in California - as illustrations of the types of arrangements involving individual insurance policies that courts have found to be regulated by ERISA.

Indicia of an ERISA Plan

The ultimate question in determining whether any insurance policy - individual or group - is regulated by ERISA, is whether the policy is part of an employment relationship. That necessarily requires the establishment of an employer-employee relationship, i.e., there must be an employer and at least one covered employee/participant. See, e.g., 29 C.F.R. §2510.3-3(b) and (c) (every ERISA plan must cover at least one common law employee). It also requires evidence that the insurance policy is part of the employment relationship.

In a typical group insurance arrangement, a group insurance policy is issued to an employer who determines that it will provide coverage to a select group of employees. The employer also typically contributes at least part of the cost of the employee's coverage and/or performs other functions or actions indicating that the employer endorses the program and/or has adopted the policies as part of its overall employee benefit program.

A typical program involving individual policies of insurance is not so different. Examples of some of the common practices involving individual insurance policies can include the following:

  • A multi-life program, sometimes exhibited in a written agreement between an employer and an insurer.
  • The employer selects the broker, the insurer, and sometimes the types of policies that will make up the program.
  • The employer may agree to accept certain responsibilities for establishing and/or maintaining the program, such as payment of all or a portion of the premiums.
  • Premiums are subject to a discount as a result of the agreement between the employer and the insurer.
  • There may be other benefits such as abbreviated underwriting procedures or higher coverage limits.
  • Billings are made directly to the employer, sometimes referred to as a "list bill."
  • Individual policies are issued to a select group of employees, many times including one or more owner/employees of the employing entity (frequently a professional corporation).
  • The employer maintains ongoing communication with the insurer, including administrative tasks such as informing the insurer when new employees are hired or existing employees are terminated.
  • The employer facilitates payment of the premiums. The actual financial responsibility for the premiums may occur in a number of ways, e.g., the employer may absorb the cost, the employer may pass on some or all of the cost to the employees (such as through payroll deductions or via a flexible benefits program), the employer may ask the employees to pay the premiums directly and may reimburse the employees through a bonus program, or the cost of the premiums may be deducted from various expense accounts available to the employees. Many times the purpose of passing on the costs to the employees is to ensure that any benefits would not be subject to income taxes.

Structure of an ERISA Plan

The structure of an ERISA welfare benefit plan is statutory and requires five elements: (a) a plan, fund, or program; (b) established or maintained; (c) by an employer (or an employee organization); (d) for the purpose of providing statutory benefits (including life, health, and disability insurance); (e) to participants and beneficiaries. 29 U.S.C. §1002(1). In the context of group or group-type insurance programs, courts also look to whether the program falls within the "safe harbor" regulation, which excludes any program from ERISA where the employer is a mere advertiser of the program. In order to satisfy the regulatory safe harbor, a plan must satisfy several elements. Two of these elements are most often in dispute when one is attempting to determine whether a plan is exempt from ERISA: (a) whether the employer contributes to the program; and (b) whether the employer has endorsed the program. Satisfaction of either of these elements removes a plan from the safe harbor exemption. 29 C.F.R. §2510.3-1(j).

Case Study: Zide v. Provident Life & Acc. Ins.

The employer in Zide v. Provident Life & Acc. Ins. Co., 2011 U.S. Dist. LEXIS 153777 (C.D. Cal. Apr. 9, 2011) signed a salary allotment agreement with Provident Life & Accident Insurance Company whereby the employer represented that it would pay the entire premium cost in consideration for Provident to issue individual disability policies to select employees of a medical corporation, some of whom were also shareholders of the corporation. The salary allotment agreement was in effect for many years. During that time, various doctors were covered under the plan. Some of the doctors were employees when first covered, but later became shareholders. Premiums were billed via periodic list bills sent to the corporation and the corporation paid the premiums. The corporation then charged the premiums back to the various doctors. There was a substantial premium discount as well as other benefits which continued even if a doctor left the corporation and continued to pay the policy premiums. By the time Dr. Zide filed a claim for benefits under his policy, he was the only insured left at the corporation and he was the sole owner of the corporation. When Provident terminated Dr. Zide's benefits, he sued under California state law and alleged bad faith, seeking compensatory and punitive damages. Provident alleged, among other things, that Dr. Zide's policy was governed by ERISA and that his bad faith claim was preempted.

