on the cover an aggressive and · the first of our profiles in partnershipfeatures suntrust banks,...

A supplement to InsideCounsel presented by LexisNexis® Martindale-Hubbell®.Bringing corporate counsel and leading law firms together to share best practices.

JULY 2 0 0 7

An Aggressive and Passionate Defense:SunTrust Banks, Inc. and Powell Goldstein LLP

In this issue• Compliance and Ethics: Training the Board • Regulatory Trends: Climate for Change—

and Opportunity• Horizon Issues in Energy

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Counsel to Counsel is published as a supplement to InsideCounsel, 222 S. Riverside Plaza, Suite 620, Chicago, IL 60606.Copyright 2007 by InsideCounsel and Martindale-Hubbell. All rights reserved. No reproduction of any portion of this supplement is allowed without written permission.

LexisNexis, the Knowledge Burst logo, Martindale-Hubbell and martindale.com are registered trademarks of Reed Elsevier PropertiesInc., used under license. © 2007 Martindale-Hubbell, a division of Reed Elsevier Inc. All rights reserved. The views expressed hereinare the views of the author(s) and do not necessarily reflect those of Martindale-Hubbell.

InsideCounsel222 S. Riverside Plaza, Suite 620Chicago, IL [email protected]

LexisNexis® Martindale-Hubbell®

121 Chanlon RoadNew Providence, NJ [email protected], ext. 2156

On the cover: Pictured from left are L. Lin Wood and Nicole J. Wade, Powell Goldstein LLP; andRaymond D. Fortin, SunTrust Banks, Inc. Cover photo by Stanley Leary. Story on page 6.

In this issue of Counsel to Counsel, we spotlight the many ways law

firms partner with corporate clients to get out in front of the critical

issues impacting their respective businesses and industries.

Global climate change is a business reality that presents a number of

opportunities. “Climate for Change—and Opportunity” makes the

case for proactive corporations to get ahead of the curve on

greenhouse gas emissions. Horizon Issues looks at the significant

impacts to the hard-charging energy industry.

The first of our Profiles in Partnership features SunTrust Banks, Inc.

and Powell Goldstein LLP, and demonstrates the value of finding the

right litigation partner when the press is watching and it’s time to dig

your heels in and stand your ground.

The second Profile examines a 7,000-acre master-planned

community—essentially a small city—that generated a three-year

regulatory review for Newland Communities and its counsel, Fowler

White Boggs Banker, and involved some 19 state and federal agencies.

We hope that you find this issue of Counsel to Counsel stimulating

and informative. Please share your comments with us at

[email protected].

letter from martindale

Michael WalshPresident and CEO

Isolated legal liability incidents can quicklybecome full-blown criminal investigations.Addressing legal liabilities right away can greatly reduce the impact of a crisis.

Richard L. SeaboltPartner/Litigator,

Duane Morris LLP

Howard M. HoffmannSenior Trial Partner,

Duane Morris LLP

Counsel need a simple way to identify corporate innovations that could be patentableand offer additional benefits to the companywhen protected.

Robert J. Pugh Chief Counsel, Technology andIntellectual Property,The PNC Financial Services Group, Inc.

Crafting an aggressive corporate defense againstmass tort litigation is no easy task. Establishingan organizational structure and a detailed producttime line will help you decide on the next step.

Sherrie L. FarrellLitigator and Member,

Dykema

A comprehensive compliance and ethics trainingprogram for board members can help companiesavoid major liability issues.

Stephen MartinGeneral Counsel and Vice President, Strategy,Corpedia, Inc.

As the EEOC steps up its commitment tosystemic employment discriminationinvestigations and litigation, counselshould work with Human Resources andtake aggressive steps to head offpotential lawsuits.

Richard S. CohenManaging Partner,

Ford & Harrison LLP

JULY 2007 01

Martindale-HubbellPresident and CEOMichael Walsh

Executive Editor/Editor in ChiefErin Martin

CoordinatorLaura Coppola

Graphic DesignerHolly Haugen

InsideCounselPublisherBrion Palmer

Director of Custom MediaCarol Alfred

EditorJay Becker

Contributing EditorsScott M. GawlickiBarry Solomon, Esq.Amy I. StickelJohn M. Toth 18

© 2007 JupiterIm

ages Corporation

features profiles in partnershipSunTrust Banks, Inc. and Powell Goldstein LLP

best practicesPreventing an EEOC Systemic InvestigationFord & Harrison LLP

best practicesCompliance and Ethics: Training the Board Corpedia, Inc.

best practicesElements of TriageDuane Morris LLP

best practicesSurfacing Patentable Corporate InnovationsThe PNC Financial Services Group, Inc.

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best practicesEstablishing the Corporate DefenseDykema

global perspectivesM&A Regulation: PiecingTogether a New Paradigm

global perspectivesChemical Industry: Facing a Mixof Regulatory Challenges

profiles in partnershipNewland Communities andFowler White Boggs Banker

regulatory trendsClimate for Change—and Opportunity

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departments brief adviceDispute Resolution Methods

decision pointOffering In-House Counsel New Objective Data forEvaluating Law Firms

horizon issuesEnergy

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in the spotlightProactive Structuring of Investment Agreements

in the spotlightNotice Provisions: Balancing Business RelationshipsWith Insurance Claims

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Martindale-Hubbell posedthe following question toprovide a variety of viewson this important topic:

What should be my primary considerations inchoosing a particular dispute resolution strategy?

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Weighing the Pros and Cons

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Lori B. WiesePartner

Powers & Frost, [email protected] Review Rated

Dispute resolution often isn’t consideredearly enough in the case-review process.Setting up an effective arbitration or mediation takes as much effort as apretrial hearing—and in a disputeresolution, not every trial strategy shouldbe disclosed to the other side, which addsanother element of complexity. Crafting anorganized strategy, bringing together bothparties, creating exhibits and compilingdemonstrative evidence are essential tosuccess. These efforts take time, but areoften worth it; an experienced mediator or arbitrator is more informed andsophisticated than the average jury.

Cathleen M. DevlinPartner

Saul Ewing [email protected]

In resolving a business dispute, one key consideration is whether the parties seek to preserve an ongoing businessrelationship. If they do, a more cooperative,informal and efficient dispute resolutionstrategy, enabling the parties to controltheir outcome by mutual agreement—suchas direct negotiation or mediation—isusually the wiser course. Such methodsmaximize the chances of salvaging therelationship in a way that the “winner andloser” outcome of more adversarial andprotracted arbitration or litigationproceedings often cannot.

Daniel F. ShankDirector

Coats Rose [email protected] Review Rated

• Mediation allows your client to hear theother side’s position directly from theother side. It is the best status reportyou can provide your client.

• Arbitration is about replacing the legalsystem with a streamlined, sophisticatedarbiter. Arbitration has its place intechnical matters, but it can be just asexpensive as traditional litigation.

• Arbitration need not be administeredbetween sophisticated parties. Instead,each party should select a mediator;the two disinterested mediators select atrue neutral third; and then, proceedusing agreed rules.

Mediation and arbitration once represented exotic alternatives to litigation, revolutionary methods that could save feuding partiesmoney, time and the unpredictability of a jury. As parties have grown more willing to embrace ADR, mediation and arbitration havebecome standard tools in a legal strategy. Since mediation, arbitration and litigation all have pros and cons, and no two cases arealike, there are many factors to consider when choosing a particular option—or options.

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03JULY 2007

DISPUTE RESOLUTION METHODS

John S. BarrPartner

McGuireWoods [email protected] Review Rated

The primary consideration is “theconsequences of losing”; not just the case at hand, but the impact losing will have on future similar disputes, businessoperations, reputation and businessstrategy. Arbitrators tend to base decisionson concepts of equity, can be arbitrary andthere is no appeal. Litigation demandsapplication of the rule of law and providesan opportunity to appeal a trial courtdisaster. Mediation allows for creativesolutions, where litigation and arbitrationserve up a number, often intolerable.Think through the end game before youpick your field of play.

(Continued on next page)

If each party genuinely believes he or shewill prevail, a nonbinding summary jurytrial may be the tool to bring them closertogether. In a summary jury trial, theparties select 12 jurors from the applicablejury pool and retain a third-party neutralto serve as trial judge. The parties eachpresent a condensed version of the case.The jurors then deliberate and providefeedback. The perspective of the jurors canoften lead a party to re-evaluate his or herposition in order to facilitate a settlement.

Cheryl E. DiazPartner

Thompson & Knight [email protected] Review Rated

For more information about theselawyers and their firms, please visitwww.martindale.com.

Michael J. DewberryShareholder

Fowler White Boggs Banker [email protected] Review Rated

A sometimes-overlooked strategy is privatejudging. Although not available in everystate, it provides the functional equivalentof a nonjury trial by a retired judge orqualified attorney, jointly selected by theparties for his or her expertise. The process generally involves the streamlinedapplication of procedural rules and morecase management by the private judge.It is best suited to cases where an earlydecision or greater control over the pretrial calendar is important, or wherethreshold legal issues require promptrulings. In many states, some rights ofappeal are preserved.


Illustration

s by Holly H

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For more information about theselawyers and their firms, please visitwww.martindale.com.

DISPUTE RESOLUTION METHODS

John F. MarianiShareholder

Gunster, Yoakley & Stewart, [email protected] Peer Review Rated

Mandatory arbitration, once viewed as the be-all, can be straightforward and definitive but is not necessarily asstreamlined as it once was, andpossibilities of appeal are practically nil.Mediation tends to work best as aprecursor to arbitration or trial, givingboth sides a glimpse of things to come andan objective outsider urging peace in placeof war. Trial, while certainly the mostinvolved, at least allows the check andbalance of meaningful appellate review.

Which to use? Focus on the level ofcomplexity of the dispute; then, match aresolution methodology to that.

Mary Jane StittPartner

Blake, Cassels & Graydon [email protected] Review Rated

Private arbitration offers severaladvantages over litigation, particularlywhen multinational organizations areinvolved. If the parties are located in morethan one jurisdiction, they can choose a neutral forum of convenience. There isalso the ease of enforcement of thearbitration award internationally withoutneeding to re-litigate the issues. Andarbitration offers confidentiality of thedispute and ultimate award; the opposingparties may not want the precedent of acourt proceeding or all the world to knowthe details of the dispute.

Michael W. HawkinsPartner

Dinsmore & Shohl [email protected] Review Rated

As a general dispute resolution principle, itis critical to know your goals and know theother party. The key is to understand yourinterests and their interests. Particularlyin mediations, the most effective resultscome from avoiding excessive posturing,and, instead, identifying the interests of the other side and proposing mutuallyagreeable solutions. Making reasonableproposals that can be backed up byobjective and legitimate standards will go far in bringing the other side in linewith your perspective.

What should be my primary considerations in choosing a particular dispute resolution strategy?

05JULY 2007

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t LexisNexis Martindale-Hubbell,we have conducted extensiveinterviews with in-house counselaround the world, asking them

what resources would be most useful to them in the outside counsel selectionprocess. This research has highlighted a critical need for reliable data based onfeedback from other buyers of legal servicesregarding their outside counsel. After all, the first resource that virtually any corporatecounsel uses when looking to hire a lawfirm is the old-fashioned referral from one of their peers.

For example, some of the tasks that buyersof legal services told us they would hope toaccomplish with this elusive objective dataabout law firms include:

■ Select outside counsel with confidence,using qualitative information from peerson key criteria for evaluating law firms;

■ Identify and evaluate the credentials of alaw firm about which little is known,such as a firm in a remote jurisdiction;

■ Receive a true sense of a law firm’sdemonstrated expertise by consideringthe feedback from other in-house counselas additional data to supplement anevaluation of law firm profile data,LexisNexis Martindale-Hubbell PeerReview Ratings and other information;

■ Save time with the law firm evaluationprocess; and

■ Justify the selection of outside counsel to the CEO, board of directors and other key executives with an objectiveindicator of the firm’s experience andcredentials.

