Pension Withdrawal Liability and EFCA Arbitration

Inside 3Q2009 2...Oxymorons and Indexes 4...Pension Withdrawal Liability and EFCA Arbitration 5...Echoes of Echostar: Practical Issues Confronting Clients Accused of Patent Infringement After Seagate 8...Give Me Back My Stuff: Adding Bite to An Employer’s Demand Through the CFAA 9...Welcome New Members focus President’s Message Mark Rogers

There’s no doubt about it: I am taking the What that means, principally, is that we are including past easy way on this president’s letter for our providing world-class learning support in the list of items we will third quarter newsletter. I’m doing it for a and development opportunities consider in determining which very good reason, though. I want to share for our members. To that end, we firms will be selected as sponsors with the entire Arizona Chapter the letter are looking for sponsors to help us for the upcoming program year. that was sent two weeks ago to past, pres- meet that goal. For law firms, we ent and potential sponsors. Along with have three levels of sponsorship To all potential sponsors for an accompanying set of materials, it was opportunities (Platinum, Gold 2009–2010, please read through mailed to 21 law firms and eight businesses and Silver) this year (October the attached materials carefully that provide services to in-house counsel. 2009–September 2010), and, and send any questions well for the first time, we have in advance of the August 25th I am also very excited about the upcoming new categories of sponsorship deadline to accarizona@yahoo. 2009–2010 year. I hope to have a full year (Chapter Underwriter and com. Please be thoughtful and of high-quality CLE sessions scheduled by Law Department Services creative in suggesting programs, September 2009 and provide a number of Sponsorship) for other service and please know that we are other training and networking opportuni- providers. We are also looking very excited about the upcoming ties. to expand the number and type year. The chapter has grown of activities and events that we significantly in the past few years Finally, I’d like to extend thanks to Snell offer to members of the chapter. (more than doubling over the last & Wilmer for its long-standing support The available opportunities handful of years), our regularly of the Arizona Chapter and for providing are explained in the attached scheduled programs are well content for this newsletter. sponsorship program description. attended, and the meetings have become a regular stop for GCs Here is the letter sent to potential sponsors To our past and present sponsors, and other in-house counsel from for our upcoming year: you will have already noted at many companies here in Arizona. this point that our sponsorship We believe that sponsorship of the Many, many thanks for your program is significantly more chapter is a unique and valuable interest in sponsoring the formal than in years past. To a proposition for law firms and activities of the Arizona Chapter certain extent, this is a product providers of services to in-house of ACC America, and to our past of how successful the chapter legal departments, and we hope and present sponsors, many, many has become with your backing. that you’ll agree. Please send us thanks for the support you have Accordingly, while the chapter your best ideas soon! already provided. is actively looking for a broad mix of sponsors (international Thank you. The Arizona Chapter is dedicated firms, national firms, regional to being nothing less than firms, local firms, large firms, Mark N. Rogers preeminent organization of and small firms), you will note in the President, ACC America Arizona for in-house counsel in Arizona. attached sponsorship program Chapter Oxymorons and Indexes Susan Hackett Senior Vice President and General Counsel, Association of Corporate Counsel [email protected]

I couldn’t decide which topic I really or public companies’ in-house lawyers In adopting this standard, the court wanted to write about most for this will be hamstrung with little alterna- seeks to promote greater convenience quarter’s chapter newsletter. One tive except to avoid any documentation for government investigators at the describes an incredible advance for in- of estimated litigation liabilities and, expense of the public interest in pro- house counsel and the value returned perhaps by extension, other forms of moting accurate and complete prepara- for their client’s legal spend; and the litigation reserves if the lawyer wishes tion of corporate financial documents other, which describes what may be the to be able to assert confidentiality over and audits. By ignoring or setting aside greatest bite into your practical ability such work product. clear precedent to protect attorney work to assert attorney work product protec- product, such as estimation of poten- tions in the history of my tenure here. Perhaps more importantly, from a tial liabilities, this court eviscerates the So you get both — I told you I couldn’t policy perspective, this case could be a notion that the in-house lawyer should decide! watershed moment in establishing and create or share legal assessments with defining work product protections that internal financial colleagues or the Bad News First: “Work-Product truly make or break the role of lawyers company’s auditors. Protection” is now an oxymoron in a public company context. On August 13, 2009, the First Circuit As noted by the dissent in this case Court of Appeals issued an en banc The court’s ruling replaces a long- (who are the judges who wrote the panel opinion that has severe and negative standing test that protects documents opinion that this en banc court over- ramifications for corporate clients — prepared by attorneys because of or turns): “In adopting its test, the majority and even greater consequences for the in anticipation of litigation (constitut- ignores a tome of precedents from the in-house lawyers and financial teams ing protected attorney work product circuit courts and contravenes much that prepare corporate tax, accounting as defined in the US Federal Rules of of the principles underlying the work- and financial statements for them. Evidence, Rule 26(b)) in favor of one product doctrine. It also brushes aside that suggests a much narrower stan- the actual text of Rule 26(b)(3), which In US v. Textron, the court overruled dard, if any remaining protection at all. “[n]owhere . . . state[s] that a document its own previous panel decision (and The court argued that Textron’s attor- must have been prepared to aid in the departs from the precedent of virtually neys’ assessments of potential litiga- conduct of litigation in order to consti- every other US court), protecting the tion liability for tax positions were not tute work product.” Adlman, 134 F.3d at traditional and widely accepted inter- protected because financial reporting 1198.” The result is that companies that pretation of what constitutes attorney and accounting requirements dictate empower their lawyers and auditors to work product in the disclosure and creation of such liability estimates, and work together in an effort to ensure that financial reporting context. The IRS thus any resulting work papers are mere their financials and accounting disclo- sought production of Textron’s lawyers’ “business” documents created pursuant sures are accurate and well-informed estimates of the company’s potential to those requirements. are punished by this decision. The court liability for tax positions it pursued, thus suggests the inconceivable: that it is Textron asserted attorney-work product According to the court, “any lawyer” more advisable for lawyers to avoid doc- protections and refused to disclose the would call Textron’s counsel’s assess- umenting or sharing information that files, and the ping pong of decisions in ment of potential liability mere tax could be used against the company’s this case began. (ACC filed two amicus or business documents, not litigation interests in litigation. In citing to ACC’s briefs in the case, available online along documents. But by “any lawyer,” the amicus brief in this matter, the dissent with the court’s decisions, at the URLs court sure wasn’t talking about the notes further: “Thus, as amici worry, the listed at the end of this article.) 24,000 members of ACC. If a lawyer’s majority’s new rule will have ramifica- assessment of the company’s potential tions that will affect the form and detail This most recentTextron decision is legal liability for a position it asserted of documents attorneys prepare when final, unless the company decides to — which the government now chal- working to convince auditors of the take the case to the US Supreme Court lenges — isn’t attorney work product, soundness of a corporation’s reserves.” (and we’ll be there again as amicus, if what the heck is? The court makes a they decide to go forward). It is impor- twisted and Herculian effort to reach And that means that the role of in-house tant to overturn this ruling and have the the perverse result it adopts. counsel is not only hamstrung, it’s per- Supremes resolve this important issue, manently damaged. The court’s ruling continued on page