The district court granted judgment to Provident, ruling that the insurance program was an ERISA plan and that Dr. Zide's state law claims were preempted. Applying the statutory five-factor test, the district court concluded:

  • Although there was no formal plan document apart from the insurance policy, there was an established plan, fund, or program in that the plan was a reality and not a mere promise of future potential coverage.
  • The program was established and maintained by the employer corporation: premiums were paid initially by the employer; the employer performed other ongoing administrative services, including maintaining contact with the insurer over a period of years; and the employees received a substantial discount and other benefits from the arrangement.
  • The corporation was an employer and was identified as such in the salary allotment agreement with the insurer.
  • The program provided statutory benefits (benefits in the event of disability).
  • There were participants in the program in that the program covered at least one non-owner employee of the corporation at least some point during the program's existence.

The district court also concluded that the program fell outside of the safe harbor exemption. Even though the employees bore the ultimate cost of the premiums, the availability of a discount through the efforts and commitment of the employer and which was in existence solely by virtue of the employment relationship, constituted an employer contribution to the program. Finally, the court ruled that even though the program might not satisfy all of the ERISA requirements at the time Dr. Zide filed his benefit claim -- because it no longer covered at least one non-owner employee -- the fact that the program had at one time been governed by ERISA meant that Dr. Zide's policy continued to be governed by ERISA as he continued to reap the various benefits (discounted premiums and higher levels of coverage) made available to him by the employment relationship and the employer's commitments to the insurer.

Case Study: Masteler v. Paul Revere Life Ins.

Another recent example of an individual disability insurance policy being governed by ERISA is the case of Masteler v. Paul Revere Life Ins. Co., 2012 U.S. Dist. LEXIS 21725 (S.D. Cal. Feb. 22, 2012). In that case, a large national employer entered into an "employee security program" with Paul Revere whereby the insurer agreed to issue individual disability income policies to a select group of executive employees with favorable coverage options and substantial premium discounts, in exchange for the employer's promise to pay the premiums. The program was in effect for several years and multiple policies were issued to executive employees of the employer during that time. When the plaintiff applied for his policy, he represented to the insurer that his employer would pay the entire premium cost. The evidence indicated that the employer did pay the first annual premium for his policy, but several months after the policy was issued, the plaintiff left his employment. He continued the policy, agreeing to pay future premiums himself.

The plaintiff became disabled due to a heart condition and was paid benefits for several years. When benefits were about to reach the maximum pay period under the policy, the plaintiff argued that his heart condition was an injury rather than a sickness, triggering the lifetime benefit clause of the policy. The insurer disagreed, benefits were terminated, and the plaintiff sued under California state law, alleging bad faith and seeking compensatory and punitive damages. Among other things, Paul Revere argued that the policy was governed by ERISA and that the plaintiff's state law claims were preempted.

The district court agreed with Paul Revere and dismissed the plaintiff's state law complaint. The court held that where an employer enters into an agreement with an insurer to make individual disability policies available to employees at discounted premiums and higher coverage levels and pays the premiums, the employer has established an ERISA plan. The court ruled that the regulatory safe harbor did not apply because the employer paid the premium cost. Finally, the court ruled that where the employee elected to continue his coverage under the same policy and under the same terms after he left his employment, the fact that the plaintiff took over the premium payments did not remove the policy from ERISA. The plaintiff's claim was governed exclusively by ERISA and his state law claims were preempted.

Conclusion

The Zide and Masteler decisions are just a couple of examples of situations where individual insurance policies were held to be governed by ERISA. These decisions dispel the myth that only group insurance policies can be part of an ERISA plan and that individual insurance is invariably subject to state law. Of course, in order for ERISA to apply, there must be a nexus to an employment relationship, but once that nexus is established, many fact scenarios may bring individual policy coverage under ERISA and outside of state law.

Mark E. Schmidtke

Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

mark.schmidtke@ogletreedeakins.com

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Bank of America’s new plan to seek reductions in its legal fees from certain outside law firms have some experts questioning the ethics of this unusual practice.  The bank is seeking a credit on its annual legal fees based on the amount of customer business it sends to the law firms.  According to the report, Bank of American has threatened to stop using law firms that refuse to sign onto the one year deal. 

The Bank of America agreement is believed to state that the credit sought is calculated based on the total amount of legal fees passed on to third-party customers.  Bank of America generally does not comment on specific arrangements with its legal providers; however, a source familiar with the agreement said that, the credit being sought is relationship based rather than percentage based. 

Cornelius Hurley, Director of the Boston University, Center for Finance, Policy, and Law opines that if the agreement is based on the amount of fees paid by customers, such an arrangement would be unethical and a “form of pay to play for the law firms.”  University of California’s Hastings Law School professor, Geoffrey Hazard explains that the agreement seems to violate the American Bar Association’s rules of Professional Conduct in a least two ways: (1) the bank is getting a reduction in legal fees; (2) and there is a referral in return for money.  