We took this feedback to heart andpartnered with in-house counsel to developa new information resource that would help meet these stated needs. LexisNexisMartindale-Hubbell Client Review is a new product that is based on confidentialsurveys completed by current and formerclients of law firms that provide clientrecommendations of a law firm’s quality oflegal representation, client service and valuefor the money. Developed in collaborationwith in-house counsel worldwide, ClientReview also includes recommendations bypractice area and industry.

Just like our Peer Review Ratings, ClientReview is a service to the legal professionfacilitated by Martindale-Hubbell. Allsurvey responses are anonymous and notattributable to specific respondents.

We view Client Review as part of the next generation of decision support datafrom Martindale-Hubbell. These reviewsaggregate feedback from law firm clients ona wide range of critical factors that buyers of legal services have told us are the keyitems that shape their selection of outsidecounsel. This is the kind of objective datathat informs in-house counsel’s evaluationof those qualitative aspects of a law firm

on which only their in-house counsel peerscan comment.

Client Review was developed from a broadspectrum of corporate counsel input and isprominently featured on www.martindale.com.No other comparable client review toolexists.

To make this offering as useful as possible to in-house counsel, we need your help.Participation of in-house counsel as activereviewers of law firms is essential as webuild this new professional resource thatwill be widely available to buyers of legal services on www.martindale.com, ourindustry-leading Web site for informationabout lawyers and law firms. Your continuedparticipation in the process will provide you and your peers with a credible source of objective and anonymous input that you can rely upon as you evaluate, compareand ultimately select outside counsel.

To help us continue building a useful and objective information resource to aid you in your evaluation of prospec-tive outside counsel, please contact us athttp://www.martindale.com/clientreview/reviewer/ and learn how you can submit aClient Review of a law firm.

Offering In-House Counsel NewObjective Data for Evaluating Law Firms

Corporate counsel and other buyers of legal services frequently

express their need for a robust and independent resource that can

help them identify, evaluate and select law firms. They can learn

about law firms from their Web sites, consult online directories to

evaluate their credentials and review legal publications to read

about their specific accomplishments. What is missing, though, is

objective data in a standardized format that enables true apples-to-

apples comparisons of law firms. In-house counsel are asking for

this type of reliable, objective data as a foundation on which they

can build their buying decisions.

Barry Solomon, Esq., is vice presidentand general manager, LexisNexisMartindale-Hubbell. He can be reachedat [email protected].

Jacob Wackerhausen/iStockphoto

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ometimes you just have to dig yourheels in and fight.

Such was the case in 2005 when two heirsof a prominent Atlanta family sued SunTrustBanks, Inc. for a staggering $165 million,claiming the bank lost them millions ofdollars by mismanaging trust funds establishedby their late grandfather.

The lawsuit generated plenty of headlinesand brought the bank more than its share ofnegative publicity. But SunTrust was notabout to be intimidated.

“We believed the plaintiffs made a variety of reckless allegations—unsupported byfacts—that attacked our integrity,” saysSunTrust Executive Vice President andGeneral Counsel Raymond D. Fortin. “Wemade a fundamental decision to defendourselves because we knew we didn’t doanything wrong.”

Faced with what looked to be a long,drawn-out battle, SunTrust turned to PowellGoldstein LLP partners and litigators L. LinWood and Nicole J. Wade. Wood, who wouldserve as lead counsel and trial lawyer, had a lot of experience with high-profile cases,including representation of Richard Jewell in connection with the 1996 bombing ofCentennial Olympic Park in Atlanta.

“SunTrust was the victim of false accusationsthat went to the core of its reputation and integrity,” Wood says. “The bankwanted an aggressive and passionatedefense. My reputation is that I play by the rules but that I’m aggressive andpassionate in defending my clients. So it was a very good fit.”

S

An Aggressive and

Passionate Defense

L. Lin Wood, Powell Goldstein LLP

Opening SalvosThe lawsuit was brought by Thomas Shawand his half brother, Alexander Hitz, afterSunTrust filed to resign as their trustee. Theplaintiffs accused SunTrust of breaching its

SunTrust Banks, Inc. and Powell Goldstein LLP

By Scott M. Gawlicki

Photography by Stanley Leary

“We made a fundamentaldecision to defendourselves because weknew we didn’t doanything wrong.”

Shaw and Hitz claimed SunTrust refused to act on numerous requests to diversifytheir stock portfolios—which were heavilyinvested in Coca-Cola stock—because itwould negatively affect its own holdings.That refusal, they argued, resulted in thevalue of their trusts declining by more than50 percent after Coke stock hit a peak ofnearly $89 in 1998 and then dropped toroughly $44 at the time of the lawsuit.

SunTrust, on the other hand, argued it had made every effort to comply. In 2000, it subdivided the original trust into multiple trusts representing Shaw and Hitzand two other beneficiaries, an aunt andEmory University. That increased each halfbrother’s annual distribution from about$75,000 to more than $230,000. But whenthe wrangling continued, the bank opted to resign as trustee.

Raymond D. Fortin, SunTrust Banks, Inc.fiduciary duty in managing trustsestablished by their late grandfather andAtlanta physician, H. Cliff Sauls. Key totheir argument was the bank’s longstandingrelationship with The Coca-Cola Co., andits substantial holdings of Coca-Cola stock.

07JULY 2007

L. Lin Wood (left), and Nicole J. Wade, Powell Goldstein LLP; Raymond D. Fortin, SunTrust Banks, Inc.

SunTrust Banks, Inc.SunTrust Banks, Inc., headquarteredin Atlanta, is one of the nation’slargest banking organizations,serving a broad range of consumer,commercial, corporate andinstitutional clients. As of March 31,2007, SunTrust had total assets of $186.4 billion and total deposits of $123.4 billion. The companyoperates an extensive branch andATM network throughout the high-growth Southeast and mid-Atlantic states.

As SunTrust’s general counsel,Raymond D. Fortin is responsible forthe company’s legal and regulatoryaffairs, and oversees corporatecompliance, regulatory liaison andfederal legislative affairs. He joinedSunTrust in 1989 and also serves ascorporate secretary and a memberof the Management Committee.Prior to joining SunTrust, he servedfor eight years as staff counsel atthe Citizens and Southern GeorgiaCorporation. Contact Raymond [email protected].

partnership at a glance

profited greatly from those decisions. As atrustee, SunTrust should not have beenheld responsible for failing to sell the stockat the one moment in history when it brieflyreached an all-time high.”

In 2006, Powell Goldstein moved for partialsummary judgment, arguing that becausethe plaintiffs signed the new distributionagreement in 2000, they effectively waivedany claim that the income paid from thetrusts was insufficient.

Further, the firm asked that expert witnessand financial analyst Candace L. Preston,whom the plaintiffs brought in to assess thealleged financial damages, be disqualifiedbecause she had no experience in trusts. Atthe same time, Wood and Wade persuadedSunTrust not to introduce any expert witnessesof its own.

courthouse, SunTrust filed suit to resign astrustee in early 2005. Wade continues,“SunTrust had nothing to hide, so we said,‘Let’s get into court and get this resolved.’The plaintiffs were very surprised by thatstrategy.”

Indeed. Shaw and Hitz quickly filed acountersuit, arguing the bank’s failure todiversify their trusts resulted in their valuedeclining from $14 million to $6 million.Claiming they lost $15 million—$8 millionin market value, as well as the value of lostincome and investment opportunities—

“There were efforts to diversify theirholdings as well, but we needed the consentof the plaintiffs and they didn’t consent,”Fortin says. “Over time, it became apparentto us that they might be more interested inlitigation than anything else. They were verydifficult to deal with.”

“SunTrust hired Powell Goldstein in 2004after it received a demand letter fromplaintiffs’ counsel,” Wade explains. “After athorough assessment, including extensivewitness interviews and document review, weagreed with the bank that its actions wereproper and it should aggressively defend thecase.” Beating the plaintiffs to the

the half brothers asked for punitive damages 10 times the $15 million figure,plus fees paid to SunTrust, or more than$165 million.

Building a DefenseSunTrust and Powell Goldstein began thedefense process by sifting through nearly30,000 pages of documents, many stored onmicrofiche and dating back to the originaltrust’s opening in 1950. The documentswere placed in an electronic databaseaccessible to both SunTrust and PowellGoldstein attorneys.

“We didn’t just hand the case over; we hadregular strategy sessions with a lot ofdialogue and interaction,” Fortin explains. “I had to assess the goals and sensitivities of our business people and convey that toLin and Nicole. There were other trusts with Coke stock, so there was a precedentcomponent to the case.”

In one analysis, the team examined allpotential gains and losses that would havebeen realized if SunTrust had diversified the trusts at any time other than 1998, whenCoke’s stock price peaked. By includingcapital gains taxes and other costs, theanalysis revealed the trusts would be worthmillions less.

“We basically re-created everything thathappened from day one,” Wade explains.“Dozens of depositions were taken,including those of the plaintiffs and theiradvisers, SunTrust management andmanagement at Coke. Over the time period,SunTrust unquestionably made the rightdecisions for the trust, and the plaintiffs

“SunTrust had nothing to hide,so we said, ‘Let’s get intocourt and get this resolved.’The plaintiffs were verysurprised by that strategy.”


Powell Goldstein LLPPowell Goldstein's litigation teamincludes attorneys with a wealth ofexperience in handling and minimizingthe impact of controversies on a widerange of industries including manufac-turing, banking, healthcare, technologyand telecommunications. The firmregularly handles cases in both stateand federal court for individuals andfor institutional fiduciaries, includingfour of the largest national banks inthe country.

L. Lin Wood has 30 years’ experience as a trial lawyer focusing on civillitigation, representing individuals andcorporations as plaintiffs or defendantsin tort and business cases involvingclaims of significant damage. He hasextensive experience in First Amendmentlitigation and management of themedia in high-profile cases, includingrepresentation of Richard Jewell,Howard K. Stern (individually and asexecutor of the estate of Anna NicoleSmith), John and Patsy Ramsey, the


of its attorneys’ fees and expenses. WithHitz’s response still pending, Fortin couldnot be happier with both the result andPowell Goldstein’s performance.

“At the start, I told upper management wewere going to be aggressive and try to set thetempo of the case. To do that, we neededlitigators with both the passion and ability toexplain our side of the story,” he says. “Weliked the fact that with Lin, Powell Goldsteinbrought a real trial lawyer to the case. Heand Nicole were focused, creative partners,and they put on a superb defense.”

“You open up the defense lawyer’s handbookand under ‘strategy’ it will advise you toprepare your own experts. We did that andhad excellent experts ready to testify for the bank,” Wood explains. “But if we hadidentified those experts, it would have given plaintiffs additional time to designatenew rebuttal experts and remedy what webelieved to be a fatal deficiency in theircase, among others. Without identifying our experts, plaintiffs were stuck withCandace Preston.”

In January 2007, Fulton County SuperiorCourt Judge Jerry W. Baxter ruled the twohalf brothers could not sue the bank for lostor insufficient income from the trust. Healso disqualified Preston, saying she did nothave the “appropriate level of knowledge,skill, experience, training, or education, inthe area or specialty in which her opinion isto be given.”

