Practicing lawyers . . . have a few important specialized skills that make their insights particularly relevant to artificial intelligence as AI stands upon the precipice of mass-incorporation into our daily lives.[i]

Imagine that John Smith goes to a lending website to borrow $20,000 to start a new business, or to remodel a home office, or to pay off credit-card debt at a lower interest rate. The information provided through the online application is fairly limited: legal name, Social Security number, address for the last 10 years, level of education, occupation, etc. Thereafter, the online system takes the captured information and crunches it with the underwriting algorithm against additional internal data to evaluate John’s loan request and credit worthiness. What exactly is the algorithm doing to evaluate the risk of underwriting this particular loan?

In the example, algorithms are used to minimize human intervention, evaluate risk, and provide the potential borrower an answer and maybe a loan as quickly as practicable. In addition to the limited information the borrower must input into the online application, the algorithm also looks at an abundance of database information, much of which may not be specifically related to the borrower. Based on address, for example, the algorithm may reference the credit scores of individuals living in the same area code. This information—both explicitly provided by the borrower and aggregated from other sources based on the information provided—is used by the algorithm to determine whether the risk associated with the loan makes business sense.

In theory, algorithms should prevent bias by removing the human component of assessing data sets. If mathematical equations are assessing risk, rather than fallible human beings with their own respective and sometimes unconscious biases, the threat of bias should decrease, right? What if your algorithm nonetheless discriminates? What if the algorithm in our example decides that women age 21–35 are poor risks and deny most of these loan requests? Does it matter if they turn out to be mostly Hispanic? What if the algorithm decides that women are higher risk than men based upon bankruptcy data and loan delinquencies? What if people from a certain zip code have lots of bad debt, and the algorithm refuses to loan money 95 percent of the time to people in that area? Does the analysis change if the lion’s share of people in that neighborhood are immigrants from Nigeria?[ii]

Hypothetically, none of that should matter because the algorithm is “blind” to these facts. Math doesn’t have a heart or feelings, or even know what it is to be brown or white. If algorithmic decision-making is integral to a business process (or if a business is headed in that direction), lawyers need a deeper understanding of AI and how it does what it does.

What Is AI?

Artificial intelligence (AI) is an area of computer science that emphasizes the creation of intelligent machines that attempt to mirror the cognitive processes of humans, but much faster, albeit in limited ways at this point. AI techniques make it possible for vast amounts of information to be analyzed very quickly, and AI allows connections and patterns to be unearthed or developed, outcomes predicted, and answers provided to various kinds of business problems. AI can be an amalgamation of several different tools (like machine learning, natural language processing, deep learning, chatbots, etc.) which may rely upon varied and layered algorithms to perform a targeted analysis.

Usually, the information that AI analyzes is so voluminous that it would be impossible for humans to meaningfully process it. Sometimes, humans teach the algorithm what to do by showing what “right” and “wrong” looks like (supervised machine learning), and other times it learns by itself (unsupervised machine learning). All of AI and its progeny in one way or another rely on various complex mathematical equations (the algorithms) to do their work. It seems neutral enough, until you remember that it is people (fallible humans) who set up the search queries, provide the inputs, and guide and manage AI. This human guidance can and does impact what AI tools do and is central to the question of how algorithms discriminate.

The Dirty Little Secret of AI: Algorithms Can Discriminate

It is a common misperception that AI technologies operate objectively. At the click of a mouse thousands or millions or billions of sets of data (often called Big Data) are sliced, diced, connected, deconstructed, aggregated, and analyzed for patterns, connections, meaning, and a decision point (like whether John Smith in our example should be approved for a credit card or loan). Although innumerable data points pass through what we acknowledge is the “AI black box” (appropriately named because little is truly knowable about what the algorithm does, discussed in depth below), we cling to the notion that AI is making an “autonomous” (and therefore legal and nondiscriminatory) decisions regardless of the outcome.

However, there is evidence that some algorithms discriminate or at least treat certain characteristics unfairly. There are two ways a company or an algorithm a company uses might discriminate against someone: either in an outright/direct manner, or using a process that has a disparate impact on legally protected classes of people. Both are illegal.

High-profile examples are already popping up. For example, Bloomberg reported that a Wall Street regulator opened a probe into Goldman’s credit-card practices after a viral tweet from a tech entrepreneur alleged that the Apple Card’s algorithms discriminated against his wife. Now another high-profile user of the Apple Card, Apple co-founder Steve Wozniak, is calling for the government to get involved, citing excessive corporate reliance on mysterious technology. The law forbids discrimination, by algorithm or otherwise, and that prohibition can be implemented by regulating the process through which AI processes are designed.

What Has AI Discrimination Looked Like?

The math that underpins AI is incredibly complex and nearly impossible for the average person to fully comprehend. Although businesses regularly rely on AI, it is not readily understood how AI does what it does or how it ultimately comes to specific results. That lack of insight—the “black box” conception of how data was sliced or diced by the algorithm—is not helped by the lack of a paper trail detailing how AI makes decisions. We do know algorithms can and do discriminate, however, and we are beginning to understand how.

Often the inputs (like training data, guidance by people, etc. ) cause the problem. Although people could set up the AI application purposefully to weed out certain people or groups, most likely AI discrimination will be indirect or “unintentional,” and this unintentional, algorithm-driven discrimination is the focus of our guidance.

AI Is a Seismic Shift in Business Decision-Making

AI is not only here to stay, but it is likely to lead a sea change in improved processes and business operations.[iv] AI is not just a new computation or analytical tool, it is a completely new way of doing business. Given that computers are so much better and faster at processing certain types of information than humans, the capability of AI goes far beyond that which humans were able to process in a pre-AI world. A case in point is the Human Genome Project, which was successful only because AI did all the real work; people simply didn’t have the capacity to analyze all the information to connect billions of data points, making sense of the aggregated data. Algorithms that do the “heavy lifting” of data analysis are very powerful and capable of answering many business questions better than human beings. As this major shift takes place across industries, responsible business leaders should anticipate the potential adverse effects of embedding AI in a business, particularly with regard to compliance and potential legal risk. In other words, AI will continue to drive great and productive change in every industry, but lawyers must figure out how to better guide the use of AI.

The Path Forward

Given the power, utility, and potential for risk and liability of AI, here are some concrete steps all businesses should consider when embedding more business processes with algorithmic tools:

1. Pick the right Big Data stewards because they can affect AI outcomes. Going forward, larger companies will likely use AI in different aspects of its operations; companies should therefore consider appointing a chief AI officer. Although it may not be reasonable for a single person to understand it all, there ought to be a single executive to whom periodic reporting is made and who has overall oversight for AI’s deployment within the company.

AI is good for business, but it requires great AI leadership, and even that is not enough. To get ahead of any potential claims for discrimination, companies should bring a multidisciplinary team to develop and implement AI processes, plans, and projects.

2. Build a diverse team. The conventional wisdom for building good AI projects is to also build diverse teams that understand the data inputs and help ensure discrimination is less likely. “If diverse teams do the coding work, bias in data and algorithms can be mitigated. If AI is to touch all aspects of human life, its designers should ensure it represents all kinds of people.”[v]

3. Make lawyers and compliance professionals part of the AI team. Transparency in the AI process (as much as practicable), and thus defensibility from claims of discrimination, requires upfront involvement and guidance from lawyers and compliance professionals as part of the AI team. Regulators and courts may expect some transparency in the upfront decisions and implementation of processes to clear claims of discrimination, and that needs the upfront guidance of lawyers.

4. Make privacy a part of the solution. When customers’ data or personal identifiable information (PII) is involved in an AI process (which will most often be the case), it will be useful to get the privacy officer (or someone primarily responsible for privacy) engaged as well. Such early involvement will not only address any business process-specific privacy issue, but can help ensure consistency in the way the company uses PII across different AI applications.[vi]

5. Don’t rely on or accept as a fait accompli the “black box” and lack of AI transparency. Although AI and related tools are inherently complicated, the black-box defense should not be relied upon to combat any future claims of discrimination (after all, ignorance is not a defense).[vii] Rather, you should seek to understand what the AI tool is doing (and if you can’t, find someone who can) and document that use of the tool was structured in a way to get a fair result. Further, it makes sense to anticipate potential points of attack on the system upfront so you can help preempt future claims. Demand AI “explainability,” which means, among other things, documenting what decisions were made and why.

