The November 2023 publication of updated guidance by the International Bar Association on the role of lawyers in promoting businesses’ respect for human rights provides an opportunity to revisit the many ways that business lawyers can and should advise their clients regarding potential adverse human rights impacts of their operations and business relationships.

Lawyers and their law firms are engaged in a wide range of business activities on a day-to-day basis as they provide services and advice to their clients, employ personnel to assist them in their assignments, and purchase goods and services from a variety of vendors. It has always been clear that lawyers are expected to conduct themselves in a manner that aligns with applicable professional codes of conduct and ethics, including obligations to promote justice and prevent injustice. However, law firms, like all other businesses, must also accept and meet responsibilities to respect human rights as provided in the United Nations (“UN”) Guiding Principles on Business and Human Rights (the “Guiding Principles”).^[1] The American Bar Association has acknowledged that the Guiding Principles apply to the professional responsibility of lawyers,^[2] and other national and local bar associations have publicly endorsed the Guiding Principles and issued guidance to their members on assisting their clients.

In November 2023, the International Bar Association (“IBA”), which previously adopted guidelines on business and human rights for lawyers and law firms based on the Guiding Principles,^[3] published an updated guidance note on business and human rights discussing the role of lawyers in the changing environment.^[4]

The IBA noted that clients that seek legal advice solely for technical compliance with laws and regulations, without regard to the potential adverse human rights impacts of their proposed actions, fail to see “the larger picture of business risks of involvement in human rights abuse . . . [including] . . . reputational harm; lost opportunities; reduced access to capital markets; delay costs; high interest or more expensive debt; top management distraction; and reduced ability to hire and retain talent.”^[5] The UN Working Group on Business and Human Rights has identified several challenges that business lawyers often must overcome in providing effective counseling to their clients regarding human rights due diligence:^[6]

• Lack of understanding of human rights law in general and what is meant by “human rights risks” in particular—business lawyers sometimes do not understand that human rights include what are otherwise familiar topics such as environmental and labor rights and standards.
• Failure to appreciate that human rights impacts are legal issues for all companies, not just private security companies and weapons manufacturers.
• Lack of understanding of the links between human rights and legal, commercial, and reputational risks, and failure to realize that even where no material legal risks can be identified, there may still be commercial and reputational consequences from the company’s behavior.
• Failure of lawyers to get involved in addressing actual or potential human rights risks at an early stage before the participants have become embroiled in litigation or another adversarial dispute resolution process.

A growing number of law firms, typically international firms with offices throughout the world, are launching formal practice areas covering business and human rights and corporate social responsibility. Such firms are offering services related to human rights reporting, implementation, and interpretation of the Guiding Principles and other “soft law” standards; human rights policies; managing supply chain risks; human rights due diligence and impact assessments; compliance systems and risk management; human rights and major projects (e.g., finance, mergers and acquisitions, and new facilities in communities where indigenous peoples’ rights may be impacted); and human rights as a defense tool. Lawyers working inside companies are leading new cross-functional working groups to oversee human rights due diligence and integrate appropriate due diligence processes into common business transactions (e.g., mergers and acquisitions), as well as expanding their existing compliance initiatives in related areas such as anti-bribery, data privacy, ethics, and business integrity.

In its recently issued guidance update, the IBA noted the following situations in which those lawyers are and should be integrating counseling on business and human rights:^[7]