“My hat’s off to Lin and Nicole; that was agutsy move,” Fortin says. “What’s interestingis that a fiduciary case can sometimes besimilar to a tort case. You’re talking about astandard of care that’s very fact-specific. Soit’s a battle of experts. In this case the otherside failed to produce a qualified expert andwe exploited it.”

Baxter’s decision represented a major win for the bank. In March, Shaw droppedout of the lawsuit and agreed to retainSunTrust as his trustee. SunTrust, in turn,agreed not to pursue the reimbursement

victim in the Kobe Bryant case andformer U.S. Congressman Gary Condit.Lin is Peer Review Rated. Contact him [email protected].

Nicole J. Wade practices civil litigation,with an emphasis on fiduciary litigation,trust and estate litigation and generalcommercial litigation. She representsfinancial institutions and individuals in a wide range of fiduciary litigation,including breach of fiduciary dutyactions, fraud claims, will caveats, willand trust construction cases, competencyclaims, actions for removal of trusteesand executors, and contestedguardianship hearings. Contact Nicole at [email protected].

“What’s interesting is that afiduciary case can sometimesbe similar to a tort case.You’re talking about astandard of care that’s very fact-specific. So it’s abattle of experts. In thiscase the other side failed toproduce a qualified expertand we exploited it.”

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09JULY 2007

Preventing an EEOCSystemic Investigation

FORD & HARRISON LLP

The EEOC has recently stepped up itscommitment to systemic discriminationinvestigations and litigation. Therefore, it’s

inside counsel’s task to work with HR to resolve the issue quickly and head off an EEOC investigation before it expands into a patternand practice lawsuit.

In this scenario, which is based on an actualcase, inside counsel and HR began theinvestigation by meeting with the department

head to get a detailed explanation as to why the department headselected the male employee. The department’s statistical evidence wasalso examined—including direct hires, promotions, resignations,terminations and exit interviews—for any evidence of discrimination.

Even though the department head’s reasoning was deemed solid,the department’s past performance was troubling. Other femaleemployees had suggested during exit interviews that a previousdepartment head—not the current manager—had not given womenquality assignments.

In this case, legal and HR opted to establish a new job opportunitywhich would represent a promotion for the charging party. HR workedwith the new department head—who was assured the solution was not based on the belief that he had done anything wrong—to assessthe woman’s skills. At the same time, legal prepared a joint letter thatwould go to the EEOC from HR and the charging party.

HR then met with the charging party and told her the situation had beenreviewed. Without discussing the merits of her charge, HR emphasizedher value as an employee and explained the last thing either wantedwas a dispute.

A new position with more responsibility and higher salary was offered.In addition, HR offered, at the company’s expense, a training seminar on supervisory skills and advised her that, because of the company’scommitment to equal opportunity, an EEO training program for allmanagers and supervisors within the department had been organized.

in-house counselchallenge

approachadopted

• If a discrimination allegation occurs, conduct internal interviewsand take immediate action.

• To prevent allegations and/or problematic EEOC systemicinvestigations in the future, establish a system to regularly monitorstatistical employment evidence, including direct hires, promotions,resignations and terminations, for evidence of discrimination.

• Establish a similar process to monitor and follow up on exitinterview results.

implementation steps

Short term: The female employee was happywith the promotion opportunity and that HR had moved so quickly and positively on

her complaint. She signed the letter for the EEOC, which thendismissed the charge without ever conducting any investigation oreven obtaining a position statement. Hence, the company avoidedwhat easily could have turned into a pattern type investigation.

Long term: The training did take place and the turnover rate forfemale employees in that department was reduced dramatically.

measuringsuccess

In light of the EEOC’s renewed focus on systemicinvestigations and litigation, inside counsel mustensure that statistical employment evidence and exitinterview results are being monitored regularly touncover and resolve potential discriminationproblems early on.

future issuesto consider

A longstanding female employee—who did notcomplain internally—files gender discriminationcharges with the Equal Employment Opportunity

Commission (EEOC) alleging that she has been repeatedly passed overfor promotion in favor of less qualified men. Regardless of the merit of her charge, Human Resources (HR) is concerned about a possible EEOC investigation which would extend beyond the individual chargingparty’s situation.

situation

Richard S. Cohen is managing partner in thePhoenix office of Ford & Harrison LLP. Hisprimary practice area is employment law, withan emphasis on employment discrimination.Richard is Peer Review Rated. He can bereached at [email protected].


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Companies must address FSG board member oversightrequirements of the organization’s compliance andethics programs and company responsibility for

communicating program standards and procedures by “conducting effectivetraining programs and otherwise disseminating information appropriate tothe [board of directors’] roles and responsibilities.” Although directors wantsuch guidance, most companies do not have formal board training programs.In-house counsel must explain the expanding liability issues, both to thecompany and the board, and establish a comprehensive training program.

Meet with management and explain the impact ofthe recent amendments to the Guidelines. Impressupon them the necessity of training the company’s

board to protect the company and individual directors.

Then, meet with the board, underscore the importance of the training andassess each member’s desired training topics. Popular and key trainingtopics include: data protection/customer privacy; gifts/entertainment;recent rule changes by the National Association of Securities Dealers andthe Securities and Exchange Commission; appropriate board oversight of acompliance program under the Guidelines; D&O liability and proactivelyaddressing risk; and what ethical leadership by directors means today.

Once needs are assessed, determine how to deploy the training. Willinternal or external experts conduct it? Will you employ electronictutorials, classroom sessions or workshops with break-out groups? Ensurequality and effectiveness while maximizing board time. A typical agendamight include:

• Overview of Board Oversight Responsibilities.• Substantive Discussion. Includes interactive scenario-based situations,

best practices workshops and Q&A.


approachadopted

• Demonstrate to senior management the need for board training.Cite supporting information, e.g., the amended Federal SentencingGuidelines, corporate and personal liability issues revealed byrecent scandals and/or examples of best practices.

• Assess the board’s training needs. Check with peers to see howothers handle training. Determine who will conduct the trainingand establish the format.

• Conduct the training and canvass the board to gaugeeffectiveness. Compare results with those of peers or consultants.Use the feedback to refine all aspects of future training.

• Consider informing stakeholders, customers and employees thatyour training has occurred. This could be great positive internaland external press.


Providing compliance and ethics board training complies with the Federal SentencingGuidelines, fulfills board oversight duties,

protects the company and individual directors and helps the company’sdrive toward increased long-term profitability and corporate sustainability.

• Ethical Frameworks and Values-Based Leadership. Includes drivinglong-term focus, profit and sustainability as an enterprise, includinghandling ethical dilemmas.

A day of formal training, separate from the board’s normal duties, isideal. Discuss with management the available (and appropriate)amount of time that can be dedicated.

Provide written reference materials and ask the board to evaluatetraining effectiveness. Compare your findings with those of peers orthird parties. Use the feedback to refine future board training.

measuringsuccess

STEPHEN MARTIN | CORPEDIA, INC.

Stephen Martin is general counsel and vice president, strategy, at Phoenix-based Corpedia, Inc., an ethics and complianceconsulting company, and a clinical professor at the University of Denver. He was a recent Counsel to Counsel forum co-chair.Contact him at [email protected].

Personal liability for compliance and corporateethics failures for board members is at its peak.Yet, despite recent amendments to the Federal

Sentencing Guidelines—and corporate financial scandals that have heldboard members personally liable for millions of dollars—many companiesstill do not provide board members with compliance and ethics training.

situation

COMPLIANCE AND ETHICS:

Training the Board

Consider approaches for retraining, onboarding newmembers and avoiding complacency. Keep things freshwith continued communications and training thatshare best practices and updates.

future issuesto consider

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11JULY 2007

As the company’s legal steward, inside counselmust play a leadership role in developing andexecuting a crisis response strategy that averts or

minimizes potential legal risks.

Gather your crisis team immediately. Prosecutorsalways look at how quickly a company reacts, sodon’t let anything fester, even for an hour. Identify

the legal risks and risk sources and list them in order of importance.

Begin by identifying the core problem and the potential for continuedinjury, death and/or financial loss, and then take remedial action. If you’rea food, toy or drug supplier, will you need to issue recalls? Should youtemporarily stop buying from your suppliers?

A factory explosion that injures workers may have been caused by leaksin aging piping. What must be done to prevent further harm at thisfacility or others like it? Can the problem be isolated, or will the entireplant have to be shut down? Retaining outside consultants—forexample, a firm specializing in evaluating and replacing piping—willobviously affect your response and enhance your image with regulators.

At the same time, institute internal measures to prevent a cover-up. Takesteps as soon as possible to prevent employees from destroying and/orfalsifying operating logs or other records.

Once the problem is identified and remedial measures are in place, develop averifiable message that addresses internal and external audience concerns.Appoint one spokesperson to ensure consistency. If an investigation isunder way and you have no information to release right now, say so.

Reach out to state and federal enforcement and regulatory agencies. Ifyou enlist regulators as your colleagues, they will be less likely to bringcharges against you.

Have Sales contact key customers. Explain the situation and how you’rereacting. Send updates by fax, email or both to keep customers in the loop.

If appropriate, consider reaching out to your competitors. They’veprobably been through similar crises and may be willing to sell overnightproduction time—or even the product itself—to help you continue to sellunder your own name.


approachadopted

The recent E. coli outbreak linked to spinach, whichbegan as an agricultural processing accident,demonstrates that what appears to be an isolated

product liability incident can quickly morph into a full-blown criminalinvestigation. Establishing and addressing legal liabilities at the outset—a form of legal triage—can greatly reduce the impact of a crisis on any organization.

situation• Assemble the crisis team as soon as possible.• Identify the root cause of the problem.• Establish and implement corrective measures.• Secure all internal records.• Craft a public message/response.• Reach out to regulators and customers.• Conduct post-crisis analysis.


Howard M. Hoffmann, former chief of thecriminal division and deputy U.S. attorney forthe U.S. Attorney’s office in Chicago, is a seniortrial and appellate partner with Duane MorrisLLP. Howard is Peer Review Rated. He can bereached at [email protected].

Richard L. Seabolt is a Duane Morrispartner/litigator, focusing on complex trials and appeals arising from commercial disputes, including those involving technology,construction and insurance. Richard is Peer Review Rated and can be reached [email protected].

Effective crisis management will prevent,defuse or win private lawsuits andindictments. Further, it will protect business-

critical licenses and registrations; reimbursements and grants fromlocal, state and federal agencies; and long-term relationships withcustomers, insurers, lenders and other business partners.

Finally, your primary outside counsel should be part of the crisis team. Theyknow your business well and often bring experience from other crises.

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Elements of Triage

DUANE MORRIS LLP

future issuesto considerIf you haven’t already done so, identify and scheduleyour first meeting with an internal, go-to crisismanagement team.

Corporate counsel must establish a simple wayto identify new technology-based systems and processes that may be candidates for patent

protection. This can be especially difficult in industries where there’slittle history of seeking such patents.

Begin with an internal education program.Develop and broadly distribute informationalmaterials explaining the types of methods

and systems that are patentable and why patent protection isimportant. Include any examples of innovations your company hasalready sought to patent. Target for more focused communicationsthose areas within the company that are most likely to developpatentable innovations, such as departments responsible for product orapplication development. Establish points of contact for those seekingmore information.

Try to leverage existing databases and systems within the company tohelp identify patentable innovations. For example, check with your IT department to see if your company currently employs one or moredatabases to track technology-based projects. PNC, for example,maintains a “Technology Initiatives” database. When new technology-based initiatives are launched, they are entered into and tracked withinthis database. The project managers enter information concerning theinitiatives into the database, including their name, department, contactinformation and detailed descriptions of the initiative.


