GC Agenda: December 2010/January 2011

A round-up of major horizon issues for General Counsel.

Practical Law The Journal
Contents

Antitrust

Most Favored Nations Provisions

A lawsuit recently filed by the Department of Justice (DOJ) suggests that counsel, particularly those at companies with high market share, should exercise caution when considering using most favored nations (MFN) provisions.

On October 18, 2010, the DOJ filed suit against Blue Cross Blue Shield of Michigan (BCBSM) alleging that MFN provisions in BCBSM's contracts with Michigan hospitals violate the Sherman Act. BCBSM covers more than 60% of all commercially-insured residents of Michigan. The complaint claims that two types of MFN provisions present in the contracts illegally restrain trade by increasing costs to actual and potential competitors:

  • Equal-to MFN provisions requiring hospitals to charge BCBSM's competitors at least as much as the prices they charge BCBSM.

  • MFN Plus provisions requiring hospitals to charge BCBSM's competitors a specified percentage more than the prices they charge BCBSM.

MFN Plus provisions are less common than Equal-to MFN provisions, and their use by BCBSM may have triggered the DOJ's investigation. However, the DOJ's complaint indicates that both types bear antitrust risk. Companies should therefore be careful when using MFN provisions of any kind.

Personal Liability

News of executives serving jail sentences can be a powerful motivator to ensure compliance with antitrust laws. Companies can incorporate recent examples of convictions into their compliance training programs to remind employees that antitrust violations may result in individual criminal punishments, including jail sentences.

Recently, a former executive at HannStar Display Corporation pled guilty to participating in a global price-fixing conspiracy in the thin-film transistor liquid crystal display (TFT-LCD) market and is required to serve a seven-month jail sentence. The executive also agreed to pay a $20,000 fine under his plea agreement with the DOJ.

Follow-on Lawsuits

The TFT-LCD price-fixing investigation also serves as a reminder that companies that may have been harmed by antitrust violations may be able to bring follow-on lawsuits.

The investigation by the DOJ and other antitrust authorities began in 2006 and has led to a number of follow-on private lawsuits, including one filed on November 1, 2010 by Target Corp., Kmart Corp., Radioshack Corp. and other retailers. It is relatively easy for private parties to file a follow-on lawsuit since much of the groundwork for the suit has already been laid by government authorities. These suits present both an additional burden for companies accused of violating antitrust laws and an opportunity for companies that believe they have been victims of cartel or monopolistic conduct.

 

Corporate Governance & Securities

Credit Rating Agencies Update

Public companies should require credit rating agencies to enter into written confidentiality agreements or add confidentiality provisions to their engagement letters before disclosing material nonpublic information to them.

Following the removal of the credit rating agency exemption from Regulation FD, some rating agencies initially refused to enter into confidentiality agreements or add confidentiality provisions to their standard engagement letters (see GC Agenda: November 2010 (www.practicallaw.com/7-503-7250)). While some agencies continue to maintain that their internal confidentiality policies suffice for purposes of Regulation FD, it appears that all of the major rating agencies are now agreeing to confidentiality agreements or additional provisions with issuers.

Use of a confidentiality agreement or additional confidentiality provisions serves two purposes:

  • Ensures that a Regulation FD exemption applies now that the specific rating agency exemption is gone.

  • Offers at least some level of comfort to companies if the internal confidentiality policies of the rating agencies fail to prevent leaks of confidential information.

While many of the rating agencies continue to resist negotiation of their standard confidentiality provisions, it seems that some agencies are in the early stages of softening their position and are at least listening to issuer concerns. As this issue continues to develop, public companies and their counsel should continue to raise their concerns with the rating agencies when negotiating confidentiality agreements.

Regulation FD Enforcement

The recent SEC enforcement action against Office Depot, Inc. and two of its executives for communicating "signals" to analysts that the company would not meet earnings estimates highlights a number of lessons for public companies.

The SEC alleged that the executives attempted to "talk down" earnings expectations during one-on-one calls with analysts late in the second quarter of 2007 by making general allusions to the softening economy and to negative public statements issued by comparable companies. The executives avoided express references to the company's business or financial results. Six days after the calls began, Office Depot issued a press release and filed a Form 8-K disclosing that its earnings would be negatively impacted. During this six-day period, the company's stock dropped 7.7%.