• Mandatory Human Rights Due Diligence. Laws and regulations mandating human rights due diligence are increasing, which will require lawyers to work with their clients “to establish and implement appropriate policies, processes and procedures to ensure compliance.”
• Environmental Law. Due diligence relating to environmental matters is expanding to include identification and remediation of potentially severe human rights impacts of environmental harm, climate change, pollution, and loss of diversity, particularly adverse impacts on vulnerable people and communities.
• Corporate Governance. Directors and members of a company’s senior management team must be provided with guidance on how to integrate and embed human rights due diligence into internal governance structure and enterprise risk management, policies, processes, and procedures.^[8]
• Mergers and Acquisitions. Since the UN Guiding Principles require that companies conduct human rights due diligence with respect to the activities of parties with which they intend to form a business relationship, lawyers advising companies on mergers and acquisitions will need expand their traditional due diligence work to include human rights and environmental risks of the operations of the other party to the transaction.
• Finance. Since the UN Guiding Principles hold financial institutions and investment companies accountable for adverse human rights impacts that they cause or contribute to, their attorneys need to advise them about the potential human rights impacts of their investment activities (e.g., use of loans by borrowers to engage in activities that have an adverse impact on the human rights of groups in the communities in which they are operating). Attorneys for such entities also need to assist them in including representations and covenants in transactional documents relating to human rights issues (e.g., covenants from companies receiving investment about diversity and inclusion in their workforces).
• Contracts. The IBA noted that “[l]awyers play a central role in the formation, drafting and enforcement of contracts . . . [which are] . . . a key source of leverage through which a company can incentivize both buyers and suppliers to improve their human rights performance.” Lawyers should be mindful of, and participate in, the various responsible contracting initiatives that have emerged to develop standards for inclusion of human rights due diligence and dispute resolution mechanisms into contracts, particularly contracts with parties in the supply chain.^[9]
• Dispute Resolution. Lawyers will be asked to bring their skills and experience in helping companies manage and resolve disputes that emerge from the growing use and acceptance of human rights due diligence standards. In addition to support in traditional forums such as courts, administrative agencies, and arbitration panels, lawyers will be involved in the development and implementation of the operational-level grievance mechanisms contemplated under the Guiding Principles.
• Reporting and Disclosure. Companies have long relied on lawyers for assistance in fulfilling their reporting and disclosure obligations to regulators. Those skills will be useful in complying with emerging regulations and voluntary standards that impose new expectations on companies to communicate with regulators and stakeholders regarding the actual or potential adverse human rights impacts of their operations and business relationships, as well as steps they are taking to promote human rights. (For example, California is requiring venture capital firms to report on diversity among the leadership teams of their portfolio companies.)

The IBA noted that a law firm’s ability to influence clients to avoid or mitigate the adverse human rights impacts of their operations, transactions, and business relationships turns on whether the firm can credibly demonstrate its competence and experience as a counselor on business and human rights issues. The IBA listed several steps that law firms can take, including developing internal firm capacity on business and human rights; identifying problems that other companies have faced when they ignored human rights issues in similar situations; offering to provide human rights capacity building to clients; providing advice on business and human rights to clients on a pro bono basis; issuing client briefings and alerts; participating in multi-stakeholder dialogues or forums to discuss emerging issues and develop standards for specific issues or industry contexts; and supporting the efforts of bar associations to provide training and guidance.^[10]

Law firms can also establish credibility in the business and human rights arena by taking actions that proactively promote the human rights of various internal and external stakeholders. For example, law firms can take steps to combat discrimination and harassment in their workforce and expand opportunities for historically disadvantaged groups through their recruitment, hiring, training, promotion, and leadership development strategies. Law firms can support the physical and mental health of members of their workforce by expanding caregiving assistance and the availability of paid leave to take care of children and other family members. In addition, law firms can support and promote realization of basic human rights by members of the communities in which they operate through investments in initiatives such as community development, education, and improvement of access to food and healthcare, and through providing employees with opportunities to volunteer with community groups while being paid by the firm. Of course, law firms have long contributed to human rights through pro bono programs that allow people and groups to contest their claims and grievances in the legal system, and in recent years, pro bono work has expanded to assist entrepreneurs from historically underrepresented groups (particularly women and racial and ethnic minorities) in starting their own businesses. Finally, more law firms have introduced sustainability into their day-to-day operational practices, and some firms have sought and achieved “certified B corporation” status to demonstrate adherence to stringent standards of performance and accountability with respect to their sustainable business practices.

The legal profession is much maligned in the business community and in society in general, and many lawyers complain of deep dissatisfaction with their choice of career and the day-to-day tasks associated with their roles in the legal system. Proactively participating in environmental and social responsibility initiatives, either as individual lawyers, as law firm team members, or by assisting clients, is a real opportunity for lawyers to change their lives and the communities in which they practice in a positive manner. Many lawyers entered law school with the goal of acquiring the tools necessary to help those who needed support from others and, in some small way, to “change the world.” For those who may have lost their way, for whatever reason, or are looking for ways to do more, embracing counseling of businesses on their duties to respect human rights is a welcome and promising platform.