Similarly, given that many companies use AI technology that is provided by a third party, claiming that a third-party consultant is responsible for the company’s AI projects is also unlikely to be a viable defense. It is imperative that your organization understand and test any third-party technology because you likely will not be able to transfer liability to the vendor if discrimination occurs (negotiate a thoughtful contract, but don’t expect it to insulate for discrimination). The EEOC has provided guidance on employment hiring tests that is likely applicable to AI technology purchased from a third party: “[w]hile a test vendor’s documentation supporting the validity of a test may be helpful, the employer is still responsible for ensuring that its tests are valid.”[viii]  Much like the need to understand the upfront decision impacting the AI project, you must understand and review what third parties are doing for your organization.

6. The output is only as good as the input. AI tools crawl through data and make connections. Sometimes those connections can have a “disparate impact” on a protected class of people or just appear to be unfair (both of which may invite legal challenges). If the tool is selecting or deselecting a protected group uniformly, this may be a sign of a potential discriminatory issue within either the data inputs or the process by which the data is analyzed. Thinking through and discussing (with the lawyers and possibly compliance team members) the scope, type, and input of data prior to launching the AI program, while being mindful of a discriminatory bias the tool may have, is prudent. That will likely require more upfront work, but given the potential for claims of discrimination and their impact, companies are well-served to redouble efforts to get this right up front. So, select carefully, analyze thoroughly, document the vigilance to promote transparency in an opaque process, test the tool, and verify results.[ix] “If a company wants to make its business fit for AI, it has to fulfill several criteria, It has to be skilled in data and understand, how data is collected, cleaned and prepared, for AI processing . . . .”

7. Determine organizational comfort with AI “predictions.” It requires a leap of faith to shift decision-making from a person to an algorithm. In that regard, organizations must understand that a decision is made not necessarily on facts exclusively related to the issue, but that an algorithm is also analyzing data from other sources that help conclude, for example, who will be best for the job or to what application to grant insurance coverage. In that sense AI can “predict” outcomes and answers based on an archetype.[xi]

8. Determine how much “rightness” or certainty is needed in AI. Work with the dedicated AI team to determine what percentage of “rightness” or certainty is needed for the company to take action. Issues around false positives or false negatives, or a precision score that indicates the likelihood of “correctness,” may be a part of the algorithm. In other words, using AI tools for business decisions must be explored and understood upfront. Lawyers should ask questions about what can be known about AI technology and document required outcomes early on in the project so the company can defend its AI process later if need be.

9. Test the AI tool to ensure it is not discriminating. Employers should test their AI tools and algorithms often to get their AI tool and corresponding algorithms “to the stage where AI can remove human bias, and . . . to know where humans need to spot-check for unintended robot bias.” Our recommendation is not to test your AI against an existing system, which may also be biased, but to statistically validate your AI by a data scientist—ideally one operating at the direction of an attorney so that the work remains privileged.

10. People should make the really important decisions. As powerful as AI tools are (and they are only getting better) for important business decisions, people should make the final decisions. Letting an AI tool “run wild” or decide major issues for the company is not prudent. This is why we don’t let the drone software assassinate terrorists without a human agreeing that the chosen target meets military requirements.

Conclusion

The legal and business landscape for AI and predictive algorithmic decision-making is evolving in real time. As we move forward into this brave new world of AI, regulators, stakeholders, company leadership, and legal departments will be playing catch-up. Despite the complex math that underlies the technology, lawyers are uniquely positioned to add value to a company’s Big Data or AI team. With a working understanding of how the technology functions, and knowledge of the potential for bias or disparate impact, lawyers should be able to bridge the gap between the technology and legal space.

Business leaders and lawyers alike should work to remain abreast of new developments in the regulatory space as it relates to AI and related technologies. If an AI/Big Data team is in place, individuals should be dedicated to observing, understanding, and summarizing technical and regulatory developments for the rest of the team.

Businesses that position themselves as proactive in the face of new regulations, laws, and best practices will be better prepared to benefit from and defend their AI practices in this complex new world where math rules the day.

[i] Theodore Claypoole, The Law of Artificial Intelligence and Smart Machines (ABA 2019).

[ii] Daniel Cossins, Discriminating algorithms: 5 times AI showed prejudice, New Scientist, Apr. 12, 2018 (“Artificial intelligence is supposed to make life easier for us all—but it is also prone to amplify sexist and racist biases from the real world.”).

[iii] “…AI can result in bias by selecting for certain neutral characteristics that have a discriminatory impact against minorities or women. For example, studies show that people who live closer to the office are likelier to be happy at work. So an AI algorithm might select only resumes with certain ZIP codes that would limit the potential commute time. This algorithm could have a discriminatory impact on those who do not live in any of the nearby ZIP codes, inadvertently excluding residents of neighborhoods populated predominantly by minorities.”

[iv] Daniel Cossins, supra note 3 (“Modern life runs on intelligent algorithms. The data-devouring, self-improving computer programs that underlie the artificial intelligence revolution already determine Google search results, Facebook news feeds and online shopping recommendations. Increasingly, they also decide how easily we get a mortgage or a job interview.”).

[v] Anastassia Lauterback, Introduction to Artificial Intelligence and Machine Learning in The Law of Artificial Intelligence and Smart Machines (Theodore Claypoole, ed.).

[vi] Camerion F. Kerry, Protecting privacy in an AI-driven world (“As artificial intelligence evolves, it magnifies the ability to use personal information in ways that can intrude on privacy interests by raising analysis of personal information to new levels of power and speed.”).

[viii] The U.S. Equal Employment Opportunity Commission, Employment Tests and Selection Procedures (“These [AI] tools often function in black boxes—meaning that they’re proprietary and operated by the companies that sell them—which makes it difficult for us to know when or how they might be harming real people (or if they even work as intended). And new AI-based tools can also raise concerns about privacy and surveillance.”).

[ix] We also recommend doing this now, even if you have an AI system currently in use.

[x] Anastassia Lauterback, supra note 6. 

[xii] https://www.shrm.org/ResourcesAndTools/legal-and-compliance/employment-law/Pages/artificial-intelligence-discriminatory-data.aspx

Maine’s Supreme Court recently held that a foreclosing lender’s equitable interest in the mortgage does not by itself equate to ownership of the mortgage and does now allow courts to compel the mortgage’s assignment.* Beal Bank USA v. New Century Mortg. Corp., 2019 ME 150, ¶ 15. The opinion revives concerns over the viability of foreclosing Maine mortgages involving Mortgage Electronic Registration Systems, Inc. (MERS).

MERS operates as an electronic mortgage registry whereby borrowers taking out mortgage loans give the mortgage to MERS as nominee for the lender’s successors and assigns. Although MERS mortgages generally include standardized language, different model mortgages utilize different descriptions of MERS’s core functions and purpose. Typically, the different MERS language makes little substantive difference in its powers. However, where state courts interpret MERS’s authority based on specific language in the mortgage, as Maine’s courts do, foreclosing lenders should check their specific mortgage language before proceeding.

In 2010, Maine’s Supreme Court analyzed MERS language with the following description in the paragraph defining MERS: “For purposes of recording this mortgage, MERS is the mortgagee of record.” Mortg. Elec. Reg. Sys. v. Saunders, 2010 Me. 79, ¶ 9 (emphasis removed). Relying at least in part on this language, the court held that MERS lacked standing to foreclose because the borrower gave MERS the right to only record the mortgage. Four years later, the court extended its MERS analysis from Saunders to mortgage assignments from MERS, holding that the assignments transfer only MERS’s right to record the mortgage. See Bank of America, N.A. v. Greenleaf, 2014 Me. 89, ¶ 17. This can create problems for foreclosing lenders who often rely on assignments from MERS to demonstrate their ownership of the mortgage.