The action is the third of its kind in just over a year and indicates a renewed SEC focus on Regulation FD enforcement. Public companies should consider the following:

  • Policy and training. A formal, written Regulation FD policy reviewed by counsel should be in place. A key issue is to determine who should be authorized to communicate with stockholders or analysts on behalf of the company. Periodic, formal training should be given to executives, investor relations personnel and any other authorized persons.

  • It's not only what you say, it's also how you say it. If something cannot be discussed with stockholders or analysts because it may be material nonpublic information, it should not be conveyed or implied through words, tone or demeanor. Executives and employees can inadvertently convey these signals, especially in person, and analysts may be specifically watching and listening for particular signals. Regulation FD violation does not require intent.

  • One-on-one meetings and timing. Conducting private calls or meetings with analysts (especially when initiated by the company) and making statements at the end of an earnings period, while both permitted and routinely done, increase the risk of Regulation FD violations and require an even higher level of care. Companies should consider updating formal training and using scripts reviewed by counsel before conducting these calls or making these statements.

  • Market reaction supports materiality. Although not dispositive, the SEC in the Office Depot action considered the analysts' and the market's negative reaction as factors in determining the materiality of the information conveyed. This is a helpful test to aid companies in determining materiality for Regulation FD purposes. If the company thinks the market would react to the information, it is likely the SEC would consider it material.

  • When in doubt, consider disclosure immediately. If there is concern about information that has already been disclosed in violation of Regulation FD, either in terms of materiality or because the audience was not broad enough, companies should consider immediate corrective disclosure, most likely in the form of a press release and Form 8-K filing, as well as reporting the disclosure to the SEC.

For more information on Regulation FD, see Practice Note, Complying with Regulation FD (Fair Disclosure) (www.practicallaw.com/1-383-2635) and Checklist, What is Material Nonpublic Information under Regulation FD? (www.practicallaw.com/9-501-3719)

 

Dispute Resolution

Operations Outside the US

Although the DOJ has stepped-up its enforcement of the Foreign Corrupt Practices Act (FCPA) against companies with non-US operations, recent court judgments have confirmed that the cross-border reach of certain other US laws is restricted.

The US Supreme Court recently held that certain US and foreign defendants were not liable under Section 10(b) of the Exchange Act for allegedly defrauding non-US investors overseas, because there was no "affirmative indication" that Congress intended Section 10(b) to apply abroad (see Morrison v. Nat'l Australia Bank Ltd.).

Relying on Morrison, the Second Circuit held that US racketeering laws could not be applied to foreign conduct due to lack of a domestic nexus (see Norex Petroleum Ltd. v. Access Indus., Inc.). In a different case, the Second Circuit held that corporations (unlike states and individuals) may not be held liable under the Alien Tort Claims Act for crimes committed against non-US citizens in foreign countries (see Kiobel v. Royal Dutch Petroleum Co.).

For guidance on how companies can avoid FCPA enforcement actions, see Practice Note, The Foreign Corrupt Practices Act: Overview (www.practicallaw.com/0-502-2006).

 

Employee Benefits & Executive Compensation

ERISA Fiduciaries

The Department of Labor (DOL) is accepting comments through January 20, 2011 on a proposal to expand the definition of an ERISA investment advice fiduciary. Plan sponsors should prepare for the anticipated effect of the proposal on their arrangements with service providers.

Under ERISA, individuals and entities are fiduciaries to an employee benefit plan if they do any of the following:

  • Exercise discretionary authority or control over management of the plan or management or disposition of its assets.

  • Have any discretionary authority or responsibility for administering the plan.

  • Provide investment advice related to the plan's assets.

Currently, the DOL uses a five-part test to determine which persons are deemed to be a fiduciary when they provide investment advice related to a plan's assets. The DOL's proposal would modify the current test and remove certain limitations, making it easier to be an investment advice fiduciary under ERISA. For example, the proposed regulations remove the requirements that the:

  • Advice be provided on a regular basis.

  • Parties have a mutual understanding that the advice will serve as the primary basis for plan investment decisions.