Not everyone sees this as an ethical issue.  Thomas Spahn, a commercial litigation partner at McGuireWoods in Virginia, said his law firm accepted the agreement and does not an issue.  He does not share the concern that this arrangement violates the rule that “a lawyer cannot give anything of value” to someone who sends him business.  Spahn’s reasoning is that “most law firms will give benefits to a company that sends them a lot of work such as free legal seminars or cocktail parties.”  He justified this position by stating that the agreement is sound as long as the credit is not tied to a particular fee. 

Bank of America does offer some notice to its customers that it is receiving a benefit.  Hurley feels the notice is “too vague and not a full-fledged disclosure...” and Hazard comments that “its getting the reduction that matters, not who knows about it.” 

The bank defended the agreement in a statement issued to Corporate Counsel.  “We do not require clients to retain particular law firms and we are committed to transparency in disclosing fee arrangements, as well as, potential benefits to our company.  We are confident that our agreements with external legal services providers are appropriate.”  Eric Cooperstein, a legal ethics practitioner in Minneapolis sees this agreement as raising serious ethical concerns as the rules do not have an exception for client consent.  “Quite simply, a legal client’s business cannot be bought and sold.”  

 

 

 

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Ethics 20/20: The Impact of Technology

Posted on August 30, 2012 03:19 by J. Logan Murphy

Every day, we see the impact of technology on the practice of law. Blogs, social networking, electronically stored information, and other legal resources create enormous economies and unprecedented depth in our field. But with these advantages come unrecognized perils. The transparency and mobility of electronic information creates significant risks to clients, unless properly controlled. As part of the project to rein in technology in the practice of law, the American Bar Association launched an ambitious multi-year project called Ethics 20/20. One of the major goals of Ethics 20/20 was to modernize the rules of ethics and bring them into congruence with the state of technology.

At its most recent meeting, the ABA passed multiple resolutions amending the Model Rules of Professional Responsibility to reflect the evolution of technology in the practice of law. This article provides a brief overview of those amendments. Those who are more interested in the details of the amendments can click here to read the reports online.

Confidentiality When Using Computers
Resolution 105A makes changes to help lawyers understand how to protect client confidences when using new technology, including cloud computing, tablets, and smartphones. Though small, one of the most significant changes is included in Comment 6 to Rule 1.1 (Competence). The Rule now includes a requirement that “a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology.” No longer can attorneys simply ignore developments in favor of staid methods of practice. To be competent, an attorney must work effectively with technology and keep alert to technological improvements and changes.

The amendment to Rule 1.6 (Confidentiality of Information) is probably the largest and most impactful rule change related to confidentiality. Now, Rule 1.6(c) requires attorneys to “make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating the representation of a client.” The comments make it clear that attorneys are required to utilize reasonable safeguards to protect confidential information. These changes are geared toward the protection of electronic data, especially given the innumerable bits of sensitive information flying around every day.

Using Technology for Marketing
Resolution 105B was designed to help lawyers understand how the principles of attorney advertising already incorporated into the Rules are affected by the growth of Internet-based marketing and social networking. This particular resolution accomplishes three main goals. First, changes to Rule 1.18 offer guidance on how to market online without inadvertently forming an attorney-client relationship. Recent cases have demonstrated confusion on behalf of the general public regarding whether an attorney-client relationship is formed when the potential client emails the attorney or fills out a communication form on the attorney’s website. The amendments to Comment 2 of Rule 1.18 address the concern by stating that a person becomes a prospective client by “consulting” with a lawyer. While the existence of a consultation depends on the circumstances, the Comment eliminates potential passive liability to prospective clients. A consultation “does not occur if a person provides information to a lawyer in response to advertising that merely describes the lawyer’s education, experience, areas of practice, and contact information, or provides legal information of general interest.” But, if the lawyer actively invites information about a possible representation, the lawyer is probably stuck with a prospective client.

Second, the Rules contain a prohibition against paying others for a “recommendation,” and this Resolution modifies that prohibition to account for online lead generation services through chances to Comment 5 of Rule 7.2. Lawyers may now pay others for generating client leads, as long as the Internet-based lead generator does not “recommend” the lawyer. The lawyer is also responsible for the representations of the lead generator, with Comment 5 placing the onus on attorneys to ensure that the lead generator is not making statements that are inconsistent with the rules.