Arizona Chapter FOCUS 3Q09 continued from page when you see those cases; that’s how we with a firm to members who want more diminishes the value of the important move the needle and make sure that the info on them. preventive and strategic roles that in in-house bar is your voice. house counsel play in complex, publicly If you are willing to help us traded companies. And calls into ques- I’d rather leave you with the pre-populate the system, go to tion the entire notion public policy pre- good news: The ACC Value Index is www.acc.com/evaluate and tell us how sumption that confidential legal counsel about to turn inefficient and non-aligned you feel about your firms and the value encourages better corporate decision- law firm business models “inside out.” they offer. Fill in multiple forms for each making and more reliable and accurate firm you feel strongly about: the form public statements of financial position The premise of the ACC Value Chal- only takes about 30 seconds to complete on which our markets must rely. In lenge (our project to reconnect the cost and submit, unless you wish to write pursuit of greater transparency for IRS of legal services to their value) is our explanatory comments or accolades for investigators in this one case, the court belief that far too often, what drives your favorite lawyers at the firm in the ends up promoting opposite result in the definition of success in outside law comment box. the larger marketplace. Bad facts made firms is size, expensive reputation and bad law here. ACC will continue to fight profitability. While we can’t stop folks The full system that allows searching to protect your client’s right to expect in firms from reading the AmLaw 200 of the data will be out in beta soon for candid and confidential counsel, and rankings and measuring themselves those who entered data as part of this your ability to protect the work product against these metrics, maybe we can push so that you can see how the system that makes your contributions to the redirect the definition of success toward works, play around with it and decide if company’s good fiscal health possible. something more closely aligned with you want to keep the postings you made, what clients value. and either edit or remove them. So this To read ACC’s amicus briefs and the is a no-risk proposition — but imagine court’s decisions, go to ACC’s Advocacy That’s where the ACC Value Index the upside of having candid peer reviews Homepage (www.acc.com/advocacy) or comes in: the idea is to ask ACC mem- of firms (“candid” since the system is use the following URLs: bers to share information about the only open to ACC members) at your U.S. v Textron Decision, 8/13/09: firms they value most on an online data- fingertips 24/7, covering firms around www.ca1.uscourts.gov/cgi-bin/getopn. base (the ACC Value Index). The intake the world and allowing you to find the pl?OPINION=07-2631EB.01A form for the ACC Value Index is now “value-based” expertise you need from up and online for ACC members to go ACC-US Chamber Amicus Brief in US outside counsel. to to pre-populate the system with data v. Textron, 4/22/09: for launch. The form presents you with www.acc.com/vl/public/AmicuBrief/ Imagine also the impact on the law a simple scoring system, asking you to loader.cfm?csModule=security/ firm community: maybe it will become give 1 to 5 stars to firms you use on six getfile&pageid=207212 at least as important to have satisfied different value criteria. Once launched clients promoting your value than to ACC-US Chamber Amicus Brief in (at the ACC Annual Meeting in advertise that you’re the most expensive US v Textron, 4/8/08: Boston in October), members will also firm in the market and your profit-per- www.acc.com/vl/public/AmicusBrief/ be able to go to the database to search partner is 20 times the salary of the loader.cfm?csModule=security/ for returns — information about firms in-house counsel who hire you. Kind getfile&pageid=15823 they might be considering or to see how of makes you feel like maybe we’re the their own firms stack up. If you want folks who hold the purse strings after Remember: ACC advocacy is the voice to find the firms that scored well for all, doesn’t it? of the in-house bar. We perform that value in other members’ hearts — say, function by engaging in work that attorneys in California who do employ- If you would like more info on the protects individual members’ practice ment law or lawyers in France who do ACC Value Index, feel free to rights and their companies’ rights to commercial litigation — the system contact my team leaders at counsel of choice: in-house lawyers. will return the information. Data can [email protected]. Your peers Textron came to us for help in taking be further sliced and diced, too. With (and your firms) are anxiously waiting this case on. You should, too, if your the ACC Value Index, you’ll be able to to hear who you like and who it is that company faces a problem that impacts see what other members think of their drives value in your outside legal rela- in-house practice and professional firms and then connect with them for tionships and spend. standards like this one does. We don’t more information if you need it. It’s not have the resources to become involved designed to be complex. It’s designed to in every case but we can’t be the voice of give a quick, down-and-dirty sense of the in-house bar unless we speak out on which firms are most valued, and then matters that truly impact YOU. Call me connect members who have experience