***

For further discussion of the role of lawyers and the legal profession in business and human rights, see the author’s chapter on the subject, which is an updated version of work that originally appeared in the author’s book Business and Human Rights: Advising Clients on Respecting and Fulfilling Human Rights (ABA Publishing). The chapter includes practical guidance for lawyers and law firms on business and human rights, a comprehensive list of resources that they can consult, and detailed discussions on law firm human rights policies and statements, client intake procedures, human rights risk management plans, withdrawing from engagements due to concerns about adverse human rights impacts of client activities, evaluation and reporting, governance and management of responsible business activities, building internal capacity and credibility on business and human rights, and the roles of in-house lawyers and the general counsel.

1. See the Guiding Principles, which are sometimes called the “Ruggie Principles” in reference to John Ruggie, the UN Special Representative for Business and Human Rights who first introduced the principles in 2007 and led the efforts that eventually led to the endorsement of the Guiding Principles. ↑

2. John F. Sherman III has pointed out that the ABA’s Human Rights Committee has noted the Guiding Principles “pour content into the independent and candid advice that lawyers must provide to corporate clients under ABA Model Rule 2.1” and that the acknowledgement in the Commentary to Model Rule 2.1 that “moral and ethical factors impinge on most legal questions” is consistent with professional codes of responsibility in other countries that acknowledge that lawyers “must balance their dual roles as guardians and advocates for the interests of their clients, and as gatekeepers for the interests of courts and society.” John F. Sherman III, “Professional Responsibility of Lawyers under the Guiding Principles,” Shift, April 2012. See also John F. Sherman III, “The UN Guiding Principles: Practical Implications for Business Lawyers,” In-House Defense Quarterly (Winter 2013), 50. ↑

3. IBA Practical Guide on Business and Human Rights for Business Lawyers (London: International Bar Association, 2016). See also Reference Annex to the IBA Practical Guide on Business and Human Rights for Business Lawyers (London: International Bar Association, 2016). ↑

4. Updated IBA Guidance Note on Business and Human Rights: The role of lawyers in the changing landscape (London: International Bar Association, 2023), 4. ↑

5. Updated IBA Guidance Note, 4. ↑

6. Companion Note II to the Working Group’s 2018 Report to the General Assembly: “Corporate human rights due diligence—Getting started, emerging practices, tools and resources” (UN Working Group on Business and Human Rights, October 2018), 19. ↑

7. Updated IBA Guidance Note, 4. ↑

8. Business lawyers are also working with clients to form, organize, and operate enterprises based on new corporate governance frameworks created specifically to integrate the responsibilities of businesses for their environmental and social impacts (e.g., benefit corporations). ↑

9. For more resources regarding responsible contracting, see, e.g., Susan A. Maslow and David V. Snyder, eds., Contracts for Responsible and Sustainable Supply Chains: Model Contract Clauses, Legal Analysis, and Practical Perspectives (Chicago: ABA Publishing, 2023); The Working Group to Draft Human Rights Protections in International Supply Contracts (ABA Business Law Section), David V. Snyder, Susan A. Maslow, and Sarah Dadush, “Model Contract Clauses to Protect Workers in International Supply Chains, Version 2.0,” Business Law Today, September 26, 2022. ↑

10. IBA Practical Guide, 36. ↑

Major sneaker brands have capitalized on new trends in technology and social media to publicize sneaker culture. As sneakers become more popular, sneaker collections increase in value, thus increasing financial exposure for collectors and other entities in the sneaker industry. One might first think of theft, authentication, fire, floods, or market valuation as the general risks associated with sneaker collections. But many sneaker companies have made headlines over the past few years with lawsuits against other sneaker companies and entities, with issues ranging from traditional patent battles to exhaustive fights against counterfeiters. Often overlooked by collectors and sneaker companies alike, insurance can be vital to helping both collectors and companies faced with unexpected liability related to sneaker culture.