Maine’s Supreme Court recently confirmed that the original lender can ratify a prior MERS assignment to give it the same effect as if the original lender assigned its interests in the mortgage rather than MERS. U.S. Bank N.A. v. Gordon, 2020 Me. 33, ¶ 10. This allows foreclosing lenders to correct the chain of assignments with an assignment or other document from the original lender acknowledging the transfer. Similarly, language in later documents, such as loan modification agreements, sometimes separately conveys full rights in the mortgage to a subsequent entity other than MERS, validating mortgage assignments from those entities.

What can foreclosing lenders do when the original lender no longer exists, and no other documents can demonstrate a transfer of the original lender’s full mortgage interest to the foreclosing lender? Before writing off the asset or making other decisions about how to proceed, lenders should confirm that their specific mortgage includes the same relevant MERS language that Maine’s Supreme Court considered controlling in Saunders and its progeny. As discussed below, some MERS mortgages include key differences relevant to the Saunders analysis.

Proof of Mortgage Ownership

Maine law requires the lender to establish the following elements to foreclose a delinquent mortgage: (1) the existence of the mortgage; (2) proof of ownership of the mortgage and note, including all assignments and endorsements; (3) a breach of the condition in the mortgage; (4) the amount due on the note, including attorney’s fees and costs; (5) the order of priority and any amounts that may be due to other interested parties; (6) evidence of a properly served notice of default and a mortgagor’s right to cure per 14 M.R.S. § 6111; (7) proof of completed mediation (or a waiver or default of mediation); and (8) SCRA compliance affidavit. See Chase Home Fin. LLC v. Higgins, 2009 ME 136, ¶ 11.

For the second element (proof of ownership of the mortgage and note), most foreclosing lenders rely on their status as the mortgage note’s holder along with a chain of mortgage assignments from the original lender to the foreclosing lender. Under the MERS system, the borrower usually gives the mortgage note to the original lender while separately conveying the mortgage to MERS as nominee for the original lender and the original lender’s successors and assigns. See, e.g., Saunders, 2010 Me. 79, ¶ 8. In many judicial foreclosure states, MERS then assigns the mortgage to a subsequent note holder when necessary to permit foreclosure. Case law from Maine’s Supreme Court has long complicated this system.

Saunders, Greenleaf, and Beal

In Saunders, MERS filed a foreclosure action in its own name, seeking to foreclose the mortgage as the nominee for the note holder. Maine’s Supreme Court held that MERS lacks standing to foreclose under Maine law. Saunders, 2010 Me. 79, ¶ 15. The court specifically quoted the applicable language in the mortgage at issue there:

C) “MERS” is Mortgage Electronic Registrations Systems, Inc. MERS is a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns. MERS is organized and existing under the Laws of Delaware, and has an address and telephone number of P.O. Box 2026, Flint, MI 48501- 2026, tel. (888) 679-MERS. FOR PURPOSES OF RECORDING THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.

* * *

[Borrowers] mortgage, grant and convey the Property to MERS (solely as nominee for Lender and Lender’s successors and assigns), with mortgage covenants, subject to the terms of this Security Instrument, to have and to hold all of the Property to MERS (solely as nominee for Lender and Lender’s [***9] successors and assigns), and to its successors and assigns, forever.

* * *

[Borrowers] understand and agree that MERS holds only legal title to the rights granted by [Borrowers] in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right:

(A) to exercise any or all of those rights, including, but not limited to, the right to foreclose and sell the Property; and

(B) to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.

* * *

[Borrowers] grant and mortgage to MERS (solely as nominee for Lender and Lender’s successors in interest) the Property described [below].

Saunders, 2010 Me. 79, ¶ 9 (emphasis in original).

Relying on this quoted language, Maine’s Supreme Court found that “[t]he only rights conveyed to MERS in either the [borrower’s] mortgage or the corresponding promissory note are bare legal title to the property for the sole purpose of recording the mortgage.” The court noted that “[e]ach reference to MERS within the [borrower’s] mortgage describes MERS solely as the ‘nominee’ to the lender,” and it explained (quoting Black’s Law Dictionary 1149 (9th ed. 2009)) that “[a] nominee is a ‘person designated to act in place of another, [usually] in a very limited way,’ or a ‘party who holds bare legal title for the benefit of others or who receives and distributes funds for the benefit of others.’”

The Saunders court further noted that under the mortgage, the borrowers expressly gave the lender—not MERS—the rights provided for in the mortgage, and that the borrowers did not make any of the mortgage covenants to or in favor of MERS. Saunders, 2010 Me. 79, ¶ 10. Accordingly, the court determined that MERS did not qualify as a mortgagee under Maine’s foreclosure statute (discussing 14 M.R.S. §§ 6321–6325).

The Saunders court next considered MERS’s standing under traditional standing rules that require a plaintiff to “show that it has suffered an injury fairly traceable to an act of the mortgagor and that the injury is likely to be redressed by the judicial relief sought.” Saunders, 2010 Me. 79, ¶ 14. Noting again that “[t]he only right MERS has in the [borrower’s] mortgage and note is the right to record the mortgage,” the court held that “MERS lacked standing to institute foreclosure proceedings and could not invoke the jurisdiction of our trial courts.”

Maine’s Supreme Court later extended its Saunders ruling to mortgage assignments from MERS. See Greenleaf, 2014 Me 89. In Greenleaf, the court analyzed identical mortgage language as the language at issue in Saunders. As in Saunders, the court quoted the specific MERS language at issue, including the definition paragraph for MERS that read: “FOR PURPOSES OF RECORDING THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.” (Emphasis in original.)

Based on this specific language, Maine’s Supreme Court reiterated that “the mortgage conveyed to MERS only the right to record the mortgage as nominee for the lender.” Greenleaf, 2014 Me. 89, ¶ 15. Thus, the court found that “[w]hen MERS then assigned its interest in the mortgage . . . it granted . . . only what MERS possessed—the right to record the mortgage as nominee.” Accordingly, the record the foreclosure plaintiff provided to show ownership of the mortgage “demonstrate[d] only a series of assignments of the right to record the mortgage as nominee, but no more.”

After Saunders and Greenleaf, foreclosing lenders in Maine “continued to argue that a holder of a note secured by a mortgage has an equitable pre-foreclosure right to compel an assignment of the mortgage.” Fannie Mae v. First Magnus Fin. Corp., No. RE-2016-110, 2019 Me. Super. LEXIS 104 *3 (Penobscot C’ty Oct. 24, 2019). Unfortunately, Maine’s Supreme Court recently rejected that work-around. See Beal, 2019 Me. 150.

In Beal, the court considered Maine’s equitable trust doctrine that “one who takes a mortgagee’s title holds it in trust for the owner of the debt to secure the debt for which the mortgage was given.” 2019 Me. 150, ¶ 7 (quotations omitted). It rejected the plaintiff’s argument that it could compel the original mortgagee to assign it the mortgage because the original mortgagee held the mortgage in trust for the plaintiff. Noting that “the language of the mortgage was identical to that in [Greenleaf]”, the court held that applying the equitable trust doctrine in the situation presented “would be at odds with our holding in Greenleaf.”

These three decisions—Saunders, Greenleaf, and Beal—call into question the viability of mortgage foreclosures involving some MERS mortgages and assignments. However, they should not apply to all MERS mortgages in Maine.

Distinguishing Saunders, Greenleaf, and Beal

Importantly, Saunders, Greenleaf, and Beal all specified that the language in the mortgages at issue there included the identical “for purposes of recording this mortgage, MERS is the mortgagee of record” language. See Saunders, 2010 Me 79, ¶ 9; Greenleaf, 2014 Me. 89, ¶ 14; Beal, 2019 Me. 150, ¶ 3 n.4. Other courts in Maine to have considered issues affected by Saunders and its progeny have also expressly confirmed that the language is the same. See U.S. Bank v. Gordon, 2020 Me 33, ¶ 25 (Horton, J. concurring); Knope v. Green Tree Servicing, 2017 Me. 95, ¶ 3 n.1 (referencing specifically the “for purposes of recording this mortgage” language) (capitalization removed); First Magnus, 2019 Me. Super. LEXIS 104, *2 n.1.