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Most companies recognize the value andimportance of patenting corporate innovations.For some industries, such as the financial services

industry, these protectable innovations include processes, generallyimplemented by computers, involved in operating a business or thatdefine a service offering (sometimes referred to as “business methods”).However, many companies in these same industries do not have a longhistory of or established culture surrounding patenting such innovations.

situation

Surfacing PatentableCorporate Innovations

• Spearhead a campaign that explains what is patentable and whypatent protection is important.

• If possible, provide examples of systems and methods yourcompany has already sought to patent.

• Provide extra focus to those areas of the company most likely todevelop patentable methods or systems, such as the product orapplication development departments.

• Check with IT to see whether a database already exists fortracking new technology-based initiatives.

• Leverage that database to obtain leads on potentially patentabletechnology-based systems and methods.


The electronic tool described here hashelped bridge the gap between the PNCLegal department and those who develop

new business methods and systems, accumulating numerous leads on potentially patentable developments. As a result, PNC is building a solid portfolio of pending patent applications.

To leverage the database, the Legal department added a simple yeteffective step—embedding a short series of “yes” or ”no” questionsconcerning the initiative into the database and requiring each projectmanager to answer them. Examples of these questions include:“Does your initiative involve a system or process that is not currentlyavailable from a vendor?” and “Are competitors using similar systemsor processes?” The questions take less than a minute to answer,and, if certain responses are given, an electronic communication isautomatically forwarded to Legal identifying the initiative as onemeriting further investigation. Often, these types of project trackingdatabases already include codes to identify the type of initiative. Youcan set up the questions so that when certain codes are selected (suchas routine building maintenance) the questions are not presented,since these types of initiatives are unlikely to involve patentableinnovation.

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ROBERT J. PUGH | THE PNC FINANCIAL SERVICES GROUP, INC.

Robert J. Pugh is chief counsel, Technology and Intellectual Property, at The PNC Financial Services Group, Inc.in Pittsburgh. Robert recently co-chaired Counsel to Counsel forums on this subject. He can be reached [email protected].

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Crafting an aggressive corporate defense,whether it’s a relatively isolated matter or abet-the-company case, requires identifying

and gathering case-specific facts, documents and input from witnessesand expert witnesses; and ensuring that highly technical issues aretranslated into concepts that are easy for a jury to understand.

The defense process starts by assessing thecompany’s current standing in terms of facts,product history, witnesses and internal documents.

Begin by identifying the affected division or divisions and retrieving all applicable organization charts. This will help you 1) determine how the organization was structured when the product was developed,2) identify key players who may ultimately serve as witnesses and 3) identify where important documents are stored. If productdevelopment dates back 10 or more years, chances are the organizationhas changed—perhaps dramatically.

Then, build a product time line, which will help establish and prioritizethe facts of the case. The goal is to create a fact chronology. How did the product design play out? What departments and individualswere involved? Were there any early issues or problems? And if so,how were they resolved?

Include disputed facts and previous litigation, if there are any. Make thetime line as detailed as possible because you will refer back to it often.Does the past or current litigation involve the same product or issue?Are there similarities in the plaintiffs? Which firms are bringing thesecases? The time line will bring all these issues out into the open.

The process will also help identify key internal players, develop apotential defense strategy and hone your discovery objectives. Onceyou arrive at a defense strategy, it’s far easier to get internal people to talk to you. Then you can review deposition transcripts—includingopposing witnesses—to uncover testimony that supports your strategy.

Apply the same approach to e-discovery. You want and need thediscovery and discovery response to be strategic. Considering the cost,you need to know what you’re looking for, versus mass document


approachadopted

The pace and breadth of mass tort litigationcontinues to expand. As a result, in-housecounsel at large national or multinational

corporations are increasingly faced with complex, voluminous,multidistrict product liability lawsuits involving personal injury, propertydamage and/or economic loss.

situation• Identify affected divisions/business units.

• Create a product time line that identifies important facts,witnesses and documents.

• Interview key internal contacts and opposing witnesses.

• Review transcripts for testimony that supports your case.

• Gather case-related documents.

• Test and refine your story.

• Choose/prepare expert witnesses.


Establishing theCorporate Defense

DYKEMA

Sherrie L. Farrell, a litigator and memberin Dykema’s Detroit office, coordinatesand provides discovery strategies forcompanies involved in multidistrictlitigation and mass tort claims. She canbe reached at [email protected].

Creating the corporate story requires acomprehensive review of all product-relateddocuments, witness interviews and case-

related facts, both good and bad. This legal “audit” is the road mapthat will help inside counsel ascertain the strength (or weakness) ofthe company’s position and craft its defense strategy accordingly.

retrieval. Use the time line and plan your discovery and responseaccordingly.

Draft the corporate story and test it. Start at the trial stage and workbackward. Ask, “Do we have enough pieces to put together our storyfor this trial? Or are there still holes in the time line?” Continue tomassage the story until it is simple enough for any jury to understand.

Once the defense is established, review your expert witness list. Ifyou’ve done your homework, you’ll know which experts are a goodfit. Then coach them to ensure they will address their topics exactlythe same way every time, regardless of where the case is tried.

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Lakeport, a rapidly growing brewer in the discount segment of the Ontario beermarket. Lakeport management vowed to call off the Labatt acquisition if there was amajor delay due to competitive review, soLabatt retained Blakes, where Facey was co-counsel in the most recent successfulchallenge to the Competition Bureau’sreview process.

The game plan was to announce that theLakeport acquisition would close within the 42-day minimum statutory reviewperiod, and to propose placing Lakeport in a separate trust (a hold-separateagreement) if the Competition Bureauneeded more review time. “We wereconfident in this strategy,” Facey relates,“because the Bureau’s policies of taking fivemonths to review a complex acquisition,and of rejecting hold-separate agreementsbefore review is complete, were merelyrecent unilateral declarations that were notsupported by the law.” The Bureau soughtan order to delay the deal and rejected thehold-separate plan. Labatt persuaded theTribunal that enough time had passed and

n a decision with far-reaching implications,Canada’s Competition Tribunal ruled in

March 2007 that the country’s CompetitionBureau could not delay the closing of LabattBrewing Co. Ltd.’s proposed $201.4 millionCAD takeover of Lakeport Brewing IncomeFund. The decision by the Tribunal, aspecialized court that decides controversiesunder Canada’s Competition Act, paves the way for faster completion of Canadiancompany acquisitions—a significantadvantage in the current active M&Amarket. It also reverses a nearly 30-yearglobal trend toward complex and time-consuming regulatory scrutiny of M&Atransactions. Central to this paradigm shiftwas a well-conceived, high-stakes plan byLabatt and Blake, Cassels & Graydon LLP,the company’s outside counsel, to forceclosing the Lakeport acquisition within thestatutory period defined for CompetitionBureau review, regardless of any delaysought by the agency. The perspectives ofBlakes Partners Brian A. Facey and Craig C.Thorburn and Labatt General CounselSusan M. Rabkin explain the success of astrategy that Rabkin defines as “plan

properly, understand your objective, bethorough—and execute.”

What’s the Game Plan?According to Facey, there is a dichotomybetween “the need of the parties in a publicmarket transaction to get deals done quickly and the inclination of the regulatorsto review these details in intricate detail,regardless of competitive realities.” In thisdeal, Canada’s leading beer company, Labatt,an indirect subsidiary of InBev SA, itself theleading global brewer, sought to acquire

I

“…the Bureau’s policies of taking five months to review a complexacquisition, and ofrejecting hold-separateagreements before review is complete, weremerely recent unilateraldeclarations that were notsupported by the law.”

By John M. Toth

Piecing Together aNew Paradigm

Slava Gutsko/iStockphoto

M&A REGULATION:

15JULY 2007

the Tribunal upheld the company position.“The decision was viewed as a tremendousupset, but we were not surprised,” saysFacey. The deal closed the next day as a fullmerger between the companies.

An Extraordinary Offer“Lakeport’s concerns in structuring thisacquisition centered on competition ratherthan finance,” recalls Thorburn, “so wemade addressing those concerns the key toour transactional structure.” Labatt’s terms

in part by a trust amendment that thecompanies had negotiated to preventholdouts. Thorburn believes that prior tothe Tribunal decision, publicly heldcompanies increasingly shied away fromdeals with antitrust issues, often opening the door to private equity interests aspurchasers. Now, he asserts, “the regulatoryplaying field has been leveled, and therewards will go to those companies that are innovative and aggressive in takingadvantage.”

Blake, Cassels & Graydon LLP has over500 lawyers across Canada, the UnitedStates, the United Kingdom and China.The firm’s integrated office networkprovides access to a full spectrum ofcapabilities in every area of Canadianbusiness law.

included what Thorburn calls the“extraordinary offer” of paying Lakeport a$5 million CAD breakup fee if the deal did not go through on time. The confidenceof the company and its counsel in theirregulatory review strategy justified the risk-reward trade-off.

Lakeport was owned by unit holders(including its founders) of an income trust,and the transaction itself was a cash offer of $28 CAD per unit. The units traded on the Toronto Stock Exchange and their price had fallen in the days before theTribunal ruling on fears of an unfavorableresult. Once the ruling was announced, allremaining outstanding units were tenderedwithin 24 hours—a result made possible

kept the pressure on ourselves to meetevery deadline the Bureau set.” When theCompetition Bureau issued a Section 11Order requiring substantially moredocuments within a 21-day period, theLabatt team relied on companywideresources to comply.

Such effort and preparation were thefoundation of Labatt’s decision to assumethe risk of the deal through the breakup fee. “For both our own management andthe Lakeport unit holders, the risk was a calculated one for the right reward,” says Rabkin. “We knew the marketplaceand were confident in the arguments weprepared. The Tribunal agreed with ourposition.” Future acquisition transactions in Canada may indeed adopt a similarapproach to the regulatory review process.

How Canada RegulatesHow Canada Regulates

The Competition Bureau is part of Industry Canada, a federal governmentdepartment, and is responsible for maintaining and encouraging fair competitionin Canada. The Bureau administers four key pieces of federal legislation, includingthe Competition Act and the Consumer Packaging and Labelling Act. Competitionlitigation in Canada involves representing clients before the courts on criminalmatters and before the Competition Tribunal on civil proceedings initiated by theCompetition Bureau. The Competition Tribunal is a strictly adjudicative body thatoperates independently of any government department and that hears and decidesall civil controversies that arise under the four competition statutes. TheCompetition Bureau has said it intends to appeal the Tribunal’s Labatt decision tothe Federal Court of Appeal, which has broad jurisdiction to hear federal civil andcriminal matters, but a ruling is some months off and would not void Labatt’sacquisition of Lakeport.

Keeping the Pressure OnRabkin, as in-house counsel, took the leadin convincing Labatt’s corporate parent that the competition risks of the Lakeporttransaction were justified by the potentialmarket advantages, and selected Blakes asthe law firm to manage those risks. “Ourwhole strategy was predicated on the belief that competition law is changing, andthat the right arguments could present asophisticated case for approval,” she asserts.Labatt had previously lost an acquisitiontarget to an offshore competitor during thedelay caused by extended regulatory review,so the company was already prepared tooffer the information the CompetitionBureau would require. Rabkin adds, “We

Susan M. Rabkin is vice president and generalcounsel – North America of Labatt Brewing Co. Ltd. She may be reached [email protected].

Brian A. Facey is a partner in the CompetitionLaw practice of Blake, Cassels & Graydon LLP.He may be reached at [email protected].

Craig C. Thorburn is a partner in the BusinessLaw practice of Blake, Cassels & Graydon LLP.He is Peer Review Rated. Craig may be reachedat [email protected].