Pension Withdrawal Liability and EFCA Arbitration By Gerard Morales, Amanda Hines, and Kate Hackett1

The interest arbitration provisions of unable to pay benefits within seven years; financial assistance from the PBGC and the Employee Free Choice Act (EFCA) (2) it has a projected funding deficiency that the average union pension fund can come with hidden dangers for employers within four years or will be unable to pay cover only 62% of what it owes to partici- faced with union proposals for participa- benefits within five years; or (3) its pants. 14 Half of the plans requiring PBGC tion in union sponsored pension plans. liabilities for inactive participants are assistance were terminated in 2008 due to EFCA appointed arbitrators could shackle greater than its liabilities for active par- insolvency. 15 The PBGC now has a $33.5 employers with significant liabilities. ticipants, its contributions are less than billion deficit.16 carrying costs, and a funding deficiency is A. Union Plan Funding under the projected within five years. C. The Risk of Withdrawal Pension Plan Protection Act Liability The Pension Protection Act of 2006 (PPA) B. Current Status of Union Withdrawal liability means that when an provides a simple analysis of union plan Pension Plans Funding employer withdraws from a plan, the plan funding. After the plan trustees review and the PBGC sponsor must review the funding status of the financial status of their plans and file Many of the largest union pension plans the plan and require the employer to pay annual financial information with the are in the Yellow and Red Zones. A recent for part of the vested benefits that remain Department of Labor, the plan’s actu- survey based on actuarial certifications unfunded at the moment of withdrawal. ary certifies the financial condition of of 230 union pension plans reported that 17 Employer withdrawal may occur for a the plan. Plans whose funds are able to only 39% of the union pension plans are in variety of reasons in the ordinary course of cover at least 80% of the vested benefits the Green Zone, dropping from 83% the business. Circumstances such as complet- with no foreseeable funding deficiencies previous year. 10 Yellow Zone plans nearly ing the work covered under the pension within the next seven years are considered tripled, rising from 10% to 29%. 11 Red fund, closing the business for personal or to be in the “Green Zone.” Plans that are Zone plans nearly quintupled, rising from financial reasons, or selling the business’ less than 80% funded or have foreseeable only 7% to 32%. 12 assets, typically causes withdrawal from deficiencies within seven years (or both) the pension fund. 18 The plan assesses are certified to be “Endangered” (or “Seri- Funding among the largest union pension withdrawal liability even if the employer ously Endangered”), which is commonly plans continues to decline. 13 The Pension entered the plan when there were no defi- referred to as the “Yellow Zone.” Actuar- Benefit Guarantee Corporation (PBGC), ciencies and even if the employer paid its ies may also certify plans as “Critical” or in the federal insurer of pension plans, has full contributions prior to withdrawing. the “Red Zone” if: (1) the plan is less than reported that 90 union pension plans need 65% funded and it has a projected fund- Given the financial conditions of so many ing deficiency within five years or will be . ERISA § 305(b)(2), 29 USC § 1085(b)(2); SEGAL, union pension plans, employers should supra note 6; PURCELL & STAMAN, supra note 6, be understandably apprehensive about 1. Gerard is a partner at the Phoenix office of Snell at 26. entering into union contracts that require & Wilmer LLP, practicing labor and employment . These include the International Brotherhood law. Amanda is an associate at the Phoenix office of of Teamsters, (IBT) United Steelworkers participation in union pension plans, Snell & Wilmer LLP, practicing employee benefits (USW), United Food and Commercial for such participation necessarily means and compensation law. Kate is an associate at the Workers International (UFCW), International undertaking the risk of withdrawal liabil- Phoenix office of Snell & Wilmer LLP, practicing Longshoremen’s Association (ILA), Laborers labor and employment law. The authors recognize International Union of North America (LIUNA), ity. Any objective observer would agree the valuable contribution of summer associate International Association of Machinists, (IAM) that employers that participate in union Joseph Miller, a law student at the University of International Brotherhood of Electrical Workers Iowa College of Law. (IBEW), Service Employees International Union continued on page . Employee Free Choice Act of 2009 (EFCA), H.R. (SEIU), United Brotherhood of Carpenters (UBC), 1409 [S. 560], 111th Cong. (2009). International Union of Operating Engineers . Pension Protection Act of 2006 (PPA) § 202, Pub. (IUOE), and the National Plumbers Union. U.S. 14. Mooney, supra note 9; PENSION BENEFIT L. No. 109-280, 120 Stat. 780 (2006), codified in Dep’t of Labor, Employee Benefits and Security GUAR. CORP., 2008 ANNUAL REPORT 63 (2008), the Employee Retirement Income Security Act of Administration, Critical and Endangered Status available at http://www.pbgc.gov/docs/2008_ 1974 (ERISA) § 305, 29 USC § 1085 (West, Westlaw Notices (June 11, 2009), http:www.dol.gov/ebsa/ annual_report.pdf. through Aug. 2006 amendments). criticalstatusnotices.html; Kevin Mooney, Almost 15. PENSION BENEFIT GUAR. CORP., supra note . ERISA §§ 103–104, 29 USC §§ 1023-1024. Half of Top Unions Have Underfunded Pension 14, at 63. . ERISA § 305(b)(3), 29 USC § 1085(b)(3). Plans, WASHINGTON EXAMINER, June 7, 2009, 16. Florence Olsen, PBGC Funding Deficit Climbs . THE SEGAL COMPANY, SURVEY OF http://www.washingtonexaminer.com/opinion/ to $33.5 Billion Driven by Accelerated Pace of CALENDAR YEAR PLANS’ 2009 ZONE STATUS blogs/beltway-confidential/Almost-half-of-top- Terminations, DAILY LABOR REPORT (BNA) No. AND FREEZE ELECTIONS (2009); PATRICK unions-have-underfunded-pension-plans-- 96, at A-10 (May 21, 2009). PURCELL & JENNIFER STAMAN, SUMMARY 47162127.html. 17. ERISA §§ 4201, 4211, 29 USC §§ 1381, 1391. If OF THE EMPLOYEE RETIREMENT INCOME 10. SEGAL, supra note 6, at 1. the plan ultimately terminates due to underfunding SECURITY ACT (ERISA) 25 (2008), available at 11. Id. in a distress termination, the PBGC will likewise http://assets.opencrs.com/rpts/RL34443_20080410. 12. Id. turn to the employer to cover deficiencies. PBGC, pdf (last visited July 2, 2009). 13. David B. Brandolph, Survey Shows Decline in Distress Terminations, http://www.pbgc.gov/ . ERISA § 305(b)(1), 29 USC § 1085(b)(1); SEGAL, Funded Status Among Large Pension Plans During practitioners/plan-terminations/content/page13261. supra note 6; PURCELL & STAMAN, supra note 6, May, DAILY LABOR REPORT (BNA) No. 113, at html (last visited July 6, 2009). at 25. A-4 (June 16, 2009). 18. ERISA §§ 4203–4205, 29 USC §§ 1383-1385.