However, not all MERS mortgages include the “for purposes of recording” language. For example, at least some MERS mortgages approved for use in Maine by the Fair Housing Association (FHA) instead read:

This Security Instrument secures to Lender: (a) the repayment of the debt evidenced by the Note, with interest, and all renewals, extensions and modification of the Note; (b) the payment of all other sums, with interest, advanced under paragraph 7 to protect the security of this Security Instrument; and (c) the performance of Borrower’s covenants and agreements under this Security instrument and the Note. For this purpose, Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender’s successors and assigns) and to the successors and assigns of MERS the following described property . . . .

* * *

Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument; but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender, including, but not limited to, releasing or canceling this Security Instrument.

Mortgage, at 1–2 (emphasis added). These alternate MERS mortgages differ from the MERS mortgages discussed in Saunders and its progeny in key respects.

Whereas Maine’s Supreme Court interpreted the mortgage at issue in Saunders as limiting MERS’s status as nominee to “purposes of recording this mortgage,” the alternative MERS mortgages quoted above expressly confirm that the borrower grants the mortgage to MERS for the purpose of securing repayment of the debt to the lender. This distinction is important because even to the extent that Saunders and Greenleaf focused on MERS’s status as nominee, the term “nominee” by itself does not mean “party limited to recording a document.” Rather, Maine’s Supreme Court describes a nominee as “a person designated to act in place of another, usually in a very limited way.” Saunders, 2010 Me. 79, ¶ 10 (internal quotations omitted). Those limitations naturally arise from the contract itself, i.e., the specific mortgage language at issue.

The Saunders court construed the mortgage’s language there to mean that the borrower gave the mortgage to MERS as the lender’s nominee for the purpose of recording the mortgage. See Saunders, 2010 Me 79, ¶ 10. Yet under other MERS mortgages, the borrower conveys the mortgage to MERS for the purpose of securing repayment to the lender. The borrower further expressly agrees that the interest it gives to MERS—which it gives for the purpose of securing repayment—includes the right to exercise “any or all” of the lender’s interests “if necessary to comply with law or custom.” Those rights specifically include without limitation “the right to foreclose and sell the Property.”

Thus, under some MERS mortgages’ alternative language, the borrower grants MERS a mortgage interest allowing it to exercise the lender’s right to foreclose for the purpose of securing repayment. In other words, the mortgage bestows on MERS a contractual right to foreclose, or more importantly for this articles purposes, a contractual right to take any action “necessary to comply with law or custom” to secure repayment to the lender through foreclosure.

Maine’s Supreme Court has repeatedly recognized that MERS can assign only the mortgage rights it has. See, e.g., Greenleaf, 2014 Me. 89, ¶ 16. In Saunders and its progeny, the mortgages at issue limited those rights to “purposes of recording,” at least according to Maine’s Supreme Court. 2019 Me. 79, ¶ 9. The language in other MERS mortgages does not limit the rights to the purpose of recording; it limits them only to any interests necessary to comply with law or custom to secure repayment to the lender.

Moreover, MERS’s lack of standing to foreclose should not impact this analysis. Maine’s Supreme Court acknowledges that its standing analysis is separate and distinct from the question of mortgage ownership. See Greenleaf, 2014 Me. 89, ¶ 22 n.13. This suggests that MERS’s lack of standing to foreclose should not limit its ability to assign its contractual rights under the mortgage to a party who could demonstrate standing.

Under Maine law, MERS lacks standing to foreclose because it does not qualify as a mortgagee under the applicable statute and because it does not suffer an injury sufficient to give the court jurisdiction. See, e.g., Saunders, 2010 Me. 79, ¶¶ 10, 14–15. However, because standing and ownership are separate issues, Maine law could still allow MERS to assign its contractual rights under the alternative MERS mortgages, including its right “to exercise any or all of [the lender’s] interests, including, but not limited to, the right to foreclose.”

Put differently, MERS can assign whatever interest it has in the mortgage to another party. See, e.g., Greenleaf, 2014 Me. 89, ¶ 16. For MERS mortgages that do not limit MERS’s authority to recording purposes, those interests include rights beyond just recording. If MERS assigns those interests to a subsequent note holder who can establish standing, then the note holder should properly acquire all the same interests in the mortgage that the original lender had, and no legal mechanism should preclude the note holder from foreclosing.

Notably, this analysis fully comports with Maine’s traditional understanding of a nominee as holding “bare legal title for the benefit of others.” Saunders, 2010 Me. 79, ¶ 10. As nominee, MERS holds legal title to the mortgage interests for the benefit of the lender and the lender’s successors and assigns. When MERS assigns that legal title to the party for whom it holds it—i.e., the lender’s successor and assign—MERS’s legal title merges into the beneficiary-assignee’s interests, and the beneficiary-assignee acquires full rights under the mortgage. Where the mortgage limits MERS’s interest to “purposes of recording” under Maine case law, MERS can only transfer that limited interest. See, e.g., Greanleaf, 2014 Me. 89, ¶ 17. However, mortgages that do not limit MERS’s interest to recording purposes should not create similar impediments to foreclosure.

Conclusion

The impact of different MERS mortgage language under Saunders and Greenleaf appears untested in Maine courts. Until the Beal decision, lenders could still seek foreclosure under the position that the original lender holds any mortgage interest MERS itself could not assign in equitable trust for the party to whom MERS assigned its interests, meaning the foreclosing lender could compel a mortgage assignment from the original lender and continue with the foreclosure. See Beal, 2019 Me. 150, ¶ 8. Now that Maine’s Supreme Court has shot down the equitable trust argument, however, foreclosing lenders must seek alternative arguments to enforce their mortgage rights. Before they decide how to proceed, they should check their Maine mortgage to see how it describes MERS’s main purpose.

* Kevin M. Hudspeth serves as of counsel to Maurice Wutscher LLP, a national financial services law firm, where he practices in the appellate, consumer credit, and regulatory compliance groups. He has extensive experience with real estate litigation in Ohio, Illinois, and other jurisdictions throughout the country. He regularly advises attorneys and clients about contested foreclosure issues arising in multiple states.

Healthcare provider companies that serve patients and affiliated organizations are straining to keep up with the spread of the novel coronavirus. While working to maintain operations, the leaders of healthcare companies also must consider the business implications of this crisis.

Here are ten operating considerations for healthcare companies grappling with COVID-19, and three deal considerations for companies active in the transaction space.

1. Redouble Your Risk Assessment Efforts. Name a task force, with board oversight, to implement your risk mitigation plan and constantly reevaluate business risk as the crisis evolves. The pandemic and efforts to stem it are having huge impacts on the regulatory environment—keep up with the latest guidance from the Centers for Medicare & Medicaid Services (CMS), the Centers for Disease Control and Prevention (CDC), and other agencies.

2. Focus on Problem-Solving with Your Clients. During a crisis, we instinctively hunker down and focus inward; instead, at this time, be proactive with your clients and partners. Communicate the risks you have identified and your mitigation plans. Invite your clients and partners to collaborate with you to solve problems: Most will be open to this approach and will appreciate your candor.

3. Review Information Systems (IS) and Data Privacy Measures. The spread of COVID-19 has expanded the use of telemedicine and remote work, putting intense pressure on IS infrastructure and policies, especially cybersecurity and data privacy. Evaluate the suitability of IS capacity, vendors, and policies for this new reality.

4. Evaluate Financing Needs and Options. Update financial projections to evaluate your cash needs over the next six to nine months. Then consider drawing on available credit facilities and requesting equity infusions from investors. Check the impact of borrowing on covenant compliance and consider approaching lenders proactively about a potential covenant default. With the sharp economic slowdown, some lenders are not fully funding available amounts under existing credit facilities.