© Corbis

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“One potentially burdensome aspect of theregulation,” she says, “is that downstreamcompanies must go beyond assessing theimpact of REACH on their own products.They must also assess the products of keysuppliers who may remove product from the supply chain if test and authorizationcosts become too burdensome. Until this issorted out,” Buller cautions, “companiesmust keep in close communication withtheir suppliers.”

For prepared global chemicals producers,REACH may also offer promise of newopportunities. PPG’s Diggs agrees thatREACH compliance means a substantialeffort but adds, “REACH also gives us an opportunity to differentiate ourselvesfrom our competitors by developinginnovative ways of improving our productsfor REACH compliance.” Diggs notes thatAsia-Pacific countries often model theirindustry regulations after Europe’s, soREACH-compliant companies may be wellpositioned in that region.

hree major regulatory issues—REACH,FCPA and homeland security—raise

new challenges for the chemical industry.Carolyn J. Buller, chair of the GlobalChemicals Practice at Squire, Sanders &Dempsey, believes companies shouldconsider proactive steps now to mitigatenegative impacts on global competitiveness.James C. Diggs, senior vice president andgeneral counsel of PPG Industries, a leadingchemical products company with operationsin more than 20 countries, agrees and alsosuggests that properly prepared companiesmay realize new advantages from thesechallenges.

A New REACH The European Union’s new Registration,Evaluation, Authorization and Restriction of Chemicals (REACH) program requiresregistration of up to 30,000 chemicals soldin Europe (see Inside REACH), with up toseveral thousand of these expected to beidentified as hazardous and requiring furthertesting and authorization. “Chemical

manufacturers must test not only thechemicals themselves, but also how they are modified by downstream users toidentify exposure risks,” Buller says. “This raises confidentiality and otherbusiness issues on how much competitiveinformation suppliers and distributors are required to disclose.” Buller believesthat collaboration on compliance will be feasible, given existing industryrelationships. However, confidentialityagreements among these companies areessential to protect trade secrets.

“REACH also gives us an opportunity todifferentiate ourselvesfrom our competitors by developing innovativeways of improving our products for REACHcompliance.”

By John M. Toth

T

a Mix ofFacing a Mix ofRegulatory Challenges

CHEMICALINDUSTRY:

17JULY 2007

The FCPA EffectForeign Corrupt Practices Act compliance is neither new nor unique to the chemicalindustry. However, the global production and growing emerging market activities of chemical companies are increasinglyaffected by FCPA disclosure rules. Oneindustry-leading company recently agreed to a $225,000 FCPA settlement for self-reporting payments in India to encouragecompletion of a new product’s regulatoryreview before the growing season. Also, asthe industry consolidates through mergersand acquisitions, transactional due diligenceuncovers offshore practices that may bequestionable but do not technically violatethe law—raising issues of what disclosure is necessary.

Diggs notes that FCPA compliance reflects“the extent to which companies like ours are allowed to operate more fully in emergingmarkets where local or state-owned companiespreviously dominated.” As these countriesintegrate into the global economy (forexample, through World Trade Organizationmembership), they increasingly followaccepted global business practices—“not byadopting the FCPA in its totality,” he says,“but by adapting to its basic tenets.”

Buller believes that managing such FCPAissues during this integration shouldemphasize frequent and thorough communi-cations with offshore managers concerningtheir compliance responsibilities. “Personalgeneral counsel visits, plant by plant andsales office by sales office, are the best wayto get the word out, particularly in emergingmarkets where these concepts may still be new,” she says. Technology should be animportant addition to personal contact,particularly the use of computerized testing(in local languages) to demonstratecompliance knowledge and create a recordof instruction. Such actions are the mosteffective at preventing a problem fromoccurring. They also demonstrate an activecompliance program that can help mitigatesanctions if disclosure of proscribed orquestionable practices is necessary.

Security MattersOn the issue of security, Diggs sees theindustry taking leadership in ensuring more

Among the strongest global law firms, Squire,Sanders & Dempsey L.L.P. combines soundlegal counsel with effective, visionaryleadership to resolve legal challenges. Withapproximately 800 lawyers in 30 officesworldwide, Squire Sanders offers one of themost global legal service platforms answeringbusiness, advocacy, regulatory and capitalmarket requirements.

Registration, Evaluation, Authorizationand Restriction of Chemicals (REACH)was adopted in December 2006 and tookeffect June 1, 2007. It has been calledthe most important European Unionlegislation in 20 years. Businesses thatmanufacture or import more than oneton of a chemical annually will berequired to register such chemicals.Substances of “very high concern”—chemicals that cause cancer, infertility,genetic mutations or birth defects,and those which are persistent andaccumulate in the environment—may be used only if they have authorizationfrom the new European ChemicalsAgency. Authorization will be grantedonly after extensive testing and aregistration process that includes regularassessment and review. Estimates arethat as many as 30,000 chemicals mustbe registered over the next 11 years, withperhaps from 2,500 to as many as10,000 chemicals in the “very highconcern” category.

Inside REACH

secure production and transportation ofchemical products that are critical to theU.S. economy. At the same time, he adds, itis important to avoid an impression that theindustry dominates the evolution of securitystandards to the exclusion of stakeholders ingovernment and society. “Improved securitywill require a collaborative effort on the partof all constituencies,” Diggs asserts. “If theprocess is handled cost-effectively, both theindustry and our country will benefit.”

New federal Homeland Security regulationscover the production and transportation of

Franz Pfluegl/iStockphoto

chemicals, but Buller says that many stateofficials do not consider the regulations tobe strong enough. “A number of states, suchas New Jersey, may be moving to create their own security requirements, althoughthese are still being developed,” she notes.As both federal and state security standardsevolve, Buller believes that industry bestpractices can play a model role in shapingthe regulatory environment. On issues suchas transportation of chemicals by pipeline,truck and rail, the industry has been outfront in establishing safeguards—reflectingconcerns over legal liability and disruptedproduction as well as homeland security.

Because REACH, FCPA and homelandsecurity concerns continue to evolve,chemical industry companies must developflexible compliance strategies that can bemodified as regulatory provisions change.However, it is imperative to move aheadwith compliance efforts today. Waiting until all rules are finalized will likely putany company too far behind the curve infulfilling its legal obligations.

James C. Diggs is senior vice president,secretary and general counsel of PPG Industries.He is Peer Review Rated. James may be reachedat [email protected].

Carolyn J. Buller is a partner and chair of theGlobal Chemicals Practice at Squire, Sanders &Dempsey L.L.P. She is Peer Review Rated.Carolyn may be reached at [email protected].

EnergyThe effects of energy industry challenges are feltglobally. The regulatory climate changes constantly,sometimes in positive ways (incentives for power plantconstruction) and other times in problematic directions(increased FERC penalties and rate-making scrutiny).Business practices are also in flux, from constructiontechniques to takeover strategies. And the threat ofmass action litigation is constant. These issues posesignificant concerns for in-house counsel.

© 2007 JupiterIm

ages Corporation

NEW ENFORCEMENT POWER FOR FERC

The Energy Policy Act of 2005 gave theFederal Energy Regulatory Commission(FERC) expanded power to impose civilmonetary penalties on companies that do not comply with electricity and naturalgas marketing regulations. The agency has increased enforcement spending by 25 percent during the past two years andnow dedicates approximately 150 personsto enforcement matters. This year, FERChas imposed the first penalties under itsnew authority:

• Five electric utilities were fined a total of$22.5 million for violations of tariff andmarket rules. Four of the five companiesself-reported their violations, and FERCemphasized that their penalties could havebeen much higher if they had not done so.

• FERC fined a Maine-based natural gascompany $1 million and the marketingarm of an independent generator $4.5million for self-reported violations of the“shipper must have title” rule.

FERC also has initiated numerous audits ofboth regulated electric utilities and naturalgas pipelines as well as nontraditionalsellers such as power marketers forcompliance with trading and operationsregulations.

FERC’s new enforcement power to levyfines of up to $1 million daily means thatenergy companies and their counsel mustdevelop effective compliance programs.Today’s volatile energy prices increasepressure on regulators to investigate marketbehavior. Companies that foster a culture ofcompliance, prepare a written complianceplan and train all appropriate personnel toobserve it have the best chance to avoidviolations, minimize their chances of aninvestigation and mitigate penalties ifviolations occur.

Daniel E. FrankPartner, Energy and [email protected]

Sutherland Asbill & Brennan LLP

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REGULATORY RISKS ON THE RISE

The electric utility industry is entering aperiod of exceptional regulatory risk due to the rising cost of producing electricity.When the cost of providing electric serviceincreases, so does the risk of regulatorydisallowances. The most successfulcompanies will avoid overreaching, managethe regulatory process well and maintainpositive relationships with the regulatoryand political community.

The cost to produce electricity has alreadyjumped in the last few years as a result of large increases in fossil fuel prices, andthis trend is expected to continue. Inaddition, the industry will need to investhundreds of billions of dollars over the next few decades to meet increasingdemand for electricity and replace agingfacilities, and recovery of this investmentwill put enormous additional upwardpressure on electric rates. The industry must also reduce its reliance on generationsources that produce greenhouse gasemissions, such as the approximately 50 percent of U.S. electric energy that iscurrently produced by burning coal. This will put additional upward pressure on rates.

Examples of regulatory risks include therecent standoffs in Maryland and Illinois,where politicians have intervened to limitcost recovery in response to substantial rate increases. The risk of disallowanceswill not be limited to so-called regulatedservices. The same political and regulatoryforces will affect the recovery of investmentcosts by unregulated “merchant” generatorswho operate in a mixed regulatory andcompetitive environment. For example,rising prices are already producingdisenchantment with deregulated markets,and this trend is likely to accelerate asprices continue to rise.

David B. [email protected] Review Rated

Steptoe & Johnson LLP

STATE UTILITY CONSTRUCTIONINCENTIVES

Evolving state electricity deregulation ledmany utilities to acquire power plantsrather than build new ones. Since 2003-2004, with the effects of California’s powermarketing crisis, Enron’s collapse, the 2003 Northeast blackout and rising naturalgas prices, however, state deregulation has slowed. Power demand is growing, bututilities find it unprofitable to build inderegulated states. The 50-year lifetime ofgenerating plants requires rate assurance forcost recovery, and several states are seekingto provide it by creating new regulatorystructures that combine modified competitiverate review with capacity constructionincentives.

In Virginia, state legislation approved in2007 ends deregulation and capped rates onDecember 31, 2007. The Virginia StateCorporation Commission will set base ratesof investor-owned electric utilities under amodified cost-of-service model based onadjusted return on equity (ROE) of a groupof Southeastern U.S. utilities. The newstructure authorizes stand-alone rate adjust-ments to recover costs of new generationprojects, major generating unit modificationsand energy efficiency and conservationprograms. Utilities are granted enhancedROE on new capital expenditures asincentive to build major generation projects.

States that re-regulate with a modifiedregulatory scheme that ensures relativefinancial certainty will likely receive mostnew energy infrastructure development,while those that stay deregulated or areslower to regulate may experience lessdevelopment. While any investment in thisarea would seem sound, it is important to understand your market and legislativeand regulatory trends to protect yourshareholders by knowing what equityreturns can be expected.

Joanne KatsantonisPartner and Chair, Energy and [email protected] Peer Review Rated

Edward L. FlippenPartner, Energy and [email protected] Peer Review Rated

McGuireWoods LLP

THE GOING-PRIVATE BRIAR PATCH

The power sector is seen as “hungry forcapital,” much of which will come fromprivate equity sources, according to theFebruary 20, 2007 edition of Platts ElectricPower Daily. An example of this trend isthe proposed buyout of TXU Corp., apublicly traded utility company regulatedby the State of Texas, by private equity firmKohlberg Kravis Roberts & Co. (KKR).