Arizona Chapter FOCUS 3Q09 continued from page pension plan, the sale of assets causes a contract. With respect to demands to withdrawal and the seller will be liable for participate in union pension plans, unions pension plans face a significant risk of the withdrawal liability, if any. 20 no longer will have an incentive to accom- withdrawal liability. modate the legitimate concerns of employ- E. EFCA Would Impose Interest D. The Effects of Withdrawal ers seeking to avoid withdrawal liability, Arbitration for First Contracts Liability on Collective Bargaining because EFCA arbitration guarantees a and Asset Sales Under current law, once a union is certi- binding contract in every case. Govern- fied by the NLRB or voluntarily recog- ment appointed arbitrators could, by The risk of withdrawal liability affects both nized by the employer, the union and the requiring participation in the union pen- collective bargaining and the value of busi- employer are required to negotiate in good sion plan, force the employer to assume ness assets. faith the terms and conditions of employ- the risk of withdrawal liability. ment, including the employer’s participa- In collective bargaining, the employer typi- tion in the union’s pension plan. Neither F. Conclusion cally seeks to avoid the risk of withdrawal party is required to agree on any term. 21 EFCA’s contract arbitration provisions liability by declining to participate in the could impose significant liabilities on union’s pension plan. This often delays, This would significantly change under employers. As currently drafted, under and in many cases precludes, reaching EFCA, as currently drafted. EFCA pro- EFCA, government appointed arbitrators agreement. vides that, if an employer and a union can- could force employers to undertake the not reach a first contract within 130 days risk of withdrawal liability. At least for With respect to employers who are already from union certification, binding arbitra- most small and medium-sized employ- contractually obligated to pay into a tion must be imposed. 22 In plain language, ers, this means that, once required to union pension fund, the risk of incur- a government appointed arbitrator decides participate in the union pension plan and ring withdrawal liability deters the sale of the disputed terms of the contract. 23 therefore undertake the risk of withdrawal business assets. 19 In such sales, if the buyer liability, they would be left without mean- assumes the obligation to pay into the Experts predict that the specter of arbitra- ingful bargaining power. For them, failure union pension fund, it is assuming the risk tion on the near horizon would decrease to reach agreement over union demands of withdrawal liability. In order to assume the likelihood that collective bargaining could mean no agreement and therefore such risk, the buyer normally demands a parties will settle on the terms of a the risk of withdrawal liability — a liability lower price for the assets. which they could not afford. In cases where the buyer does not assume 20. ERISA § 4204, 29 USC § 1384; see e.g., S&F Market Street Healthcare, LLC v. NLRB, 2009 For more information about the EFCA the obligation to pay into the union WL1851770 (D.C. Cir. 2009), for discussion of a successor employer’s legal obligation to assume a legal developments and this article, please union contract. contact the authors at 1.800.322.0430 or 19. See ERISA § 4204, 29 USC § 1384 (listing 21. Gerard Morales & Kathryn Hackett, The [email protected]. certain conditions to a sale that absolve the seller Employee Free Choice Act: What Employers Should of withdrawal liability), and § 4225, 29 USC § Know, SNELL & WILMER LLP LEGAL ALERT, 1405 (limiting liability to between 30% and 80%, Jan. 2009, at 1. depending on the dissolution or liquidation value of 22. EFCA § 3. the assets). 23. Id. Echoes of Echostar: Practical Issues Confronting Clients Accused of Patent Infringement After Seagate By Andrew F. Halaby and Anne W. Bishop1