5. Determine whether CMS Waivers Apply. CMS announced blanket waivers on March 13 under Section 1135 of the Social Security Act, relaxing certain regulatory requirements in response to the COVID-19 pandemic. A separate blanket waiver for telehealth was announced March 17. Review whether your company can use this flexibility to better serve patients.

6. Analyze Force Majeure Clauses for Material Contracts. For contracts that require your company to provide services, evaluate whether force majeure could provide relief from performance. Likewise, analyze contracts with suppliers and vendors to assess whether they are likely to cite similar outs—this will have an impact on your company’s ability to maintain uninterrupted service.

7. Manage Your Workforce. Set the right tone by being empathetic to employee concerns. Communicate the ways you are assessing and mitigating risks. Consider more flexibility in work-from-home arrangements, with proper supervision and data security. Also, stay on top of employment regulatory changes, as several federal regulatory bodies have issued guidance for employers.

For companies active in the deal space—transactions are still moving forward—here are three additional things to consider.

8. Be Prepared for Robust Diligence. Investors are looking for signs that a target company has mishandled the crisis, damaging relationships with employees, patients, or partners. Lenders will increase scrutiny of borrowing needed to complete a transaction. Insurers will engage in a much more robust underwriting process for representations and warranties insurance.

9. Consider Impact on Deal Terms. Many sellers will want to find carveouts related to COVID-19 to ensure the deal closes. Buyers should weigh contingencies carefully, such as a financing contingency because of the volatility of credit markets. With more closing contingencies built in, buyers also may want to consider negotiating interim operating covenants that address compliance with certain COVID-19 guidelines.

10. Analyze Existing and Proposed Earnouts. The coronavirus pandemic likely will affect financial performance metrics and the ability of recently acquired companies to achieve earnouts and other performance-based payments. For earnouts with measurement periods impacted by the current COVID-19 crisis, consider whether, based on the circumstances, the period should be extended or metrics modified—in particular if the earnouts are payable to key employees.

Healthcare companies can be proud of the way the industry has come together to serve patients and rally the nation to fight the coronavirus pandemic. Company leaders need to anticipate the business issues this effort will raise as best as they can in a rapidly changing environment.

Angela Humphreys is chair of the Healthcare Practice Group at Bass, Berry & Sims PLC and co-chair of the firm’s Healthcare Private Equity Team. With more than 20 years of experience, she counsels private equity firms and national healthcare organizations on mergers and acquisitions and investments in the healthcare sector. She can be reached at [email protected].

Healthcare and tax regulations require nonprofit healthcare organizations to consider fraud and abuse and private inurement issues when engaging with physicians. Acquisitions of physician-owned entities, employment agreements, service agreements, and many other arrangements can involve multiple regulatory hurdles. Compliance necessitates consideration of fair market value (FMV), commercial reasonableness (CR), and reasonable compensation (RC) when employing physicians.

General Healthcare Industry Laws

Whether for-profit or nonprofit, participation in government reimbursement programs requires organizations to comply with federal laws, statutes, and regulations. Understanding these and corresponding FMV, CR, and RC requirements is key to evaluating arrangements and compliance. Related state statutes should also be considered, as applicable.

Anti-Kickback Statute (AKS). The AKS,[1] applicable to referrals from anyone, protects patients and federal healthcare programs by making the knowing or willful exchange of renumeration in return for referrals (for services and items) illegal. Even though multiple purposes for the arrangement may be legitimate, if one purpose[2] of the renumeration is to improperly induce referrals, the arrangement violates AKS. Consequences, including exclusion from federal healthcare programs and criminal and civil penalties, can apply to organizations and individuals. Several voluntary safe harbors require FMV and CR be met and should be principal considerations of organizations seeking to meet these safe harbors.

Stark Law (Stark).[3] Stark prohibits patient referrals for designated health services payable by Medicare or Medicaid to an entity with which a physician, or their immediate family member, has a financial relationship. Likewise, claims for services from prohibited referrals may not be submitted for reimbursement. As a strict liability statute, proof of intent is not required, and violation may result in exclusion from Medicare and Medicaid plus civil (but not criminal) penalties. FMV and CR are requirements to meet several mandatory exceptions, highlighting the importance of these considerations for compliance purposes.

Commercial reasonableness. Many of the Stark exceptions and AKS safe harbors require CR, but neither define it. CMS and the Department of Justice have provided commentary that CR means the particular arrangement furthers a legitimate business purpose of the parties and is on similar terms and conditions as like arrangements.[4] Although an arrangement may be FMV, it may not be CR (e.g., multiple medical directors over a service line may be compensated at FMV, but the services may be duplicative and hence not CR).

Fair market value. FMV is a key element of federal laws, statutes, and regulations. Internal Revenue Ruling 59-60 defines FMV but does not reference referrals or business generated between the parties. Therefore, healthcare nonprofit organizations should refer to FMV under Stark, which defines FMV as the value in arm’s-length transactions, consistent with the general market value, and determined without consideration of referrals.[5] AKS does not define FMV, but several safe harbors require compensation be consistent with FMV.

Establishing FMV may require appraisers with expertise in compensation, management and professional services, business and intangible assets, real property, and equipment, among others.

False Claims Act (FCA). Under the FCA, whistleblowers can file qui tam lawsuits for false claims submitted as a result of arrangements in violation of either AKS or Stark. Whistleblowers may receive a share of any recovery. Penalties under the FCA are civil.

Regulatory Sprint to Coordinated Care. In October 2019, the U.S. Department of Health and Human Services issued proposed rules for Stark and AKS to advance the transition to value-based care, ease regulatory burdens, and remove barriers to coordinated care. In many instances, the proposed revisions to Stark and AKS mirror one another. Key proposed revisions include new, value-based exceptions and safe harbors, potential new definitions of FMV and CR, clarification of wRVU-based compensation as a reasonable method, and clarification an arrangement may be CR even if it is not profitable. Nonprofit entities should be familiar with the proposed rules and anticipate more to come later this year.

Additional Tax Regulations for Nonprofit Entities

Nonprofit regulations emphasize private inurement, excess benefit transactions, and RC with the risk of further penalties and potential revocation of tax-exempt status. These regulations prohibit excess benefits to “insiders” (i.e., those with substantial influence over an organization) which may include physicians.[6] To be reasonable, compensation cannot be excessive and must be properly structured.[7] Payments in excess of FMV may violate these regulations. Determination of RC may contemplate amounts paid to others with similar roles and responsibilities at comparable organizations. In addition to salary and wages, nonprofit entities must also consider other forms of cash and noncash compensation (e.g., fringe benefits, pension plans, deferred compensation, etc.).

Best Practices

Implementing best practices may protect against regulatory infractions.

Create emphasis on, and consistency with, the contracting process. Centralize compensation contracting oversight and formalize the process. Formal and methodical contract reviews may include CR, FMV, and RC evaluation policies. To identify high-risk arrangements, organizations may need the expertise of an independent, third-party valuator as well as consultation with in-house and outside counsel.

Consistently seek to understand contract components and related data. Are requirements of all contract components feasible (e.g., total work hours)? Have compensation limits been set for each component of service and for total contractual compensation? Are services duplicative of other services? Does total compensation fall within FMV and is it RC? Has an FMV been performed and, if so, what is the effective period of the valuation and when should it be updated? When using market data to support compensation, understand how the market compensation is calculated (may vary from source to source).

Commit to proper documentation and pay physicians according to the documentation. Require physicians to document work for each role (e.g., time logs). Regularly audit the documentation and reconcile to services required and described in the contract.

As compensation arrangements of nonprofit healthcare organizations are under increasing regulatory scrutiny, organizations must make systematic efforts to document and comply with CR, FMV, and RC to ensure regulatory compliance.

[1] 42 U.S.C. § 1320a-7b.

[2] United States v. Greber, 760 F.2d 68 (3d Cir. 1985), cert. denied, 474 U.S. 988 (1985).

[3] 42 U.S.C. § 1395nn.