KKR may have assumed that a relativelybenign regulatory environment in Texaswould prevail. TXU’s assets and operationsare within the Electric Reliability Council of Texas (ERCOT), which is within Texas’geographic boundaries, and largely outside the purview of the Federal EnergyRegulatory Commission (FERC). Thiswould mean only the regulatory scrutiny ofthe Public Utility Commission of Texas(PUCT), whose rules require only notice ofthe transaction to PUCT within 30 daysafter closing of the sale. FERC approvalwas not necessary.

However, PUCT is working to change itsrules to give it power to review theKKR/TXU transaction. Moreover, ElectricPower Daily reported on March 30 thatRep. Joe Barton, congressman from Texas,has pressed for FERC regulation ofERCOT.

Whether the efforts of PUCT, Rep. Bartonor FERC result in control over theKKR/TXU transaction is not the real story.The real story is that the hard and soft costs of this transaction just skyrocketed.As counsel in such a transaction, planahead, count on opposition, devise a warplan and count on exponential increases intransaction costs. Whether the costs areworth it will remain to be seen.

Douglas F. PedigoPartner, Corporate and [email protected] Review Rated

Thompson & Knight LLP

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NUCLEAR POWER REGULATORYINITIATIVES

Although about 100 U.S. nuclear powerplants generate approximately 20 percent of the country’s electricity, no nuclear plants have been constructed since the1970s. Now concerns over greenhouse gasemissions and energy independence haverenewed interest in nuclear power. Utilitieswill benefit from at least two federalregulatory innovations to spur nuclear plant construction.

In late 2006, the Nuclear RegulatoryCommission (NRC) issued a final ruleupdating CFR 10 Part 52 for approval ofnuclear plant construction. The new rule establishes a streamlined process forsite selection, design certification and an operating license, each of which waspreviously a separate approval proceeding.The streamlined process could cut the new plant approval time in half. The use by utilities of probabilistic riskassessment (PRA) in their applications,reflecting decades of experience operatingsophisticated offshore nuclear plantsabroad, also supports greater efficiency in the approval process. The NRC hasadopted the position that third partieswishing to contest plant construction must base their objections on sound anddemonstrable technical reasons somewhatcomparable in sophistication to a PRA.

“Nuclear Power 2010” is a complementaryDepartment of Energy (DOE) initiative.This joint government/industry cost-sharedeffort focuses on identifying standardizednuclear plant technologies and site selectiontechniques. Thanks to the program, theDOE is close to finalizing two standardizednuclear plant designs, which by replacingcustomized, site-specific designs will furthersimplify regulatory approval. Also, theTennessee Valley Authority is taking thelead in demonstrating how new nuclearplants can be built on existing sites tofacilitate site approval.

Roy P. Lessy Jr.Partner, Energy and Natural [email protected] Review Rated

Patton Boggs LLP

MASS LITIGATION LIABILITY

Two recent mass litigation verdicts in WestVirginia state courts may lead to significantliabilities for energy producers, and couldspur similar lawsuits in other states.

Individual cases arising from a 2001 floodwere consolidated and allowed to proceedby the Supreme Court of Appeals of WestVirginia as In re: Flood Litigation. Theapproximately 4,000 plaintiffs alleged thatlandscape alterations from surface coalmining and timber operations causedflooding of nearby homes and businesses.Many defendants settled before trial, andthe first case tried in 2006 produced a jury verdict for the plaintiffs. In March2007, the trial court set aside the verdict,ruling that the floods were caused by anunforeseeable event and not the actions ofthe defendants. Nevertheless, the FloodLitigation cases were an innovative attemptto hold energy extractive producers liablefor what previously were considered “Actsof God.” Subsequent floods have resultedin additional litigation.

In another new mass litigation approach, a class of West Virginia landowners sued anatural gas producer, alleging that theywere fraudulently denied the full value ofnatural gas royalties by company practicesconsidered standard in the industry. The2007 jury decision in Estate of Garrison G. Tawney, et al., v. Columbia NaturalResources, L.L.P. awarded the plaintiffs$404.3 million, including $270 million inpunitive damages. Although an appeal islikely, two lawsuits against other producershave already been filed. The plaintiffs’ casefocused on the deduction of post-productioncosts from royalties as well as alleged“fraud” in failing to properly identify suchdeductions on royalty statements. The size of the verdict will likely force naturalgas companies to change their royaltycalculation formulas and royalty statements.

Richard J. BolenPartner, [email protected] Peer Review Rated

Huddleston Bolen LLP

NEW CONTRACT TERMS FORNUCLEAR CONSTRUCTION

Pressures to reduce greenhouse gasemissions have renewed interest in nuclearpower plant construction. However, U.S.utilities will be unable to obtain financingunless they can ensure plant operationwithin a fixed period. Utilities are likely todemand different construction contractterms than those from the 1970s by:

• Replacing cost-plus arrangements with afixed sum for the entire project.

• Replacing the role of the subcontractordesign team with direct contracts betweenutilities and designers.

• Requiring that contractors bear thefollowing risks: labor interruptions, even though personnel shortages areanticipated; procurement problems, evenfor overseas purchase; and schedule risk,even when the contractor will have littleor no control over the design schedule.

• Expecting contractors to bear the risk of damage to existing facilities when newplants are built nearby.

• Requiring contractors to meet SafetyConscious Work Environment (SCWE)standards of the Nuclear RegulatoryCommission (NRC), and to maintainEmployee Concern Programs (ECP) forworkers.

• Dealing with a tightening surety market.

Some issues from 30 years ago will remain critical:

• Contractor quality assurance responsi-bilities under evolving NRC regulationsand construction acceptance standards.

• Contractors participating in environ-mental site assessment and approvalunder the National Environmental Policy Act of 1969.

Increasing the contractor’s risk could helputilities commoditize the constructionprocess, ensuring prompt NRC approvaland recovery of capital and constructioncosts in ways that can attract financing.

Richard H. LowePartner, Construction Law and [email protected] Review Rated

Charles W. WhitneyChair, Nuclear Energy Practice [email protected] Review Rated

Duane Morris LLP

For more information on these lawyers andtheir firms as well as energy industry legalanalysis, please visit www.martindale.comand our Legal Articles database.


21JULY 2007

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rom an attorney’s perspective, thereare real estate projects, and then thereare “master-planned communities.”

Consider San Diego-based NewlandCommunities’ latest project, the 7,000-acreBexley Ranch. Located in Pasco County,Fla., just outside Tampa, Bexley will feature6,000 single-family homes; 1,000 multifamilyunits; 400,000 square feet of retail space;250,000 square feet of office space; land fortwo elementary schools, a middle schooland a high school; an 18-hole golf course; alibrary; some 120 acres of parks; a 176-acrewildlife corridor and a 1,433-acre greenwaycorridor, each with walking trails and bikepaths; and roughly $78 million in local road improvements.

Getting a project this big off the ground—it’s being developed in three phases andshould be completed around 2025—takesexperience and plenty of legal legwork. Inthe case of Bexley, the legal concerns restsquarely on the shoulders of Rhea F. Law,president and CEO of Fowler White Boggs Banker.

“Rhea’s knowledge regarding the legal issues surrounding project developmentcomplements our land use expertiseperfectly,” says Newland Senior VicePresident and General Counsel Martha Guy.“Her input on a project like Bexley isinvaluable. She’s as much a part of our teamas anyone in-house.”

“I love my job,” Law says. “Newland is oneof the largest residential and urban mixed-use community developers in the country—they have nearly 40 communities under wayin 14 states. They’re very successful and thekey to that success is their focus on qualityand innovation. And I love working withinnovative people.”

F

Walking Hand in Hand

Pictured clockwise from left are Don Whyte, Newland Communities; Rhea F. Law,Fowler White Boggs Banker; Sharon Koplan and Martha Guy, Newland Communities

Starting With a RetreatIndeed, virtually everything about Newland’s approach to project developmentis innovative.

Take, for example, the way the companylaunches each new project. It assembles allthe key players, including land use planners,engineers, marketing experts, biologists,wetland experts, botanists and the project’slegal/permitting representative, in this case Law, for an “envisioning.” It’s a retreat of sorts, often held near the proposedbuilding site.

“Each team member brings an instinctive feel for where the community needs to go,”explains Don Whyte, Newland senior vicepresident for the Southeast region who alsoworks with the company’s regional generalcounsel, Sharon Koplan. “Our communitiesare literally designed from the ground up. Webegin by identifying the buyers. Will there befamily units built for kids or empty-nesterunits for adults? Families are changing andtheir needs are changing, too. So we say,‘Here are the potential buyers, what kind ofamenities will they need?’ Then we examineeach idea from a land use perspective.”

Newland Communities and Fowler White Boggs Banker

By Scott M. Gawlicki

Photography by Red K

ite Studios


Newland CommunitiesHeadquartered in San Diego,Newland Communities is a privatelyowned company that creates residen-tial and urban mixed-use communitiesfrom coast to coast. With expertise increating a special sense of community,Newland brings to life the uniquehistory, culture and traditions of theland they develop. Newland believesit is their responsibility to createenduring, healthier communities sopeople may live life in ways thatmatter most to them. Newlandcurrently has nearly 40 communitiesunder way in 14 states.

Martha Guy is NewlandCommunities’ senior vice presidentand general counsel. She joined thecompany in 2001 and is responsiblefor all corporate and project levellegal matters. Martha came toNewland from TrizecHahnDevelopment Corporation, whereshe served as senior corporatecounsel. She can be reached [email protected].

Sharon Koplan is the regionalgeneral counsel for the Southeastand mid-Atlantic regions of NewlandCommunities. She works closely withthe local business teams on projectlegal matters, including acquisitions,sales and operational issues. Sharoncame to Newland in 2004 from theDallas office of Gibson, Dunn &Crutcher LLP. She can be reached [email protected].

Don Whyte has more than 30 years’experience in creating communitiesin Canada and the United States,including major amenity-orientedmaster-planned communities inFlorida, Colorado and Alberta. He iscurrently responsible for all Newlandoperations in the Southeast regionof the United States, includingFlorida and Georgia. Don joinedNewland Communities in 2001, afterit acquired Genstar Land Company(USA). He can be reached [email protected].


or access way early on and say, ‘There’s noway the county will allow that, but youcould accomplish the same thing by doing itthis way instead,’” Whyte explains.

More important, the sessions give Law athorough understanding of the project, oneshe would need to develop and submit what’sknown as an Application for DevelopmentApproval of a Development of RegionalImpact (DRI)—essentially a due diligencereport prepared for an array of state andfederal regulators on Newland’s behalf. TheDRI must be approved by each regulatorybody before the project can move forward.

“It’s Rhea’s responsibility to help us workour way through the regulatory maze so thatwe end up with the same development weoriginally envisioned,” Whyte says. “She’s animportant part of the envisioning, becauseshe’s the one who’s going to deliver ourvision to the regulators.”

Meeting Regulatory DemandsAn application is required for any projectthat’s beyond the statutory scope of aparticular county or region. In the case ofBexley, Pasco County requires a DRI studyfor any project over 2,000 units in size. It took Law and her team three years togather and distribute the information.