The proposed expansion could lead to an increase in costs for plan sponsors. Service providers that are not currently fiduciaries under ERISA will likely incur additional costs, such as increased exposure to plan-related litigation, and any increased costs may likely be passed on to the plan sponsors. In addition, some service providers may also choose to leave the market, which could reduce the number of service providers available to plan sponsors.

Counsel should coordinate with their benefits attorneys to ensure that the plan sponsor is prepared for the expected changes by, among other things:

  • Revisiting their existing service provider agreements.

  • Considering whether the expanded definition of fiduciary will cause the plan to violate ERISA's conflicts of interest provisions and cause any prohibited transactions.

The proposal is scheduled to go into effect 180 days after the final rules are published in the Federal Register. However, the DOL is accepting comments on whether the regulation should go into effect on a different date.

For more information on the obligations of fiduciaries under ERISA, see Practice Note, ERISA Fiduciary Duties: Overview (www.practicallaw.com/5-504-0060).

Retirement Plan Fees

The new DOL retirement plan fee disclosure regulations become effective for plan years beginning on or after November 1, 2011 (January 1, 2012 for most plans). Employers should begin coordinating with their service providers now so that they can timely compile the necessary information to present to plan participants in the required format.

The regulations require all retirement plans that allow participants to choose how their accounts are invested to disclose substantial new information to participants.

Plans must disclose two types of information both before employees can invest their accounts and annually thereafter:

  • Plan-related information, such as:

    • limits on investment instructions;

    • fees for general plan administrative services (for example, legal and accounting fees); and

    • specific dollar amounts actually charged to participants' accounts.

  • Investment-related information (in chart form) for each investment option, such as:

    • performance data;

    • benchmark information; and

    • fees and expenses (for example, expense ratios).

 

Finance

Basel III

At the G-20 leaders' summit in Seoul, South Korea in November:

  • The G-20 endorsed the agreement reached by the Basel Committee on Banking Supervision on the new bank capital and liquidity framework (known as Basel III).

  • European Commissioner, Michel Barnier, stated that the European Commission intends to publish the draft legislation (referred to as CRD 4) for the amendments to the Capital Requirements Directive in March 2011 to implement Basel III in the EU.

For an analysis of Basel III and its main implications for banking institutions, see Practice Note, Basel III (www.practicallaw.com/6-503-9909).

Credit Bidding

A recent order issued by the US Bankruptcy Court for the Northern District of Illinois creates further uncertainty over the right of secured creditors to credit bid in sales of their collateral conducted under a plan of reorganization (In re River Road Hotel Partners, LLC (D. Bankr. Ill. Oct. 5, 2010)).

Rejecting the Third Circuit's decision in In re Philadelphia Newspapers, LLC, the order stated that the debtors could not circumvent the lenders' right to credit bid by providing them with the "indubitable equivalent" of their claims under section 1129(b)(2)(A)(iii) of the Bankruptcy Code.

If other courts follow the reasoning of River Road, secured creditors in those jurisdictions may not need to protect their interests in collateral as aggressively during the early stages of bankruptcy because they would be more assured of their credit bidding rights in any future potential sale of their collateral under a plan of reorganization. As a further challenge to debtors, this decision demonstrates that debtors must meet a substantial burden to deny secured creditors the right to credit bid for cause under section 363(k) of the Bankruptcy Code.

The debtors appealed the decision and on November 4, 2010, the bankruptcy court certified it for direct appeal to the Seventh Circuit.

For more information on the parameters of credit bidding in section 363 sales, see Practice Note, Credit Bidding in Section 363 Bankruptcy Sales (www.practicallaw.com/7-500-4339).

 

IP & IT

Third-party Use of Software

A recent Fifth Circuit decision highlights the need for software vendors and licensees to ensure that their software license agreements specify the extent to which the licensee can permit a third party to access or use the licensed software on its behalf.

In Compliance Source, Inc., et al. v. GreenPoint Mortgage Funding, Inc., the Fifth Circuit held that a licensee breached the terms of a software license by allowing its outside counsel to access and use the licensed software. The terms of the license agreement did not explicitly allow this type of third-party access or use and expressly prohibited all uses of the licensed software other than those expressly stated in the agreement (along with other restrictions on use, transfer and sublicensing).