Finally, amendments to Rule 7.3 assist attorneys in determining when communications on the Internet, particularly through social networking sites, may constitute a “solicitation.” Only a “target communication initiated by the lawyer” directed to a “specific person” that “offers to provide” legal services is a solicitation. Communications to the general public, including Internet banners, are not solicitations, so feel free to jump on that Facebook advertising spot.

Outsourcing
Lawyers have been slow to adopt the economies of scale that outsourcing can provide, in part because of the perceived ethical dilemmas presented in outsourcing. Outsourcing can endanger confidential client information and presents a quandary over legal work being performed by attorneys not licensed in the United States. Resolution 105C encourages attorneys to ensure the efficiency, competence, and ethics of any outsourcing process. An entirely new comment is added to Rule 1.1, requiring the informed consent of the client to contract with any lawyer outside of the lawyer’s own firm. And, lest we forget, lawyers are always charged with supervising non-lawyers; that requirement does not abate simply because work is being outsourced to a foreign country. Comments 1 and 3 to Rule 5.3 incorporate this concept and apply the general rule to all non-lawyers outside of the lawyer’s own firm. The basic gist of the changes in Rule 105C is to encourage lawyers to keep a sharp eye on professionals hired from outside their own firm, and to work closely with clients in determining the proper scope of outside contracting and supervision. No surprise there—constant communication with the client is a harbinger of a durable and responsible attorney-client relationship.

Mobile Lawyers
A prevalent by-product of an informationally small, but geographically large, practice is the tendency of lawyers to move their practice. The world does indeed get smaller every year. No longer do lawyers move down the street; more and more, attorneys are moving their practice to different jurisdictions, and virtual law offices are sprouting in all states. The remaining resolutions that passed enable attorneys to establish a practice in another jurisdiction—subject to stringent information protection requirements—while pursuing admission in that jurisdiction. Resolutions 105D and 105E address the ABA Model Rule of Practice Pending Admission and the ABA Model Rule on Admission by Motion, respectively. With a few states signaling their intent to adopt a uniform bar exam, these model rules and their amendments continue the progress toward a more uniform practice of law. In case you have never encountered these model rules, or their state versions, their purpose is to allow experienced lawyers who have moved into a different jurisdiction to continue to practice while awaiting an expedited admission to the Bar. 

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On Friday, August 24, a nine member jury entered a verdict in favor of Apple and awarded almost $1.05 billion in damages.  Apple filed suit against one of its largest competitors, Samsung Electronics, in April 2011, and alleged that Samsung’s Galaxy line of smartphones and tablets infringed seven of Apple’s patents covering the iPhone and iPod products.  In turn, Samsung countersued alleging that Apple infringed Samsung’s patents covering various wireless software components of its products.  After more than a year of highly contentious litigation and following a trial that began at the end of July and lasted the better part of August, the jury deliberated for less than three days before delivering the verdict in favor of Apple. 

Prior to trial, Apple received a significant e-discovery victory when the court sanctioned Samsung for its failure to preserve emails after Samsung should have anticipated the lawsuit by Apple.  The court determined that Samsung had a duty to preserve evidence as of August 23, 2010, and while Samsung issued a litigation hold and provided instructions detailing how to save emails using its email system, Samsung failed to disable the auto-delete function of its email system, which automatically deleted all emails every two weeks in Samsung’s Korean offices.  The court ordered that, as part of the sanctions, the jury would be allowed to draw an adverse inference against Samsung and that the jury would be told to presume that relevant evidence was destroyed and that the lost evidence was favorable to Apple.  

The court also entered pretrial preliminary injunctions against Samsung barring the sale of the Galaxy Nexus phone and the Galaxy Tab 10.1 in the United States. Moreover, the court delivered various ruling for and against both parties on various in limine motions.  One ruling against Samsung appeared to be very significant: Samsung took issue with the court’s ruling that, because Samsung failed to disclose in time contentions that Samsung’s designs were in development before the iPhone, Samsung was precluded from using slides containing images of the Samsung designs.      

In opening statements and during trial, Apple set forth its theory that Samsung had ripped off the unique design features of the iPad and iPhone and infringed certain utility patents.  Apple focused on comparisons between Samsung’s phones from 2006 to its newer smartphones from 2010.  Also, Apple relied on internal documents from Samsung comparing Samsung’s products with the iPhone hardware.  On the other hand, Samsung maintained the position that Apple had no right to claim a monopoly on certain design features that were not revolutionary.  Samsung’s theory to demonstrate non-infringement was to get the jury to focus on the specific legal requirements relating to each of Apple’s patents.  Samsung also went on the offensive by attempting to prove that Apple’s products use certain Samsung features for mobile devices, such as the process for emailing photos and the technology relating to easily finding photos in an album.  Moreover, Samsung attempted to demonstrate that Apple’s patents were invalid due to developments in technology that existed before Apple claimed to have invented such technology.  The parties relied on various liability and damages experts to support their respective positions. 