[4] 63 Fed. Reg. 1700 (Jan. 9, 1998); 69 Fed. Reg. 16093 (Mar. 26, 2004).

[5] 42 C.F.R § 411.351.

[6] I.R.C. § 501(c)(3).

[7] 26 C.F.R. § 53.4958-4.

Is hair discrimination a new form of race discrimination?[1] Sadly, it is not new, and it is not novel. Minorities have suffered hair discrimination for years. A recent study[2] found that African American women face the highest instances of hair discrimination and are more likely to be sent home from the workplace because of their hair. The study also uncovered that 80 percent of African American women felt they needed to switch their hairstyle to align with more conservative standards in order to fit in at work.[3] Hair discrimination occurs not only in the workplace, but in schools as well:

• In 2017, Mya and Deana Cook, twin sisters in Massachusetts, had to serve detention when school officials determined that their braids violated school policy.
• In August 2018, Clinton Stanley Jr., a 6-year-old student at Book’s Christian Academy in Florida, was sent home from school on account of his hair. The child’s father was told that the school handbook states that boys are not permitted to have dreadlocks.
• In September 2018, officials at Christ the King middle school in Terrytown, Louisiana, informed one of its students that she was being expelled from the school because her “extensions” (braids) were unacceptable under their school code.
• In December 2018, Andrew Johnson, a black New Jersey teenager, was made to cut his dreadlocks by a white referee to continue participating in his school’s wrestling match.
• In January 2020, DeAndre Arnold, an 18-year-old at Barbers Hill High School in Mont Belvieu, Texas, was suspended from school for dreadlocks he started growing in the seventh grade in the same school district. He was facing possibly missing his high school prom and graduation. He has since withdrawn from the school district and enrolled elsewhere.
• In January 2020, a second student at Barbers Hill High School, 16-year-old Kaden Bradford, was suspended for the length of his dreadlocks. Kaden Bradford is DeAndre Arnold’s cousin.

In a 2017 case against Catastrophe Management Solutions, the 11th U.S. Circuit Court of Appeals ruled against the Equal Employment Opportunity Commission when it held that the defendant “…banning dreadlocks in the workplace under a race-neutral grooming policy—without more—does not constitute intentional race-based discrimination.”[4] The court effectively held that refusing to hire someone because of their dreadlocks is legal.

However, in three states, it is now illegal. The CROWN Coalition is an alliance of organizations, including Dove, National Urban League, Color of Change, and Western Center on Law and Poverty, that is dedicated to the advancement of anti-discrimination legislation. “CROWN” stands for Create a Respectful and Open World for Natural Hair and is a law that prohibits discrimination based on hair style and hair texture.

On July 3, 2019, California became the first state to pass the Crown Act, which updates the definition of “race” in the California Fair Employment and Housing Act[5] and the California Education Code[6] to be “inclusive of traits historically associated with race, including, but not limited to, hair texture and protective hairstyles.”[7] The California CROWN Act prevents enforcement of grooming policies that claim to be race neutral, but in reality have a disproportionate negative impact on people of color. California’s CROWN Act became effective January 1, 2020.

The New York City Commission on Human Rights adopted guidelines under which it can impose a penalty on those who harass, demote, or fire individuals because of their hair.[8] The new guidelines describe the following hairstyles as not to be subjected to discrimination: “natural hair, treated or untreated hairstyles such as loss, cornrows, twists, braids, Bantu knots, fades, Afros, and/or the right to keep hair in an uncut or untrimmed state.”[9]

The guidance advises employers that requirements around “maintaining a work appropriate appearance” are acceptable, but warns that policies “that ban, limit, or otherwise restrict natural hair or hairstyles associated with Black people generally violate the NYCHRL’s anti-discrimination provisions.” Further, facially neutral grooming policies may also violate city law if an employer enforces an ostensibly neutral policy only against black employees. These guidelines became effective in February 2019.

On July 12, 2019, the State of New York solidified the NYC Commission on Human Rights Legal Enforcement Guidance on Race Discrimination on the Basis of Hair and became the second state to pass its own CROWN Act.[10]

On December 19, 2019, New Jersey became the third state to enact an anti-discrimination law to “protect people of color facing discrimination based on their hairstyle.” New Jersey’s CROWN Act amends the New Jersey Law Against Discrimination so that the term “race” includes “traits historically associated with race, including hair texture, hair type and protective hairstyles.”[11] In signing this legislation into law, Governor Phil Murphy stated that “[n]o one should be made to feel uncomfortable or be discriminated against because of their natural hair.”

Twenty-two additional states—Colorado, Delaware, Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Oregon, Pennsylvania, South Carolina, Tennessee, Virginia, Washington, West Virginia, and Wisconsin—are considering enacting their own version of the CROWN Act.

On December 5, 2019, U.S. Senator Cory Booker introduced the CROWN Act of 2019 on the federal level to prohibit discrimination based on natural and protective hairstyles associated with people of African descent, including hair that is tightly coiled or tightly curled, locs, cornrows, twists, braids, Bantu knots, and Afros. Under the federal CROWN Act, hair discrimination is a prohibited form of racial or national origin discrimination.

Is hair discrimination race discrimination? Maybe. As of February 2020, it is in three states: California, New York, and New Jersey. In addition, there is a strong movement to enact the CROWN Act in 22 more states and federally. Implementation and enforcement of the CROWN Act will force employers and schools across the United States to take a closer look at their facially neutral grooming and appearance policies and their disparate impact on African Americans and other minorities.

[1] D. Sharmin Arefin is the founder and managing attorney of Arefin Law Office, LLC. Sharmin focuses her practice on consumer financial services defense, employment counseling and defense, and child welfare.

[2] Dove, The CROWN Research Study (2019).

[3] Id.

[4] EEOC v. Catastrophe Mgmt. Sols., 876 F.3d 1273, 2017 U.S. App. LEXIS 24533, 101 Empl. Prac. Dec. (CCH) P45,934, 27 Fla. L. Weekly Fed. C 405, 2017 WL 6015378.

[5] Calif. Gov’t Code § 12926.

[6] Id. § 212.1.

[7] Calif. S.B. 188.

[8] See N.Y.C. Admin. Code § 8107.

[9] Id.

[10] N.Y. S.6209A/A.7797A.

[11] N.J. Stat. § 10:5-5; see also https://www.assemblydems.com/mcknight-reynolds-jackson-speight-timberlake-bill-to-prohibit-hair-discrimination-advances-in-assembly/.

On March 24, 2020, the ABA Business Law Section presented a webinar regarding rapidly evolving developments in M&A deals due to the influence of the COVID-19 pandemic.* Among other topics, the panel discussed considerations related to MAE definitions, COVID-19-focused representations, interim operating covenants, and the response of the representation and warranty insurance market to the current crisis.

Material Adverse Effect

Pandemics, epidemics, and similar events were rarely explicitly included as carve-outs to “Material Adverse Effect” definitions prior to the COVID-19 outbreak. Over the last two months, however, there has been a sharp increase in explicit exclusions in MAEs for pandemics, epidemics, or similar health emergencies. A pre-pandemic MAE definition that makes no reference to COVID-19 (or even to pandemics or epidemics generally) may or may not be found to include the effects of COVID-19. In such cases, disputes may focus on whether definitional language that typically excludes general economic or market conditions and other broad-based factors impacting the business climate or the target’s industry generally is sufficient to exclude the impact of COVID-19. Market practice so far has been that carve-outs for pandemics and similar health emergencies do not apply if they have a disproportionate impact on the target relative to (typically) other companies in the target’s industry. As a result, we may see disputes as to the appropriate industry and comparable companies for a given target (if not explicitly defined). Ultimately, MAE determinations will hinge on the specific facts and circumstances and depend on the nature and extent to which an event or series of events affect the particular target’s business.