Focusing on the agreement's actual language, the Fifth Circuit, reversing the lower court's decision, found that the outside counsel's use was not permitted by the contract, even though the use was on behalf of or for the benefit of the licensee. The court distinguished two earlier Fifth Circuit decisions relied upon by the lower court because the licenses in those cases explicitly permitted general third-party uses.

To minimize confusion and the risk of disputes, vendors and licensees should ensure their software license agreements:

  • Identify the categories of non-employees, if any, who may access or use the licensed software on behalf of the licensee, including its independent contractors, other third-party vendors (for example, outsourcing service providers) or advisors.

  • Distinguish between the parties that may use the licensed software and those that may only access it.

  • Specify the permitted level of access or types of use (including potential uses) intended by the parties.

Online Copyright

The series of copyright infringement suits filed by Righthaven LLC should remind website owners to take precautions against online copyright infringement, including minimizing liability arising out of user-generated content.

Righthaven, a company formed to acquire rights to newspaper articles and then sue websites that re-post all or a portion of those articles without permission, has filed over 160 copyright infringement claims against websites since March 2010. In some cases, the site owner or operator posted the allegedly infringing content, but, in others, the content was posted by third-party users.

Website operators should take steps to reduce their risk of being sued for online copyright infringement, including:

  • Educating employees, in particular those responsible for the company's website content, about copyright infringement and developing and enforcing internal policies aimed at preventing infringement.

  • If the site's users can post content directly on the site (user-generated content), ensuring the site operator is in compliance with the Digital Millennium Copyright Act's (DMCA's) safe harbor requirements.

The DMCA's safe harbor shields online service providers from copyright infringement liability for content posted by third parties if the service provider complies with the DMCA's procedural and other requirements. To qualify, online service providers must, among other things:

  • Designate an agent to receive copyright infringement claims and post the agent's name and contact information on the site.

  • Register the agent's name and contact information with the US Copyright Office (the registration form is available at copyright.gov/onlinesp/agent.pdf).

For a model website DMCA policy, with integrated drafting tips and explanations, see Standard Document, Website Copyright/DMCA Policy (www.practicallaw.com/7-502-3328).

 

Labor & Employment

Workplace Noise

The Occupational Safety and Health Administration (OSHA) is currently accepting comments on proposed changes to employer obligations to reduce employee exposure to workplace noise. The comment period is open until December 20, 2010.

Under the proposals, administrative and engineering controls (such as new equipment or job rotation) would be required to reduce hazardous noise levels, unless such controls are not feasible. Measures would be regarded as feasible if they "will not threaten the employer's ability to remain in business," although certain controls may also be specifically required under industry health and safety standards (which are not defined in the proposal).

The rules would apply to employers subject to OSHA's general industry and construction noise exposure standards with workplace noise levels at or above 90 decibels. The new rules would make it more difficult for employers to rely on more affordable noise reduction techniques, such as ear plugs and ear muffs. Employers that fail to comply with the new requirements risk citation.

Given OSHA's new focus on noise hazards, covered employers should consider:

  • Monitoring the work environment for unacceptable levels of noise.

  • Evaluating their hearing conservation programs.

  • Ensuring employees are trained to properly use hearing protectors.

  • Conducting audio-metric testing and maintaining proper records regarding testing and results.

For more information on OSHA requirements, see Practice Notes, Health and Safety in the Workplace: Overview (www.practicallaw.com/9-500-9859) and Handling an OSHA Inspection (www.practicallaw.com/8-502-3422).

Background Checks

Employers should review the use of social media sites in company hiring processes.

The US Equal Employment Opportunity Commission issued a final rule on November 9, 2010 implementing Title II of the Genetic Information Nondiscrimination Act of 2008. Among other things, the final rule regulates employers' acquisition of genetic information through social media and internet searches. Certain types of information obtained from social media (for example, membership in any protected class, credit history, concerted activity or lawful off-duty activities) can result in claims for, among other things, failure to hire, discrimination, unfair labor practices and invasion of privacy.

Employers should consider not relying on social media when conducting background checks on prospective employees, or should implement a clear policy in relation to such checks. A policy should:

  • Designate a human resources professional (rather than the person making the hiring decision) or an independent third-party to conduct all social media background checks and to provide a report including specified information objectively related to the hiring decision.