Given how much money is at stake in the industry—nearly $72.2 billion currently and expected to reach $100 billion by 2026—it should come as no surprise that sneaker companies are using intellectual property (“IP”) law to protect their assets. For example, in early 2022, a large shoe manufacturer sued an online sneaker resale marketplace, asserting claims for trademark infringement of the shoe manufacturer’s non-fungible tokens (“NFTs”), counterfeiting, and false advertising after a sneaker collector and reseller bought thirty-eight pairs of counterfeit sneakers from the resale marketplace. The litigation has likely been costly and damaging for the online reseller because of the extensive discovery process, including a discovery dispute resulting in a court order requiring the online reseller to produce information about the identity of known users who sold counterfeit sneakers through the company’s resale platform. The same large shoe manufacturer also sued a major athletic apparel retailer in January 2023 for alleged infringement of footwear patents.

Sneaker companies and other entities on the receiving end of IP lawsuits—including, for example, third party retailers and online resellers—should be able to leverage their IP or commercial general liability (“CGL”) policies for insurance coverage for defense costs in IP lawsuits related to sneakers and their director’s and officer’s (“D&O”) policies for any downstream lawsuits against executives of sneaker companies.

IP Insurance

IP insurance covers the initiation or defense of claims for IP infringement. This means a sneaker company can leverage IP insurance to enforce its intellectual property rights against suspected infringement and to defend against allegations of infringement. Like many types of coverage, IP policies often cover litigation costs and expenses as well as potential judgments and settlements.

CGL Insurance

While IP insurance, which protects a business from allegations of infringement of another business’s intellectual property, may be the obvious source and first line of defense for coverage for IP claims related to sneakers, coverage may also be available under a CGL policy. Most CGL policies do not explicitly include patent infringement coverage. In fact, most CGL policies include an IP exclusion that expressly excludes patent infringement coverage, but insureds may still be able to secure coverage. Most IP lawsuits are conjoined with other allegations, such as unfair competition, which some courts have found to be fundamentally the same as an asserted trademark infringement claim,^[1] thereby potentially implicating coverage under the CGL policy that the insurer acknowledges and defends. A complaint that alleges infringement of a competitor’s patent may also allege defamation and disparagement of its product. Because claims for defamation and disparagement are typically covered under CGL policies, there may be defense coverage related to those covered claims. Thus, it is crucial to closely review factual allegations in the complaint that might bring the lawsuit within the scope of CGL insurance coverage.

A claim for patent infringement may also be covered under “advertising injury” that falls outside the scope of the policy’s IP exclusion. Some courts have held,^[2] under certain versions of the standard CGL form, that a trademark constitutes an “advertising idea,” meeting the definition of “advertising injury” as that term is typically defined in standard CGL policies. In other words, the misuse of another’s trademark may constitute appropriation of an advertising idea, which falls within the coverage typically provided under a CGL policy form. Willful acts of infringement are generally not covered, though; the infringement must be inadvertent.

There are some CGL policies that provide direct coverage for IP claims and do not include explicit exclusions. For example, the insured may be able to negotiate a CGL policy without an IP exclusion by agreeing to absorb routine defense costs and fees through a self-insured retention, a specific amount that the insured must pay before the insurance policy responds to a loss. A policy that includes a self-insured retention shifts some of the risk from the insurer to the insured, which in some cases allows the insured to negotiate terms that provide direct coverage for IP claims. Sneaker companies, particularly those with significant capital, may want to consider negotiating a self-insured retention in order to procure direct coverage for IP claims under a CGL policy.

D&O Insurance

D&O insurance may also cover claims in sneaker-related lawsuits against individual business leaders, such as directors, officers, or certain company executives, arising from certain actual or alleged acts, such as failing to adhere to state or federal laws, unethical practices, or fiduciary duty mismanagement. Companies within the sneaker industry, for example, may be subject to Securities and Exchange Commission investigations that implicate the sneaker company, as well as its individual officers and directors. A D&O policy typically covers the defense costs and expenses the company incurs during such investigations.