Representations and Warranties

As buyers (and targets) work to understand the actual and potential impacts of COVID-19, tailored representations can help facilitate the buyer’s due diligence, as well as allocate certain COVID-19-related risks to the target or sellers through the bring-down condition and/or indemnification provisions. Buyers should consider expanding relevant representations to cover concerns related to COVID-19, especially to the extent fundamental to buyer’s valuation. Although the issues will be highly business/industry specific, buyers should consider adding or modifying representations regarding customers and suppliers, labor matters, contractual force majeure (or similar) provisions, insurance, inventory, and accounts receivable to address COVID-19-related concerns. Targets/sellers should expect significant focus on COVID-19 matters—time spent analyzing problems and planning for contingencies will help facilitate transactions. The parties should also carefully negotiate the language of the applicable disclosure schedules to balance permitting disclosure of known issues and providing protection for the myriad unknown problems arising from the rapidly evolving COVID-19 situation.

Interim Operating Covenants

When there is some period between signing and closing, the acquisition agreement usually provides that the target must operate “in the ordinary course of business,” preserve its business, and refrain from various actions.

COVID-19 and the reaction to it have raised questions about what is “ordinary course” when parties are taking actions never before taken, and how a seller should act to preserve the target’s business. Parties are beginning to consider exceptions for COVID-19-related actions. Even in ordinary times, the covenant should be considered in the context of the entire agreement, including, when considered as a condition to the acquiror’s obligation to close, the degree to which the target must comply (often “in all material respects”), and, in private company transactions, the sellers’ indemnity obligations.

Impact on Representations & Warranties Insurance (“RWI”)

RWI insurers are moving quickly to develop underwriting protocols around COVID-19 risk, including (1) proposing exclusions for COVID-19 exposures, some of which are broadly worded, while other insurers are taking a more targeted approach on a case-by-case basis; (2) identifying heightened due diligence requirements for COVID-19 impacts on the target, including with respect to operations, facilities, supply chain, distribution networks, and business continuity plans; (3) reviewing purchase agreements for COVID-19 specific representations and often excluding coverage for them, and (4) asking COVID-19 specific questions during bring-down calls prior to closing to determine known impacts of COVID-19 on the target and any steps the parties have taken to address COVID-19 issues. Proactively negotiating how RWI will address COVID-19 impacts will be an important consideration to effectively utilize RWI in the current deal market. The RWI market remains competitive, and a well-constructed diligence plan around potential COVID-19 impacts will be an important component to narrowing proposed exclusions in RWI policies.

*We wish to recognize, with appreciation, the assistance of Matthew Barnett.

Those who follow the topic of corporate governance are well aware of an ongoing ideological battle regarding the responsibilities of corporations.[1] For those who do not follow this battle, a quick synopsis:

On the one side, the shareholder reigns supreme. Proponents of this view believe that fiduciary duties are owed to the corporation’s shareholders only. Thus, the shareholders’ interests are necessarily paramount. This position gives rise to short-termism, the approach of operating the corporation to maximize today’s profits for today’s shareholders. Much of shareholder activism is based upon this view (or, at least, on benefitting from it).

On the other side, corporate responsibility is to a broader set of stakeholders. In this view, corporations have responsibility to consider the interests of all stakeholders, including shareholders. Stakeholders are specific to a given situation, but generally can include the community around that corporation, its employees, and even those affected by that corporation’s impact on the environment.

(For more on this ideological battle and its history, please see the author’s interview of Marty Lipton of Wachtell, Lipton, Rosen & Katz in the upcoming Spring 2020 75^th Anniversary issue of The Business Lawyer.)

On April 8th, 2020, in the midst of the global novel coronavirus pandemic, the Chairman of the Securities and Exchange Commission (“SEC”) and the Director of the SEC’s Division of Corporation Finance released a statement advising U.S. public companies regarding public disclosure of the impact of the novel coronavirus on their businesses (the “SEC Statement”).

The SEC Statement asserts that “broad dissemination and exchange of firm-specific plans for addressing the effects of COVID-19 under various scenarios will substantially contribute to our nation’s collective effort to fight and recover from COVID-19” and elaborates as follows:

Investors are not the only ones who are interested in how companies will adjust their affairs as we pursue our collective fight against COVID-19. …[B]road and extensive coordination across workers, firms, investors and governmental officials will be critical to successfully emerge from this fight. …[W]hen a company articulates its strategy publicly, it gives investors and the public a heightened level of confidence and understanding. This increased confidence and understanding reduces risk aversion and facilitates action. This type of positive dynamic plays out across our economy in countless ways and further demonstrates the need for, and the power of, a coordinated, dynamic and forward-looking public-private strategy for fighting COVID-19.

The SEC Statement illustrates this point (“one of millions of examples”) by noting that a laundry might be able to rehire laid off employees if the owner knew hotels were developing a plan to operate.

By acknowledging the impact of operations on the broader community, the SEC Statement implicitly (but not necessarily intentionally) highlights the need for corporations to adopt a stakeholder approach.

For some, the interconnectivity of various aspects of the economy is more apparent now during our current global health crisis. For others, this interconnectivity has long been apparent. (In August 2019, The Business Roundtable released a new Statement on the Purpose of a Corporation, signed by 181 chief executive officers who committed to lead their companies for the benefit of all stakeholders.[2])

This interconnectivity means we are all the stakeholders. Short-termism hurts us all. We cannot focus on short-term profits alone over the long-term health of the business or over the needs of employees, the needs of the planet, or the needs of the community to be able to get back to health.

[1] Jessica Pearlman is a corporate partner in the Seattle office of the global law firm K&L Gates LLP, and serves as a vice chair of the M&A Committee of the American Bar Association’s Business Law Section. The views expressed here, however, are her own and do not purport to represent the views of the firm or of anyone else.

[2] Statement on the Purpose of a Corporation, Bus. Roundtable (Aug. 19, 2019), https://opportunity.businessroundtable.org/ourcommitment.

As we write, the COVID-19 pandemic is having a profound, and profoundly unpredictable, effect on the economy.*  We profess no knowledge as to what lies ahead, or the timetable on which it will unfold. Indeed, this unknowing is precisely what led us to produce the model standstill and tolling agreement we describe below (and which you can access here in an annotated version and here in a version without annotations). 

The current uncertainty will lead businesses to conserve cash if they have it or to miss scheduled rent or other payments if they don’t, resulting in what could be massive cascades of defaults. Some, perhaps many, will be tempted to take legal action, whether in the form of collection suits, bankruptcy or a combination. And yet the very courts they approach may be swamped by the continuing crisis. Even where payment obligations are secured, in many instances it seems doubtful that exercising rights against collateral would meaningfully improve a secured party’s position vis-à-vis its debtor. Mass foreclosures would be economically suicidal.

We believe that negotiated resolutions are in most cases preferable to those that are litigated.  At the same time, we believe it is particularly unlikely that parties will divine, let alone agree upon, optimal resolutions until they can look to the future with greater certainty. We recognize that many businesses—especially those that are small or medium-sized—may not be in a position in this time of severe economic disruption to retain counsel to provide the advice and representation that they need to produce an acceptable, temporary workout that obviates the need for litigation and, ideally, preserves a productive economic relationship. 

We’ve prepared a model standstill and tolling agreement that can serve as a basis for addressing these problems.  It is intended to be a template for businesses facing problems of performance under contracts, including payment or collection, which may soon be overwhelming to the parties, and to the legal system. It contains the basic elements that such an agreement should include, and so provides a balanced way for businesses to place a legal “freeze” on their commercial relationship while the economy stabilizes. This model agreement is, needless to say, neither intended as nor a substitute for legal advice.  All users are encouraged to retain counsel when possible.

In substance, the model agreement identifies “standstill issues” and stipulates a “standstill period” during which the party owed the salient performance agrees not to seek certain remedies, and the party owing the salient performance agrees that it will not undertake a range of non-ordinary course acts that may ultimately harm the other party. It contemplates that certain obligations, e.g., for partial payments or provision of some goods or services, may continue during the standstill period.  It provides suggested remedies in the event that either party breaches. In a nod to practicality, the model agreement explicitly contemplates the possibility of traditional or electronic execution, and provides a mechanism for specifying the manner in which notice should be given by either party to the other – particularly helpful in this time when so many businesses are closed or being conducted from remote locations rather than their usual locations.