  • Identify which social media sites will be reviewed.

  • Identify types of information that will be considered and how information discovered may impact hiring decisions (for example, protected class information will not be considered but evidence of false employment history will be).

  • Be applied consistently to all applicants (to reduce the risk of discrimination claims).

  • Require an authorization for review of social media from each applicant.

  • Require compliance with the Fair Credit Reporting Act where an independent third party is used.

  • Require compliance with all applicable end-user license agreements and prohibit unethical use of social media (for example, employers should not "friend" applicants or coerce employees to allow access to a candidate's social media information).

  • Require recordkeeping for social media sites reviewed and information considered in the hiring process.

  • Allow applicants rejected on the basis of information in social media an opportunity to verify or refute the accuracy of the information.

For a Toolkit of resources to assist in identifying the risks and rewards associated with company, employee and third-party use of social media, see Social Media Usage Toolkit (www.practicallaw.com/0-501-1201).

For more information on background checks (including Fair Credit Reporting Act obligations where third parties are used to perform background checks), see Practice Note, Background Checks and References (www.practicallaw.com/6-500-3948).

For more information on minimizing risks in hiring generally, see Employee Hiring and Orientation Toolkit (www.practicallaw.com/2-500-8919).

 

Real Estate

Development Disclosures

Companies and investors involved in real estate development should confirm whether their development projects are subject to or exempt from the disclosure and other requirements of the Interstate Land Sales Full Disclosure Act (ILSA). Recent court cases across the country have brought this obscure federal law to light again. A number of contractual purchasers have successfully sued developers on the basis that the developers have not fulfilled their ILSA disclosure requirements and those purchasers have been able to walk away from their contracts and keep their deposits.

ILSA was enacted by Congress in 1968 in an effort to regulate intentionally misleading advertisements about development properties. It:

  • Requires the developer to register the development with the US Department of Housing and Urban Development and publicly file a detailed property report before any purchase agreements are signed if the development is advertised beyond the state where the project is situated.

  • Covers (generally) subdivided parcels of land and condominium units. It may apply to certain commercial industrial projects.

  • Applies in addition to any state and local laws.

  • Applies to developers and any party "stepping into the shoes" of a developer, such as:

    • silent partners in joint ventures who take over the projects if their developers are unable to perform;

    • lenders foreclosing on the projects if the developers default under their construction loans; and

    • third-party purchasers who buy properties from construction loan foreclosure sales.

  • Provides exemptions in whole or in part to:

    • properties that were improved at the time the contract was signed;

    • properties subject to contracts where the seller is unconditionally obligated to deliver the improved property within 24 months of signing the contract; and

    • subdivisions that consist of no more than 99 lots.

    Projects advertised online will most likely be deemed as being advertised across state lines and may be subject to ILSA.

 

GC Agenda is based on interviews with leading experts from PLCLaw Department Panel Firms. PLC would like to thank the following experts for participating in interviews for this month's issue:

Antitrust

Lee Van Voorhis

Weil, Gotshal & Manges LLP

Corporate Governance and Securities

Richard Truesdell

Davis Polk & Wardwell LLP

David Lynn and Anna Pinedo

Morrison & Foerster LLP

A.J. Kess

Simpson Thacher & Bartlett LLP

Dispute Resolution

Michael Lynch

Kelley Drye & Warren LLP

Yvette Ostolaza

Weil, Gotshal & Manges LLP

Employee Benefits & Executive Compensation

Stephen Saxon

Groom Law Group, Chartered

Sarah Downie

Orrick, Herrington & Sutcliffe LLP

Howard Pianko and Durward J. "Jim" Gehring

Seyfarth Shaw LLP

Alvin Brown and Jamin Koslowe

Simpson Thacher & Bartlett LLP

IP&IT

Cathy Kiselyak Austin

Drinker Biddle & Reath LLP

Mary Rasenberger

Skadden, Arps, Slate, Meagher & Flom LLP

Roger Bora and Robert Ward

Thompson Hine LLP

Labor & Employment

Jan Michelsen and David Jones

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

Tom Wilson

Vinson & Elkins LLP

Real Estate

Robert Krapf

Richards, Layton & Finger P.A.


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