D&O insurance may also protect sneaker companies against lawsuits for theft of intellectual property. This is because IP-related claims often constitute a wrongful act, as that term is defined in the D&O policy, if the directors and officers are named as defendants in the IP lawsuit. If faced with allegations of IP infringement, sneaker companies should consider coverage under D&O policies that may complement any coverage afforded under CGL policies.

Insurance for Collectors

Insurance for sneaker-related claims, however, is not limited to sneaker companies. As sneakers become increasingly valuable, even individual collectors can consider insurance coverage options. Traditional homeowner’s insurance typically covers personal property, including sneakers. But a traditional homeowner policy does not cover authentication issues, such as the counterfeit issue in the lawsuit mentioned earlier, or other risks unique to sneaker collecting and investments. To that end, sneaker insurance for individual sneaker collectors exists, which insures against a broader range of risks than traditional homeowner policies.

While homeowner’s insurance policies often exclude coverage for property damage resulting from or arising out of flooding, sneaker insurance typically provides some coverage for flood damage. Larger collections, in particular, are more vulnerable to potential disasters, making purchasing comprehensive insurance a necessary step in protecting a collector’s investment. Policies tailored for sneaker collections also provide coverage for sneakers lost or stolen during shipping, delivery, and travel—losses that are usually not covered under traditional homeowner policies. Sneaker insurance facilitates collectors’ profiting from their investment through resale while decreasing exposure to the risks of shipping and delivery of valuable sneakers. Another advantage to sneaker insurance is that the sneakers are valued and authenticated during the underwriting process and insured at replacement cost, rather than actual cash value, allowing the collector, in most cases, to avoid incurring a loss because of depreciation or a decline in market value for the sneaker.

Sneaker collectors, however, should understand that sneaker insurance is an emerging market, and options are somewhat limited. This means high premiums for coverage, particularly because insurers in the sneaker industry are likely attuned to the nuances of the sneaker market and may tie premiums to market fluctuations.

Conclusion

Insurance is a great way to mitigate and hedge against the risk of unforeseen losses in the sneaker industry. CGL policies, D&O coverage, and sneaker insurance provide sneaker companies and collectors with various routes to securing coverage when faced with losses, including costly litigation. But the sneaker industry, especially sneaker companies with greater vulnerability to lawsuits, should recognize that insurance policies are often narrowly tailored to exclude the very claims that pose large risks to sneaker companies and collectors alike. Sneaker companies and collectors should consult experienced insurance coverage counsel to carefully consider all insurance options to protect their assets and investments.

1. See, e.g., Land’s End at Sunset Beach Cmty. Ass’n, Inc. v. Aspen Specialty Ins. Co., 745 F. App’x 314, 319–20 (11th Cir. 2018) (finding that the fact allegations in the underlying action for the counterclaims of false designation and unfair competition “require elements of proof beyond [intellectual property] use and [the fact] that those types of claims may exist absent [intellectual property] infringement does not alter the analysis . . . [and] depend on [the insured’s] use of [the intellectual property’”); see also Marvin J. Perry, Inc. v. Hartford Cas. Ins. Co., 412 F. App’x 607, 614 (4th Cir. 2011) (finding that a plaintiff’s claim for unfair competition was based on another’s use of the plaintiff’s trade name, trademark, logo, and website in violation of the plaintiff’s ownership of the trademark). ↑

2. See, e.g., Lebas Fashion Imports of USA, Inc. v. ITT Hartford Ins. Group, 50 Cal. App. 4th 548, 557, 565–66 (2d Dist. 1996) (construing the phrases “advertising idea” and “style of doing business” in a CGL policy broadly to provide coverage for trademark infringement, as “a trademark is but a species of advertising”). ↑

In 2020, approximately forty-six law firm data breaches were reported, according to a recent Law360 Pulse survey. In 2022, that figure more than doubled and exceeded one hundred.

Many midsized firms mistakenly assume that cybersecurity breaches won’t happen to them—that breaches only happen to large firms or that their firm is adequately defended by their current technology systems. Not only is this thinking naive, it is risky.

In 2022, 70 percent of reported breaches occurred at firms with fifty lawyers or less. Research shows that cyberattacks are increasing in size and becoming more sophisticated, occurring through a variety of tactics including social engineering and phishing, which can lead to stolen credentials such as usernames and passwords.