Introduction to choose between the privilege and what you” and move on. But Seagate neverthe- Viewed from the perspective of one who was then the defensive tactic of choice: less presents some practical issues and believes one shouldn’t have to choose offering an opinion of counsel. But uncertainties that we here explore. In between substantive rights and the attor- Echostar represented a logical extension particular, Seagate’s distinction between ney-client privilege, In re Seagate Technol- of the law originating with the Federal opinion and trial counsel leaves uncer- ogy2 was a good decision. Issued by the Circuit’s 1983 decision Underwater Devices tainties for those considering offering an Federal Circuit in 2007, Seagate clarified v. Morrison-Knudsen Co.,4 which as we opinion of counsel as a defense to a claim and improved the law governing applica- explain below was really a mess — a mess of willful infringement. And Seagate has tion of the defendant’s attorney-client that the Federal Circuit’s intervening 2004 practical implications for the attorney-cli- privilege where the defendant is accused of decision in Knorr-Bremse Systeme Fuer ent relationship, including the continued willful patent infringement. Before Seagate, Nutzfahrzeuge GMBH v. Dana Corpora- risk of waiver of the attorney-client privi- the Federal Circuit’s 2006 opinion in In re tion5 didn’t clean up.6 lege and potential limitations for clients Echostar Communications3 governed that who have longstanding relationships with issue. Echostar was a mess, for it forced the Seagate is such an improvement over prior their outside IP counsel. defendant accused of willful infringement law that one is tempted to just say “thank continued on page continued from page because the costs of waiving the privilege However straightforward a conclusion easily exceed the benefits of offering the this was from the problematic framework Background lawyer’s advice. established by Underwater Devices, the 35 USC § 284 permits enhanced (up to practical implications of Echostar’s ruling treble) damages to be awarded in pat- Typically, placing a lawyer’s advice in issue were extraordinary, extending as they ent infringement cases. The statute is waives the privilege as to all privileged did from the accused infringer’s earliest silent on when enhanced damages should communications on, at a minimum, the glimmer of a problem all the way through be awarded. But courts have generally same subject matter.9 Courts have gener- the trial where, after all, even the accused’s required “willful infringement,” which ally declined to establish a bright line test trial counsel might have — and offer to the means bad faith or deliberate conduct.7 to determine if there has been a waiver, client — an opinion different than opin- instead relying on an examination of the ion counsel’s. TheEchostar court did not Back in the day, Underwater Devices circumstances, the nature of the advice, extend its holding of waiver to attorney bizarrely held that one had an affirmative and the prejudice to the party.10 work product not communicated to the duty of due care to avoid infringement. client11 or trial preparation materials,12 but With the duty came a burden of proof. The fact thatUnderwater Devices effec- compared to its expansive privilege waiver That is, a defendant accused of infringe- tively put the burden to prove innocence ruling, this limitation was of little practical ment had to prove due care, which was on the accused infringer placed accused consequence.13 essentially tantamount to a burden to dis- infringers on the horns of a dilemma our prove willfulness. How would one disprove accused fraudster never confronts: waive In Seagate, the Federal Circuit recognized that state of mind? The approach advo- the privilege or fail to satisfy a burden of and went a long way toward effectively cated by Underwater Devices was to hire a proof. Where our accused fraudster has the addressing the problems wrought a quarter lawyer to look at your accused article and choice of whether to invoke his lawyer’s century earlier by Underwater Devices, tell you whether your product infringed advice, because the plaintiff has the burden as manifested in Echostar. Among other a valid patent. If the lawyer opined that it of proof on fraudulent intent, our accused things, the court changed the willfulness didn’t, then even if you were later found to infringer more or less had to obtain and standard to one of objective recklessness have infringed, you couldn’t have infringed then reveal his (opinion) counsel’s advice and placed the burden to prove it upon “willfully” because of what your lawyer to satisfy the duty of due care. the plaintiff.Seagate further held that the told you. waiver of privilege occurs only when the In a baby step forward, the Federal Circuit accused infringer relies on an advice of The difficulty, of course, was that you had held in Knorr-Bremse that no adverse counsel defense — which should not occur to offer your lawyer’s advice to prove the inference could be drawn against an until plaintiff has proved willfulness.14 The fact in issue. In this, the patent law differed infringer for failing to offer an opinion of court also held that absent “chicanery,”15 from almost every other arena of substan- counsel. But that holding didn’t address any waiver of the privilege by offering an tive commercial law. Consider, by com- the fundamental quandary created by opinion of counsel would not extend to parison, the tort of common law fraud. The Underwater Devices, namely the placement trial counsel, who presumably would have plaintiff must prove, among other things, of the burden of proof on the defendant. become involved only after defendant’s the defendant’s intent to deceive.8 Unless Thus, it had little or no effect in ameliorat- state of mind was, as a factual matter, the defendant admits that state of mind ing the broad, practical implications of already established. (which the defendant almost never does), Underwater Devices that Echostar brought the plaintiff has to prove it circumstantially to light a couple of years later. Analysis or else fail to meet its burden of proof. The Seagate is a distinct improvement, but defendant has several choices: maintain In Echostar, the Federal Circuit held it isn’t a panacea. The issue is this: Does silence on the issue, deny fraudulent that an accused infringer who offers an the distinction between trial counsel and intent, or adduce other evidence tending opinion of counsel waives the privilege opinion counsel really protect the accused to demonstrate the absence of intent to not only as to all communications with patent infringer who wants to offer an deceive. The defendant could, conceiv- that counsel, but also communications on opinion of counsel defense? We think ably, offer its lawyer’s advice to prove lack the same subject matter with any other that Seagate leaves uncertainties, particu- of intent: “From everything I ever saw or counsel, including in-house counsel. The larly for the client who — understand- heard, it appeared to me that my client underlying “sword and shield” theory was ably enough — wants to use a single law thought what he was saying was true,” the pretty straightforward: The defendant is firm both to counsel it through potential lawyer might say. But because the plaintiff, not entitled to withhold some privileged infringement issues and to represent it at not the defendant, bears the burden of communications on the subject matter trial if those issues come to a head. proof, the defendant is under no compul- (which might, after all, suggest that thereis sion to offer any evidence on intent to an infringement problem) while produc- Consider a hypothetical scenario in which deceive at all. And among the defendant’s ing others (those of opinion counsel, who the client has vested a law firm, whom we’ll choices when the defendant does want to perhaps not surprisingly says there is not a call “IP counsel,” with substantial respon- offer evidence, the defendant invariably problem). does not choose to offer its lawyer’s advice, continued on page