During closing arguments, counsel for Apple argued that Samsung copied Apple’s designs after realizing that Samsung could no longer compete with Apple.  Samsung, in turn, argued that a verdict in favor of Apple would severely suppress competition and reduce consumer choices.  In the end, with more than 100 pages of legal instructions, the jury was able to complete a 20 page-long verdict form and return a verdict in less than three days.    
       
For the specific articles from which the information in this summary was obtained, please visit http://newsandinsight.thomsonreuters.com/Legal/.  

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“Our decision today should not be interpreted as a comment on the wisdom or policy merits of EPA’s Transport Rule.  It is not our job to set environmental policy.  Our limited but important  role is to independently ensure that the agency stays within the boundaries Congress has set.  EPA did not do so here.”  EME Homer City Generation, L.P v. E.P.A., ---F.3d --- (2012).  

On August 21, 2012, the United States Court of Appeals for the District of Columbia Circuit ruled in Homer City that the United States Environmental Protection Agency (“EPA”) overstepped its bounds when it promulgated the controversial Transport Rule.  The Transport Rule, a/k/a the Cross-State Air Pollution Rule, was enacted for the EPA to implement the statutory “good neighbor” provision of the Clean Air Act (“CAA”).  The Rule was proposed in August 2010, and finalized in August 2011 at 76 Fed.Reg. 48,208 (August 8, 2011).  The Rule defines emissions reduction responsibilities for 28 upwind States based on those States’ contributions to downwind States’ air quality problems.  

To completely understand the decision in Homer City, it is important to understand the “why” behind EPA’s promulgation of the Transport Rule.  Under the CAA, the EPA sets National Ambient Air Quality Standards (“NAAQS”), which outline the maximum permissible levels of common pollutants in the ambient air.  The EPA uses this information to designate “nonattainment” areas in the States.  After this is done, each State is responsible for implementing the NAAQS in their State through State Implementation Plans (“SIPs”). The SIPs must include provisions to address the “good neighbor” provision, i.e., how is each State going to protect its down-wind neighbors from pollutants which may contribute significantly to the downwind States’ nonattainment areas.  The EPA can reject a State’s SIP, or find that a State has failed to submit a SIP and issue a Federal Implementation Plan to implement the NAAQS within a State.  The “good neighbor” provision has been before the D.C. Circuit before.  Notably, this issue was addressed in North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008), when the EPA’s 2005 Clean Air Interstate Rule (“CAIR”) was challenged.  In North Carolina, the Court emphasized that States should only be required to eliminate their own significant contribution to downwind pollution, and should not be required to share the burden of reducing other upwind States’ emissions.  In North Carolina, CAIR was remanded, but left in place pending the development of a valid replacement.  The EPA promulgated the Transport Rule as its replacement for CAIR.
                                                                                                                  
The Transport Rule 1) defines each State’s emissions reduction obligations under the “good neighbor” provision; and, 2) prescribes Federal Implementation Plans to implement those obligations at the State level.  In Homer City, the Court finds that the Rule violates federal law.  The Court cited “at least three independent but intertwined legal flaws in EPA’s approach to the good neighbor provision.”  First, the requirements imposed on upwind States is not based on pollution from upwind States that “contribute significantly to nonattainment” in downwind States - as required by the Statute, and the Court’s prior decision in North Carolina v. EPA, 531 F.3d 896 (D.C. Cir. 2008).  Second, the Rule does not take into account the proportionality requirement, i.e., it does not look at the contributions of other upwind States to the downwind States’ nonattainment issues, and fails to take into account the downwind States’ fair share of pollution contributing to its nonattainment.  Finally, the Rule does not protect the upwind States from unnecessary over-protection, or over-control in the downwind States.  The Court also took serious issue with the EPA’s issuance of Federal Implementation Plans without giving the States a chance to implement the obligations themselves through their own SIPs.  

In the end, the Court found that the EPA’s authority comes from statute and is limited by statute.  The Court summarized that the Transport Rule, as promulgated, stands on an unsound foundation, and vacated the Transport Rule and the Transport Rule FIPs.  Much like the decision in North Carolina, the matter has been remanded to the EPA to develop a valid replacement that can sustain a legal challenge.  In the meantime, the EPA will continue to administer CAIR.   
 
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