Here are three proactive steps your firm can take to help mitigate both the risk and the potential negative impacts of a data breach.

1. Investigate Your Managed Service Provider (MSP)

Many law firms rely on a third party to provide technology and related services to support firm operations and infrastructure (phone systems, email, video conferencing, document management systems, etc.). However, in addition to supporting law firm technology operations, MSPs are also a primary resource for defending against and mitigating cyber risks. Thus, it makes sense to ensure your MSP is secure.

One way to assess your MSP’s security is to request to see its latest SOC 2 audit. SOC 2 (System and Organization Controls 2) is an audit report that indicates the trustworthiness of the services provided by an MSP and is used to assess the risks associated with third-party service providers that store consumer data online. MSPs are not required to have SOC certifications, but SOC certification has become an industry benchmark for recognizing high security standards; it indicates an added measure of proof that an MSP is secure. An increasing number of businesses, especially those operating in regulated industries such as banking, financial, health care, energy, and retail, only work with law firms that use an MSP that is SOC 2 certified or law firms that have their own SOC 2 certification.

While investigating your MSP’s SOC status, here are additional questions to ask your provider:

• What’s being done to protect my organization from breaches, hacks, and attacks?
• What cybersecurity-related services am I paying for?
• How are these services protecting me? What reporting is available?
• What security awareness training services can you offer my firm?

2. Don’t Lose Sight of Your #1 Risk: Access Points into Your Data through Your Employees

Each individual working at your firm represents a potential entry point for hackers to gain access to your data and client data. It’s also possible to encounter employees who decide to steal or compromise data.

It’s important to note, though, that employees can also be your best protection against cybersecurity breaches. With proper security awareness training and other strategies, law firms can decrease the chances of being breached and defend themselves.

For example, firms can start, increase, and mandate cybersecurity awareness training for employees. Many firms conduct such training on an annual basis, yet given the increased complexity and sophistication of cyberattack methods, this may no longer be frequent enough. Formal cybersecurity awareness training, which includes cybersecurity test-and-learn exercises such as penetration testing and phishing attack simulations, should happen often and at random, to simulate how unexpected a hack attempt can be and reinforce readiness at all times.

Another option to strengthen a firm’s cybersecurity training is the gamification of the training to drive the desired employee behavior. Law firms can create healthy competitions among employees, whereby an award or prize goes to the most vigilant employees for efforts such as detecting and properly reporting the most (simulated) phishing attempts within a given time frame.

Firms that prioritize training create a culture of cybersecurity compliance and a stronger shield from cyberattacks than those firms that are not adopting training, creating awareness, and simulating attack situations. Firms that proactively build, implement, and test (or literally practice) their defense measures will be much better prepared than those that choose to wait and react.

High adoption of security-compliant practices happens when firms make a concerted effort to track and reward participation in cybersecurity training and make it part of the employee evaluation process, building in incentives. This helps the firm identify areas for cybersecurity improvement and employees who pose a cybersecurity risk.

3. Maintain a Robust and Up-to-Date Breach Response Plan

Given the plethora of security and privacy regulations, it is critical that any cyber incident is met with a timely and appropriate response. While no organization wants to experience a breach, for law firms, such incidents invoke a particularly unique ethical obligation. Lawyers have an obligation to protect their client’s information and to disclose any breach.

Rule 1.6 of the ABA Model Rules of Professional Conduct states that lawyers must not disclose information related to the representation of a client. This includes information that is communicated in confidence by the client and any other information related to the representation. The rule also states that lawyers must make reasonable efforts to prevent the unauthorized disclosure of client information.

Notably, the European Union’s General Data Protection Regulation (GDPR) applies to law firms that offer services to clients in the EU, among other circumstances, and if a firm falls under the GDPR’s definition of a controller, it is required to report personal data breaches to the relevant supervisory authority “without undue delay and, where feasible, not later than seventy-two hours after having become aware” of the breach. The notification must include information about the nature and scope of the breach, including the number of data subjects and records involved.