Arizona Chapter FOCUS 3Q09 continued from page Issue #2: Even if the Client Retains Sepa- stern warnings on the danger of failing to sibility over legal issues surrounding its rate Trial Counsel, IP Counsel’s Opinions take preservation of documents, including business. IP counsel’s work includes assist- May Still Be Discoverable. The decision electronic documents, seriously. If Seagate ing the client in developing a portfolio of to hire different trial counsel doesn’t solve sets a “chicanery” standard for discovery patent rights and advising the client on the dilemma of whether IP counsel will of trial counsel’s communications with the potential infringement issues arising from be deemed “opinion counsel” for privilege client (or, perhaps, with IP counsel), then competitors’ patent rights. Outside the waiver purposes. The underlying thrust does a defendant — or indeed, a potential client’s technical personnel, no one knows of Echostar is that one shouldn’t be able defendant — and its outside counsel have the client’s business, technology, and to obtain (and offer) an opinion that one’s a duty to preserve evidence bearing on related IP issues better than IP counsel. product doesn’t infringe, while at the same whether such “chicanery” took place; i.e., Thus, if the client is accused of — or sued time hiding a “back door” opinion to the all communications between the defendant for — patent infringement, no one is better contrary from any other lawyer, including and/or its IP counsel, on the one hand, and equipped than IP counsel to analyze the in-house counsel. What about IP counsel? its trial counsel, on the other? The problem issues, advise the client, and — assuming If the client chooses to offer an opinion is at least theoretically exacerbated by the the requisite litigation expertise — defend — whatever its source — then as a general fact that Fed. R. Civ. P. 26(b)(5) requires the case. In other words, the same group proposition, Echostar at least arguably that a party claiming privilege identify the of lawyers might (1) assist the client in renders IP counsel’s opinions discoverable. documents subject to the privilege claim. obtaining legal protection for its inventions Seagate does not undermine that proposi- Must all these communications be not only as they develop, including helping the cli- tion, which leads to another general prop- preserved, but logged? In today’s modern ent assess whether products deriving from osition: The accused infringer may want age of electronic communications, lawyers those inventions infringe the patent rights to consider not offering any opinion at all. email one another all the time. Must every of others (with validity, enforceability, Retaining new trial counsel does nothing email be kept and logged? For fear of this and infringement aspects), and (2) advise to change whether offering an opinion problem, should lawyers and clients forgo the client, defend its interests, or both in waives the privilege as to communications the benefits of emailing? connection with any patent infringement by attorneys other than trial counsel. Conclusion litigation. In that event, the lawyers are both opinion counsel and trial counsel. Issue #3: IP Counsel’s Communications This gets us to the crux of the matter. with Trial Counsel May Be Discoverable. Despite Seagate, retaining separate trial This hypothetical highlights four issues Supposing the client proceeds to retain counsel still involves a multitude of risks with Seagate’s approach: separate trial counsel, the client presum- or issues. Given these issues, should clients ably will want that new group of lawyers offer an opinion of counsel when accused Issue #1: Seagate’s Solution Tends to brought up to speed by IP counsel. Is that of infringement? And, if the client chooses Deprive the Client of Its Choice of Coun- the “chicanery” discussed in Seagate? One to offer an opinion, should a client stay sel. Despite its improvement over prior would think not; one would want new with its long serving, reliable IP counsel? law, Seagate’s distinction between “opinion counsel to be fully informed and ready to counsel” and “trial counsel” has its flaws. advocate as soon as possible. Yet under If the client is resolved to offer an opinion Chief among these is that IP counsel Echostar’s reasoning, if IP counsel’s com- of counsel, and the foregoing problems could be either or both. Seagate’s solution munications to the client are discoverable, persist, the client has at least a slightly bet- assumes that opinion counsel and trial is there an argument that IP counsel’s com- ter argument limiting the impact of Issue counsel are different law firms. But this munications to trial counsel are discover- #3 when it retains separate counsel. For assumption has practical consequences. able as well? After all, if IP counsel’s com- if the same law firm that is litigating the Is the client to be deprived of the benefits munications to the client might constitute case has counseled the client all along, the of the opinion/trial counsel distinction a “back door” opinion that the plaintiff is plaintiff may seek discovery of all commu- — namely, that communications between entitled to discover, might not IP counsel’s nications between the firm and the client, the client and trial counsel aren’t discover- communications to trial counsel — who, again reasoning from Echostar that any of able — because the client used the same after all, is the client’s agent — provide a those communications may reflect back law firm for both jobs? The risk that a “double secret” mechanism to supply that door advice contrary to the exonerating court might so hold has sometimes caused same opinion? But the client still must opinion of counsel that the client offers. clients to take their work to new counsel weigh the risk of acting on that assump- The generally accepted, if unstated, rule when accused of infringement. But the cli- tion. that communications between lawyer and ent incurs transition costs, such as the cost client need not be logged, and generally of getting the new lawyers up to speed, Issue #4: Document Preservation Obli- are not subject to discovery, may not serve in that event. And clients hire and retain gations Compound the Complexities of as a failsafe bulwark against such tactics. lawyers for many reasons, including but Communications Between IP Counsel not limited to longevity and comfort level. and Trial Counsel. We are all by now If the defendant decides to take Seagate The client loses these benefits. familiar with cases like Zubulake v. UBS at its word and not offer an opinion at all, Warburg16 — ordinary cases that serve as continued on page