The study consists of multiple, highlydetailed analyses. For example, one analysisevaluated the site’s wetlands and outlined

Environmental concerns abound, and theBexley project is no exception. The project’stwo-day envisioning, held in nearby Tampain 2002, included celebrity zookeeper“Jungle Jack” Hanna, who’s appeared on

“Rhea may look at a proposedroad or access way early onand say, ‘There’s no way thecounty will allow that, butyou could accomplish thesame thing by doing it thisway instead.’”

numerous regional and national televisionoutlets, including “Good Morning America.”“He brought snakes, eagles and other wildlife,everything you find on the property,” Lawexplains. “Newland brought him in becausethey wanted all of us to understand the site’senvironmental resources and what needed tobe protected.”

Dual-Purpose GuestIncluding Law in the gathering served adual purpose. First, her participation helped identify (and when necessary rectify)potential legal snags early in the designprocess. “Rhea may look at a proposed road

23JULY 2007

Though it will take decades to complete,Law says seeing a project like Bexleythrough is indeed rewarding. “These areobviously long-range projects,” she says.“But to me, they’re like my children. I liketo watch them grow. And, of course, I neverstop worrying about them.”

measures Newland would take to preserveand/or enhance them. A wildlife analysisassessed whether any endangered speciespopulate the site, while another assessed the potential for archeological issues—inthis case the limited chance of uncoveringNative American tribal remains. Oncecompleted, agencies then review, commentand, if necessary, request additionalinformation.

“With Bexley, we ended up with three, 3-inch binders of documentation andanalyses. We worked closely with 19agencies, especially the Tampa Bay RegionalPlanning Council, the Florida Departmentof Transportation and Department ofEnvironmental Protection (DEP), and theU.S. Army Corps of Engineers,” Lawexplains. “Usually the reviewing agenciesengage in several rounds of additionalinformation requests.”

The objective, Law says, is to resolve issuesas quickly as possible and keep the projectmoving forward. That, of course, is wherethe envisioning process really pays off. If,

the importance of including us from theoutset. We’re an integral part of the team.”

Long-Range SuccessWith the DRI study and other regulatoryapprovals completed in 2006, the Bexleyproject is now officially under way. Soon it will join nine other communities Newlandhas developed in Florida—includingFishHawk Ranch, which recently receivedthe Best in American Living Award fromProfessional Builder magazine and theNational Association of Home Builders,essentially the Oscars of the home-buildingindustry.

As Newland’s statewide counsel for Florida,Law and Fowler White have played a keyrole in all of them, as well as many others inthe Southeast region.

“We consider Rhea to be the premierattorney for government entitlement workin Florida,” Guy says. “We operate in

Newland CommunitiesHeadquartered in San Diego, NewlandCommunities has been creatingdesirable, livable communities across thenation for nearly four decades. Itscommunities are consistently listedamong the top 20 selling in the nation.The company is currently developingcommunities across the country,including sites in Colorado, Florida,Georgia, North Carolina, South Carolina,Texas, Nevada, Arizona, California,Oregon, Washington, Minnesota andMaryland.

Martha Guy is Newland Communities’senior vice president and

general counsel. Shejoined the company in2001 and is responsiblefor all corporate andproject level legalmatters. Martha came toNewland from TrizecHahnDevelopment

Fowler White Boggs BankerFowler White’s Government,Environmental and Land UseDepartment is devoted to land use, environmental permitting and real estate transactionalmatters, including permitting ofDevelopments of Regional Impact,Sector Plans, comprehensive plansand zonings, representation beforelocal government and regulatorybodies, real estate acquisitions,loans, leases and litigation. Thegroup represents a variety ofdevelopers and land owners.

As president and CEO of FowlerWhite Boggs Banker, Rhea F. Lawis also a member of the firm’sGovernment, Environmental andLand Use Practice Group. She hasexperience in land acquisition,

permitting, environmentalrepresentation and landuse and zoning matters,with a specific emphasison commercial/industrial/residential Developmentsof Regional Impact, and serves as generalcounsel for CommunityDevelopment Districts.Rhea is Peer ReviewRated and can be reachedat [email protected].


“You have to walk theproperty and examine theaerials. If we had not beenthere during the envisioning,we might not understand anagency’s concerns.”

seven regions encompassing 14 states. These are long-term, complex projects; thedevelopment process ranges from landacquisition to financing to entitlements todisposition and turnover of the community.We rely on outside counsel like Rhea towalk with us hand in hand throughout theentire process.”

for example, the DEP voices a concern overthe project’s impact on a particular wetlandarea, Law is able to sit down and explain indetail that portion of the project.

“I always advise new lawyers to never takeon a project they have not personally seen,”Law says. “You have to walk the propertyand examine the aerials. If we had not beenthere during the envisioning, we might not understand an agency’s concerns. Thepersonal experiences on the site allowed us to convey to them exactly what we’replanning to do. That’s why working withNewland is so wonderful—they understand


regula

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rends

lobal climate change, nomatter what its scientificacceptance, is a regu-latory and business

reality. The U.S. Supreme Court’s2007 Massachusetts v. EnvironmentalProtection Agency ruling that the EPAcan regulate mobile source green-house gas emissions under the CleanAir Act illustrates this fact. However,says Gabrielle Sigel, co-chair ofJenner & Block’s Climate and CleanTechnology Law Practice, manymajor companies are moving aheadof regulatory action to develop“verifiable, transparent and clearlyarticulated strategies for reducingtheir greenhouse gas emissions.”Such strategies may involve sig-nificant costs and even businessdisruption for organizations, butRobert L. Graham, also co-chair ofJenner & Block’s Climate and CleanTechnology Law Practice, believesthey will create substantial oppor-tunities. “Companies that proactively dealwith global climate change today,” he asserts,“will be analogous to those that took firstadvantage of Silicon Valley’s digital revolu-tion 20 years ago.”

A Regulatory Crazy QuiltThe key issue for corporate America in therapidly evolving regulation of greenhousegases is whether to support a single federalstandard, or accommodate a wide range ofstate programs that Sigel believes couldproduce “a crazy quilt of different standardsand requirements.” Although some statesmay keep regulation minimal, others,including Illinois and Massachusetts, are

clearly articulated protocol orstandard for determining baselineemissions in such a way thatcompanies can get credit forreducing them.” However, sherecommends that rather than waitfor a single standard to emerge,companies should prepare forcomprehensive federal regulation bymeasuring and monitoring CO2

emissions now, to build a proactiverecord that will be verifiable underany future emissions reductionrules.

Know ThyselfBusinesses should pursue additionalplans for stronger greenhouse gas regulation, says Graham. Hedefines the aim of the planningprocess as “simultaneouslytransforming your organization and working to influence events, to be a driver and not a victim of the new regulatory environment.”

A multifaceted approach should begin withan understanding of climate change issues,an assessment of how those issues impactorganizational needs and a pragmatic effortto influence decision makers as they developthe new regulatory structure. Proactiveexamination of the roles that both suppliersand customers play is crucial—as Grahamnotes. “If you buy products from suppliersthat have a large carbon footprint, at thevery least you will face cost-push pricepressures as these companies face highercompliance costs.”

The compliance assessment process is abusiness issue, not just a legal one. “Carbon

Climate for Change—and Opportunity

G

considering strict emission controls andtrading systems for emission credits.California has already mandated thatcompanies in the state lower theirgreenhouse gas emissions to 1990 levels by 2020.

Given this disparity in state regulation, Sigel says that any company with multistateoperations should actively advocate for a consistent federal regulatory approach that supercedes fragmented state action.Ultimately, any federal program will likelyrequire emissions reduction from a baselinelevel, as California does now. “Theproblem,” Sigel adds, “is that there is no

Tim Teebken/Photodisc Green/Getty Im

ages

“Companies that proactively deal with

global climate change today will be

analogous to those that took first

advantage of Silicon Valley’s digital

revolution 20 years ago.”

By John M. Toth

25JULY 2007

2. OrganizationalThink beyond environmental compliancealone and structure a cross-disciplinaryteam to address issues related to greenhousegas emissions in the full range of yourorganization’s production operations andfacility management.

“Any company will lose with an

ostrich-like approach to climate

change regulation…”

emissions do not just come from tailpipes;they are generated in some way by virtuallyevery business activity,” Graham warns.Every business needs to evaluate how much CO2 it generates, what regulatoryactions would put it in jeopardy andwhether it can function in a cap-and-tradesystem of buying emission offsets, such ascurrently exists on the Chicago ClimateExchange. Avoid compartmentalizing youranalysis of these items by applying a fullrange of disciplines to reflect intellectualproperty, tax, litigation and corporate issuesas well as regulatory concerns.

Don’t Be an OstrichBecause, as Graham asserts, “any companywill lose with an ostrich-like approach toclimate change regulation,” he and Sigelboth identify actions as prudent to take now.They fall into three broad categories:

1. RegulatoryIdentify every state where your operationscould produce CO2 and other greenhousegases, and continually monitor statelegislative and regulatory efforts to restrictemissions.

Review your compliance process to maximizethe advantages of confidentiality by using legalcounsel to hire and structure the analyses ofenergy and environmental consultants.

The U.S. Supreme Court’s Massachusetts v. Environmental

Protection Agency decision did not broadly expand

greenhouse gas regulation, says Robert L. Graham, co-chair

of Jenner & Block’s Climate and Clean Technology Law

Practice. The Court ruled affirmatively on the narrow issues

of whether motor vehicle carbon dioxide emissions are

pollutants under the Clean Air Act, and whether states can

sue the EPA to force CO2 regulation. The ruling gives the

EPA discretion to regulate carbon dioxide emissions, but

the Court warned the agency, as Graham says, “You must

explain your reasoning if you decline to exercise this

discretion.” More important, he believes, is that the ruling

creates a tipping point in climate change regulation. “The

regulatory world was already changing before the Court’s

decision,” Graham says. “The real significance of the ruling

is that it reinforces the prominence of the climate change

issue, and creates a ripple effect that applies environmental

law and regulation to greenhouse gases.”

The Supreme Court and Climate Change

Robert L. Graham and Gabrielle Sigel arepartners in Jenner & Block’s Environmental,Energy and Natural Resources Law Practiceand co-chairs of the firm’s Climate and CleanTechnology Law Practice. Robert andGabrielle are both Peer Review Rated. Theycan be reached at [email protected] [email protected].

3. OperationalEstablish a baseline year from which tomeasure greenhouse gas emissions and keep comprehensive, verifiable records ofemission reductions from that point.

Explore the use of alternative energy sourcessuch as solar, wind, biofuels and biomass,with particular emphasis on state incentivesfor use (such as solar power in Arizona).

Prepare to report publicly on your remedialactions, in everything from securities filingsto affirmative public relations messages.

Sigel believes such steps will create “acomprehensive approach that is practical,sustainable and that reflects organizationalvalues,” allowing companies to retaincontrol of their own futures no matter whatregulatory framework ultimately emerges.

Create a board of directors subcommitteewith responsibility for risk assessment andchange empowerment to deal withemissions mitigation actions.


hether private equity andventure capital funds invest insmaller-sized growth companies,

or multinational corporations are jointventure co-investors, the structure of theparties’ investment agreement determinesthe success of the transaction. Terms ofmanagement control, methods of disputeresolution, strategies for growth andstandards for valuation should all be settledand documented upfront in the shareholders’agreement. Charles F. Hertlein Jr. and James A. Marx, partners in corporatepractice at Dinsmore & Shohl LLP, believethat these issues involve many of the sameconsiderations regardless of the size of thetransaction or the partners involved. “Anyof these concerns are fertile ground forcontroversy in an investment transaction,”Marx asserts, “unless the parties clearlydefine and agree upon eventualities at the start.”