In extraordinary moments like these, we may feel the need to do something, to act—if only to counteract the sense of powerlessness we feel in the face of severe uncertainty. While there are many important things we can all do to ameliorate the current crisis, commercial litigation is unlikely to be one of them, at least in the near term. Rather, creating space and time to communicate—to adjust or forgive obligations; to create new, more plausible ones—is a critical precondition to economic restabilization and, we hope, growth.     

* Jonathan C. Lipson is the Harold E. Kohn Professor of Law at, Temple University-Beasley School of Law, where he teaches Contracts, Bankruptcy, Corporations, Commercial Law, Lawyering for Entrepreneurship, International Business Transactions, and a variety of other business law courses.  Professor Lipson is a member of the American Law Institute and a Fellow in the American College of Commercial Finance Lawyers, and is active with the Business Law Section of the American Bar Association where he is currently a member of its Council and, from 2011 to 2017, he was Section Content Officer.

Norman M. Powell is a partner in the Delaware law firm of Young Conaway Stargatt & Taylor, LLP, where his practice includes formation of and service as Delaware counsel to corporations, limited liability companies, and statutory trusts, and the delivery of legal opinions relating to such entities, security interests, and other matters of Delaware law. Mr. Powell is a member of the American Law Institute, the immediate past-president of the America College of Commercial Finance Lawyers, a member of the Permanent Editorial Board on the Uniform Commercial Code, and is active with the Business Law Section of the American Bar Association, for which he currently serves as Section Content Officer.

The views expressed herein are those of the authors and are not necessarily those of any organization with which either of them is affiliated. © 2020 American Bar Association. May be reprinted with permission with attribution. 

Virtual Pro Bono Advice

A Florida man found himself in danger of becoming homeless and needed immediate legal advice. He submitted his legal question on ABA Free Legal Answers and quickly received a response from a qualified pro bono attorney licensed in Florida. This attorney’s advice allowed the client to better understand his legal rights and options. As a result of the advice, he was able to return to court with his required paperwork in order and received an extension of time, resulting in a far less dangerous living situation.

This is just one example of the thousands of legal issues that are addressed on ABAFreeLegalAnswers.org, an online virtual legal clinic through which income-eligible clients can post civil legal questions to be answered by pro bono attorneys from their state.

Providing Pro Bono Legal Advice to Clients Where They Are: Online

According to a 2017 Legal Services Corporation survey, 86 percent of the civil legal problems reported by low-income Americans in the past year received inadequate or no legal help, resulting in an access-to-justice gap. Given that legal advice is increasingly sought online and, according to a recent report from the Pew Research Center, nearly 80 percent of households with low-moderate income households have internet accessibility, the solution was clear.

ABA Free Legal Answers (ABA FLA) seeks to narrow the “justice gap” by offering access to legal advice to people online. Modeled after a legal advice portal created in Tennessee, the ABA Standing Committee on Pro Bono and Public Service launched the first and only online national pro bono legal advice portal, providing nonincarcerated adults with income under 250 percent of the federal poverty level and assets under $10,000 with access to brief civil legal advice from attorneys who are licensed and in good standing in their jurisdiction. ABA FLA provides access to legal advice to those who are often screened out by existing legal services due to conflicts, income or asset eligibility, or citizenship status. It offers a resource to those who are unable to utilize traditional walk-in clinics or hotlines due to geographic or temporal limitations. For those who have nowhere else to turn yet cannot afford an attorney, ABA FLA often serves as a last resort for qualified legal advice.

ABA FLA is designed to allow any eligible user with an internet connection to access civil legal advice and resources at any time from across their state—ultimately to prevent larger legal crises from developing and to allow existing legal services staff attorneys to focus on full representation.

Since its launch in 2016, 42 jurisdictions have committed to participate and more than 7,000 pro bono attorneys have registered to respond to the over 100,000 civil legal questions that have been posted on ABA FLA —primarily in areas such as family law, housing, and consumer rights.

“I am so very grateful for this service. I have zero knowledge of the legal system,” said a recent ABA FLA client. “This site helped me gain confidence to go into court and get placement of my daughter.”

“Free Legal Answers is a godsend,” said Jim Sandman, president emeritus of the Legal Services Corporation. “It is critically important in expanding the services available to people who otherwise have nothing.”

A Tool for Disaster Relief

Disasters produce, among other challenges, a variety of legal issues for disaster survivors, including unemployment, lease terminations, Federal Emergency Management Agency (FEMA) applications, insurance claims, property damage, bankruptcy, document loss, and guardianship. These legal issues persist for weeks, months, or even years following the initial impact.

ABA FLA responds to post-disaster crises by providing wider access to pro bono legal advice and allowing more volunteer attorneys to meet the needs of disaster survivors. For instance, when disaster strikes, ABA FLA temporarily lifts the income and asset cap in impacted states, adds disaster-specific categories for clients, and adds alerts for attorneys to select those questions. In addition, ABA FLA provides access to out-of-state attorneys who are permitted by court order to temporarily practice law to assist in disaster relief.

Analyzing Data for Better Preparation

ABA FLA also provides valuable data to industry researchers, such as at Stanford Legal Design Lab and Baylor Law School, to help identify the low-income populations with legal needs as well as the types, geographical locations, and seasonality of the legal problems that impact their households. This research is determining how best to communicate legal information for the purpose of mitigating the effects of disaster-related and other legal problems. Ultimately, the data has the potential to assist in predicting legal problems before they occur, thereby avoiding access-to-justice challenges at the outset.

Attorneys Provide Brief Legal Advice at Their Convenience

In addition to the success that this site has had as a much-needed legal assistance resource to low-income populations, ABA FLA has been a useful tool for attorneys in search of convenient, short-term pro bono opportunities. ABA FLA provides for partnerships between the private bar, law firms, corporate law departments, government attorneys, and law schools that wish to provide their members with first-hand pro bono experiences in their own settings.

“Since my hearing is too bad to continue working with clients or in a courtroom, I’m glad there’s something I can do,” said an ABA FLA volunteer attorney in Massachusetts.

“What a pleasant surprise to learn that my pro bono responses have made a difference,” said Linda Reid Oldham of Crockett & Oldham Attorneys in North Carolina. “I am so grateful that the American Bar Association has made this opportunity possible. It is actually one of the most relaxing things I do as an attorney.”

Questions are submitted in a variety of civil legal areas, including consumer rights, bankruptcy, landlord/tenant, and family law matters, among others. Attorneys can sign up to receive notifications when questions are posted in their areas of interest as well as sort by subject matter and for questions that are submitted by those with senior or veteran status.

ABA Free Legal Answers Is Making an Impact

The ProSocial Valuation® service measured the impact of ABA FLA and found that providing legal services is more than just a public service. Client outcomes, pro bono service, advocacy, and improved health and wellbeing are all drivers of social capital created by ABA FLA. We now know that for every $1 invested in ABA FLA, $7 worth of social capital is created, producing $7.3M in social capital in just one year.

“It’s been really steady, reliable growth such that any Wall Street CEO would be proud to have,” said George T. “Buck” Lewis, Shareholder at Baker Donelson in Memphis, Tennessee and founder of ABA FLA. “It’s the typical example of a simple idea that’s easy to use and very useful, catching on in all of the various jurisdictions.”

“The best reason to do pro bono is the joy that it brings to your professional life,” said Mr. Lewis. “So many times, we find that just that limited scope advice can make all the difference in someone’s life.”

ABA Business Law Section members and attorneys licensed in most U.S. jurisdictions can sign up to get involved at ABAFreeLegalAnswers.org under “Volunteer Attorney Registration.” The ABA provides legal malpractice insurance to all volunteer attorneys for their communications on the site.

Contact the ABA Free Legal Answers National Administrator, Tali Albukerk, at [email protected] for further information about the site or how to make a tax-deductible financial contribution.