continued from page affairs, will determine whether, all things 9. In re Echostar Communications Corp., 448 the defendant avoids all of the foregoing considered, this or that particular accusa- F.3d at 1299. problems. The defendant can hope that the tion of infringement should be met with 10. In re Seagate Technology, L.L.C., 497 F.3d trial court will apply Seagate faithfully, and an opinion of counsel. But as a general at 1372; see also Andrew F. Halaby & Teresa preclude discovery or argument on alleged proposition, Echostar created (or rec- K. Anderson, A Brief Primer on Inadvertent willfulness unless and until the plaintiff ognized) a variety of problems with the Disclosure of Otherwise Privileged Documents, establishes, by objective evidence, that the traditional approach of offering an opinion ACC Focus (Arizona Chapter) (3d Q. 2007). defendant has acted recklessly or worse in of counsel to defend willfulness charges. 11. Id. at 1303. regard to the plaintiff’s patent rights. Then, Seagate solved only some of those prob- 12. Id. at 1297. having not put its attorneys’ advice in lems. IP counsel and clients should be 13. Id. at 1304 (describing the waiver as issue by offering the opinion, the defen- aware of that fact, and take it into account including “any document or opinion that dant never has cause to consider whether in their approach to fielding accusations of embodies or discusses a communication to engage separate trial counsel from its infringement going forward. … concerning whether that patent is valid, regular IP counsel. IP counsel’s advice to enforceable, and infringed by the accused. This the client is not subject to discovery; it waiver of both the attorney-client privilege is privileged; and, the client having not (Endnotes) and the work-product immunity includes not offered it to prove a fact in issue, it may 1. Andy is a partner and Anne is an associate only any letters, memorandum, conversation, not be discovered by the plaintiff. Even if at Snell & Wilmer LLP in Phoenix, Arizona. or the like between the attorney and his or her different lawyers within the client’s firm Andy can be reached at [email protected] client, but also includes, when appropriate, handle the prosecution, counseling, and and 602.382.6277. Anne can be reached at any documents referencing a communication litigation aspects of the client’s represen- [email protected] and 602.382.6267. between attorney and client.” tation in connection with the plaintiff’s 2. In re Seagate Technology, L.L.C., 497 F.3d 14. But it is unclear when, in the context of alleged patent rights, all of those lawyers’ 1360 (Fed. Cir. 2007). a particular infringement lawsuit, the waiver advice and related files are privileged. And 3. In re Echostar Communications Corp., 448 occurs. Does waiver occur as soon as the there is no reason to preserve (or log) F.3d 1294 (Fed. Cir. 2006) (en banc). defendant pleads or argues “advice of counsel”? communications between the lawyers and 4. Underwater Devices, Inc. v. Morrison- If so, might a defendant inadvertently waive the client, or among the lawyers, for they Knudsen Co., Inc., 717 F.2d 1380 (Fed. Cir. that defense? These are questions for another are beyond discovery. Sometimes offering 1983). article. an opinion will be necessary, and the client 5. Knorr-Bremse Systeme Fuer Nutzfahrzeuge 15. In re Seagate Technology, L.L.C., 497 F.3d and its counsel will have to address these GMBH v. Dana Corp., 383 F.3d 1337 (Fed. Cir�� at 1376. thorny issues. Unlike our alleged fraudster, 2004). 16. Zubulake v. UBS Warburg LLC, 217 oftentimes opinion counsel has exculpa- 6. Now Qualcomm v. Broadcom, 543 F.3d 683 F.R.D. 309, 312 (S.D.N.Y. 2003) (standard for tory or potentially exculpatory evidence. (Fed. Cir. 2008), threatens to create another allocating costs for producing e-mails contained In that circumstance, Seagate may not mess by undermining Knorr-Bremse’s holding on backup tapes); Zubulake v. UBS Warburg help very much. To the extent the client is in cases involving accusations of inducing LLC, No. 02 Civ. 1243, 2003 WL 21087136 undecided on whether to obtain and offer infringement. But that’s for another article. (S.D.N.Y. May 13, 2003); Zubulake v. UBS an opinion of counsel to avoid a finding of 7. See, e.g., In re Seagate Technology, L.L.C., 497 Warburg LLC, 216 F.R.D. 280 (S.D.N.Y. 2003) willful infringement, the problems remain- F.3d at 1370; Beatrice Foods Co. v. New England (cost allocation for backup tape restoration ing afterSeagate weigh against doing so. Printing and Lithographing Co., 923 F.2d 1576, costs); Zubulake v. UBS Warburg LLC, 220 1578 (Fed. Cir. 1991). F.R.D. 212 (S.D.N.Y. 2003) (sanctioning UBS In many or all instances, the particulars 8. See, e.g. Norton v. Curtiss, 433 F.2d 779, for violation of duty to preserve evidence). of the client and its industry, and the 793 (C.C.P.A. 1970). role played by IP counsel in the client’s