Where to BeginA smaller company seeking growth throughprivate equity or venture capital investmentshould begin a successful transaction by

This is particularly important in privateequity and venture deals, where investorsgenerally have a five-year time frame.Deciding the investors’ exit vehicle isessential and Hertlein notes that, in today’ssecurities regulation climate, put rights tobuy out an investment partner are becomingmore attractive than registration rights toforce a public equity offering. “This alsoraises business planning issues for companymanagement,” he adds, “because they must secure capital to replace the originalinvestors once they cash out.”

The Nuclear OptionControl ultimately manifests itself in theboard of directors structure. Majority ownerswill have a majority of the board; equalpartners with equal board representationshould add a neutral third-party memberwhose vote can break deadlocks. Either way, avoid requiring unanimous consent toapprove the sale of the company. WhatHertlein calls a “nuclear option” could be aprovision to force one party to buy out theother if they cannot agree on sale terms.Another option, which Marx identifies as

clearly defining the organizational andmanagement structure. Most such businesseschoose the limited liability company formbecause of its tax advantages, but in any entitystructure, the most important considerationis determining which management membershave active responsibility for control. “Theanalogy is to a football coach who is mosteffective when he has responsibility for bothdeveloping strategy and securing players,”Marx says. “Even if the control is equallydivided among venture partners, there needs to be a clear voice on valuation andbuy/sell rights.”

W

“Even if thecontrol is equallydivided amongventure partners,there needs to bea clear voice onvaluation andbuy/sell rights.”

Mikael Dam

kier/iStockphoto

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By John M. TothBy John M. Toth

ProactiveStructuring of InvestmentAgreements

ProactiveStructuring of InvestmentAgreements

27JULY 2007

“Russian roulette,” allows each side todefine in the investment agreement thosepreconditions of price and valuation under which it would be a buyer or seller.Provisions for binding mediation orarbitration would be a third possibility. The last resort for either side is a court-mandated dissolution of the venture.

Most private equity and venture investmentmodels currently use either “drag-along” or “tag-along” rights. In the former, theinvestors can require company managementto participate when they find a buyer fortheir stake; in the latter, if a buyer is foundfor a certain percentage of the investment,both sides can sell that percentage of theirownership stakes. Because such opportunitiescan arise suddenly, Marx urges boards tocommission an annual company valuationby an outside accounting firm. “Most

A Meeting of EqualsWhen large corporate equals create a jointventure investment, many of these samecontrol and valuation issues should beaddressed initially. “Both parties contributesomething to such a venture,” Hertleinobserves, “and establishing issues of fairvalue and depreciation upfront is essentialto a successful transaction, particularly ifthe contribution of assets is not equal.” If the venture is not administratively self-sufficient, one or both sides must providemanagement services and value themappropriately.

Intellectual property rights are frequentlycentral to large company ventures. The parties must decide from the start whethertechnology is given or licensed to the venture,and either option has significant implicationsfor IP ownership. To address the issue of who

agreement on what and how much eachparty can consolidate from the venture intoits own financial results. That includes the extent to which either side can derivetax benefit from losses and depreciation.Financial agreement should also includeagreement on the extent to which eitherside may buy back its own or the otherside’s investment stake. “In all theseconsiderations, it is essential that the partiesanticipate and resolve negative eventualitiesbeforehand,” Hertlein warns. “If a disputearises, it is harder to force an exact divisionof asset ownership in a joint venture than itis in a marital divorce.”

The Fundamental RuleHertlein and Marx agree that onefundamental rule applies to all investmentagreements, no matter what the size of the parties or the nature of their businessrelationship: Make every effort duringnegotiations to anticipate future disputes.“The eagerness to get a deal done createsthe temptation to minimize the likelihood of problems,” Hertlein warns. “Thinkingthrough negative eventualities and how toaddress them is one of the surest ways toavoid them.”

As lead counsel in many software manufacturing business combinations, Charles F.

Hertlein Jr. urges clients to build maximum flexibility into transaction

documentation because the industry changes so rapidly. “Technology ventures

often evolve in unexpected directions, and either partner may find that the fully

developed venture is significantly different than they anticipated,” he explains.

“Once that happens, it is extremely difficult to renegotiate venture terms.”

In one example, an engineering design company had created a new category of

workflow management software. Because software was not its core business, the

company entered a joint venture with another industry participant to develop the

product. Five years later, the software had become a significant growth business,

and the company could only bring it back in-house by engaging Hertlein to

negotiate a new agreement with significantly higher valuation—which could have

been avoided by clear growth and control definitions in the original agreement.

Dinsmore & Shohl LLP is a full-servicelaw firm with more than 300 attorneyspracticing in nine offices. For the past 99years, Dinsmore & Shohl has provided abroad range of integrated services tomeet the needs of both large and smallbusinesses as well as institutions,associations, governments, professionalfirms and individuals.

Article Participants:

Charles F. Hertlein Jr.Partner, [email protected] Review Rated

James A. MarxPartner, [email protected]

companies do a single valuation at the startof a venture and never update it, whichoften creates valuation disputes later,” hesays. “An annual valuation brings issuessuch as underfunded pension plans to thesurface, so they can be resolved before they become due diligence problems whenselling an investment stake.”

gets control of intellectual property developedby the venture itself, Hertlein and Marxsuggest that the parties agree to licensetechnology from the venture, with cleardefinition of ownership expiration rights.

Particularly if the joint venture owners arepublic companies, there should be clear

Technology Ventures: The Need for Flexibility


in the

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t’s a common scenario for businesses—your company is working on a projectwith another company with which you

have a good relationship, when somethinggoes awry. It could be a problem with abuilding under construction or a productthat doesn’t meet agreed-upon standards.The situation doesn’t appear to be dire,though, and you’ve successfully workedthrough problems before during your longhistory together. So after meeting with yourorganization’s management and the otherparty’s management and in-house counsel,you decide that the two of you can fix itwithout calling in the insurance company.

However, straightening out the situationtakes some time, and you eventually realizethat it can’t be fixed. Things go from bad to worse, and you must make a claim toyour insurance company. Unfortunately, theinsurance company response is that, byrefusing to notify it as soon as the originalproblem surfaced, you failed to properlyexercise the notice provision in yourinsurance contract. Once that happened,you prejudiced the claim and now theinsurer is balking at paying it.

companies decided to try to work togetherto solve the problem. However, after some time passed, it became clear the twocompanies couldn’t resolve the situationthemselves. A lawsuit was filed and whenGeorge’s client, the insurance company, wasfinally notified of the claim, it argued that it didn’t have to pay because of the timedelay in filing the claim while the companiesattempted to work out the problem.

“It put [both companies] in a bad situation,”says George.

That situation isn’t unique, though: Satisfyingthe notice provision is usually not the firstthing that occurs to most in-house counselwhile a situation is unfolding. Those provisionstend not to be closely read, and they don’tusually offer a specific timetable for reportingclaims. It can be unclear when the insurancecompany needs to be called, and the rulesfor notice provisions vary widely from stateto state.

“The notice provision is way in the back ofthe contract, and it’s not something thateven the lawyers give any thoughts about,”George says.

The Perils of Going Alone It’s a scenario that Charles George, a partnerat Patterson, Dilthey, Clay & Bryson, L.L.P.in Raleigh, N.C., has seen before.

“There are often good incentives for twoparties to try to resolve problems bythemselves. But something may start out as a little thing, and the next thing youknow, it’s something bigger,” says George.

He points to a recent situation he wasinvolved with in which a company tried to fix a problem internally. This caseinvolved a real estate company that hired aconstruction company to build a property.The property wasn’t built according to theagreed-upon specifications; but rather thanreport the situation to the insurer, the two

Steve Cole/Photodisc/GettyImages

I

Satisfying the noticeprovision is usuallynot the first thingthat occurs to mostin-house counselwhile a situation isunfolding.

By Amy I. Stickel

Balancing Business RelationshipsWith Insurance Claims

NOTICE PROVISIONS:

29JULY 2007

The language also tends to be boilerplate—notice provisions usually call for policyholdersto notify the insurance companies “as soonas practicable.” This is a vague definitionthat can allow for disagreements betweenpolicyholders and insurance companies,with the insurance companies often arguingthat they should have been called in sooner,no matter when a claim was filed.

Some situations also evolve so slowly it can be difficult to determine when aseemingly small glitch becomes a matter for an insurance claim. The scope of aproblem may not even be clear to thebusinesspeople who are working closely onthe situation. And if it’s not clear to them,employees may not think about alerting thelegal department until it is too late.

Variations AboundEven if a company files a claim, state policiesvary widely. For instance, under Virginia law,the passage of time can be enough to violatethe notice provisions—if a company doesn’treport an incident immediately, the claimcan be denied. But under North Carolinalaw, there has to be a showing of prejudice to the insurance company for the claim tobe denied, regardless of any time delay.

“That’s just one example of two differentstates interpreting ‘as soon as practicable’differently,” he says. “From state to state,one needs to be aware of the differences.”

George points to a case in Virginia where acompany waited 126 days to file a claim,only to have the insurance company deny it.From a business’ perspective, four monthsmay not be much time in which to identify a potential claim and decide whether toreport it, says George.

The differences between states is furthercomplicated for companies with businessaround the country. Simply determiningwhich state’s standards are applicable can be

DIY Approach

a time-consuming process. George points toanother client that was headquartered inGeorgia, had purchased insurance in NorthCarolina and then had a claim in Tennessee.Determining which state’s rules to followtook some time to figure out.

The key to determining whether to call in the insurance company often hinges onspecific notice provisions and the laws inindividual states. When deciding whether asituation warrants involving an insurancecompany, in-house counsel must understandthe ramifications of what could happen ifthey do, and what could happen if theydon’t. “Consider whether the insurancemight apply, and the pros and cons to yourorganization in reporting it to your insurer.When in doubt, give notice to theinsurance company,” George advises.

Patterson, Dilthey, Clay & Bryson, L.L.P. is afirm comprised exclusively of trial lawyerswho are actively engaged in the defense of civil litigation throughout North Carolina.The firm’s attorneys concentrate their practice in the defense of products liability,premises liability, extra-contractual litigation,medical malpractice, workers’ compensation,insurance coverage, automobile liability andother civil defense litigation.

Article Participant:

Charles [email protected]

Insurance companies may always prefer to be notified immediately about anypotential claims, but in-house counsel have valid reasons to advise on holding offon a notification in some situations.

“You have to weigh the pros and cons,” says Charles George, partner at Patterson,Dilthey, Clay & Bryson, L.L.P. “There may be reasons to handle it yourself.”

Good reasons to avoid notifying an insurance company about a situation that could evolve into a claim include:

■ Business relationshipsTwo companies with a good relationship may feel they can settle the issuethemselves rather than bring in the insurance companies immediately.

“If you’ve worked with someone for a long time and things are not working out,oftentimes, parties will stick with the situation and try to resolve it themselves,”he says. “Or you may have a situation where you are hoping to keep a goodcustomer happy.”

■ Differing interestsInsurance companies and their policyholders don’t necessarily share commoninterests and goals. Insurance companies report to their own stakeholders, andthey are most interested in resolving disputes for the lowest cost possible,according to George. A policyholder, on the other hand, may be far moreinterested in retaining a business relationship—something that doesn’t worry the insurance company.

■ Rising costs for claimsThe more incidents a company reports, the more likely it is to see insurance ratesincrease. Some corporate situations are the equivalent of a fender-bender thatdoesn’t require bringing in the insurance company. “If you rear-end someone andyou may be able to fix it for $100, you wouldn’t necessarily call the insurancecompany,” George points out. If you can convince the other party to send you thebill from the body shop, you’ve saved yourself rising rates and a lot of paperwork.

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