Give Me Back My Stuff: Adding Bite to An Employer’s Demand Through the CFAA

The Computer Fraud and Abuse Act cause of action can serve as a valuable tool the employee on company-issued laptops (“CFAA”) was passed by Congress in 1984 for employers to protect their intellectual in the regular course of employment. primarily to deter computer hackers. 18 and proprietary information. When the employment relationship does U.S.C § 1030 et seq. Although the CFAA is not work out for whatever reason, the generally a criminal statute, it does permit Employers frequently entrust employees employer will request the return of the lap- private parties to bring a cause of action to with their intellectual and proprietary redress violations. Importantly, this private information, which are stored and used by continued on page

Arizona Chapter FOCUS 3Q09 Board Members and Contacts continued from page top along with all intellectual and proprietary information. Sometimes the President Board of Directors former employee will refuse to return the laptop and/or destroy the informa- Mark Rogers Kelleen Brennan tion it contains. Associate General Counsel Catherine Brixen and Assistant Secretary Margaret Gibbons These familiar facts are very similar to the facts in a recent district court Insight Enterprises, Inc. David Glynn decision that found that two former employees violated the CFAA when 480.333.3475 Kevin Groman they “deleted confidential and trade secret information from [the employer’s] [email protected] Ruth Hay computer” and waited well over a month to return “all electronic and hard Robert Itkin copy information in [their] possession belonging to [the employer].” See, Virginia Llewellyn e.g., Lasco Foods, Inc. v. Hall and Shaw Sales, 600 F. Supp. 2d 1045 (E. D. Mo. Secretary Robert Longo 2009). In reaching this conclusion, the Lasco Court found that the employer Gary Smith Mary Beth Orson had established “damage” and “loss”. General Counsel Steven Twist Phoenix Engine Services Cyndy Valdez The CFAA defines “damage” as “any impairment to the integrity or avail- 602.284.7491 ability of data, a program, a system, or information.” 18. USC § 1030(e). [email protected] Damage, for example, can include the deletion of information from a single Chapter Administrator laptop because it “impairs the integrity or availability of data, programs, Karen Rogers or information on the computer.” While the CFAA does not define “loss,” Treasurer [email protected] courts, including Lasco, have consistently interpreted that word “to mean a James Curtin cost of investigating or remedying damage to a computer, or a cost incurred Corporate Counsel because the computer’s service was interrupted.” A “loss” must result in the Republic Services, Inc. “interruption in service”, which can be established by showing the former 480.627.2381 employee physically withheld return of the laptop computer. JCurtin@republicservices. com While this language is meant to combat computer hackers and their del- eterious effects on computer systems, the Lasco decision shows us that the CFAA has beneficial application in the familiar and nontechnical setting that employers regularly face, as discussed above. First, the CFAA gives employers an additional tool to maintain control over their laptops, electronic devices, and the confidential information they may contain. Second, because Welcome the CFAA is a broad statute covering the unauthorized and unlawful access of all electronic information or interruption of service, the employer can New Members theoretically use the CFAA as a proverbial sword without necessarily showing that the information is proprietary, confidential, or otherwise protected. We wish to welcome the following new Third, by creating a private cause of action for the unauthorized and unlaw- members who have joined our chapter recently: ful access of electronic information, employers now have another claim they can raise and therefore obtain additional leverage over the defendant Susan Bovee, US Airways, Inc. employees.

Lukas M. Grabiec, Intel Corporation Finally, the CFAA should also remind employers of the importance of having confidentiality agreements and/or agreements that protect intellectual prop- Thomas N. Jankowski, Apollo Group, Inc. erty with those employees who have access to confidential and/or protected information. Additionally, if appropriate, employers should consider whether Richard Karam, Microchip Technology Inc. a noncompete, nonsolicitation, and/or anti-piracy agreement is required or, if already existing, whether it is sufficient, to protect the employer’s interests. William D. Sheldon, SCF Arizona If you have any questions on the subject of this article or would like more James R. Todd, Limelight Networks, Inc. information, please contact a Snell & Wilmer attorney at 602.382.6000.

Fay Waldo, Incentive International

Toni A. Yarwood, MasterTax, LLC