Firms need to follow all legal requirements and should also have their own detailed, formal breach or incident response plan in place. A robust breach response plan should include:

• Incident response team roster with clearly defined roles and responsibilities
• Procedures for monitoring and detecting threats
• A clearly defined process for reporting incidents internally
• Training for all firm personnel on how to detect and respond to cyber threats
• Procedures for handling the discovery, investigation, and containment of threats
• Procedures for correcting any security problems
• Reporting requirements to respective regulatory authorities
• Notifications to affected persons, particularly clients

Review and update your response plan after every incident and note what worked, what didn’t, takeaways, and necessary updates to the plan.

If your firm already has a breach response plan in place, regularly review it. When was the last time it was updated? Perhaps it’s up to date but needs to be tested. Consider implementing simulated breach scenarios to pressure-test your plan, tracking personnel, processes, response times, and other important elements against relevant benchmarks and standards.

The best practices noted in this article are excerpted from Meritas Cybersecurity Standards.

We are pleased to share the new form of the Emerging Business Credit Agreement (EBCA), which is the product of a collaborative project of the Commercial Finance Committee of the American Bar Association (ABA) Business Law Section and the Primary Market Committee of the Loan Syndications and Trading Association (LSTA).

The new EBCA includes three supplements that have been prepared with the agreement: the Security Supplement, the Financial Covenants Supplement, and the Agency Supplement. We worked under the expert guidance of our external counsel, Thomas Mellor and Sean Zoltek of Morgan, Lewis & Bockius LLP, who drafted the EBCA form. They have led us in the production of an excellent form with numerous guideposts and in-depth drafting notes, some of which are highlighted below.

The EBCA is intended to be used for a borrower that is an “emerging business.” For the purposes of this form, the term “emerging business” refers to a borrower that is no longer a new venture but is not yet an established middle market company. The current form is designed to bridge the gap between the “off the shelf” form for new venture companies and the more highly negotiated and tailored agreements of the larger, more established middle market companies. Borrowers using these forms will likely be generating regular and consistent revenue but will often not have consistently positive EBITDA. They will likely desire more flexibility when it comes to running their businesses and making decisions about, for example, investments and distributions. Our goal with this form is to take into account, on the one hand, the interests of the borrowers and their growing businesses, and on the other hand, those of the lenders who are willing to put their money at risk, to create a more balanced form that the parties can use as they start their negotiations.

We anticipate that our form could be useful for loans between $25 million to $100 million; however, parties should note that the size of the loan should not be the sole factor when deciding the form with which to start. When determining where to begin, parties will always need to assess the borrower, the stage of its life cycle, and the parties’ willingness to spend time and money negotiating a credit agreement.

Our form also assumes the borrower is formed in the US with US-based operations and limited, if any, foreign operations or assets located outside the US. If significant activity takes place or material assets are located outside the US, then parties will need to adapt the form and include foreign borrower and/or foreign assets language, as well as considering, among other issues, the local law requirements (especially if there are foreign guarantors) and the taxes clause.

The form of the agreement is governed by New York law. However, because of comments submitted by the ABA’s Commercial Finance Committee shortly before the penultimate turn of the document, we have included provisions specific to credit agreements that are governed by the laws of California, Illinois. or Texas. For example, drafting notes in Annex I highlight language that should be included if the agreement is governed by the laws of California or if the entity has assets (in particular real estate assets) located there. For that state, language has been provided whereby each loan party waives all rights and defenses that they may have if their obligations are secured by real property there.

We have also drafted a security supplement, a financial covenants supplement, and an agency supplement for the EBCA. The terms of a security agreement have been incorporated into the credit agreement itself; this reflects common practice in the venture debt space where the loan is to be secured. This form assumes that subsidiaries of the borrower will become guarantors of the facility irrespective of whether or not the facility is secured. This approach should streamline the process and save the parties both time and expense of negotiating another document. Additionally, because the borrower’s own collateral and structure is typically more straightforward than companies further along in their life cycle, the incorporation of security terms in the credit agreement itself can more easily be achieved. The separate Security Supplement serves this purpose, but, of course, if the parties prefer to use a separate security agreement, the form can easily be adapted for that as well. Parties should note that the security supplement is not exhaustive of all applicable security interest provisions that parties may need for their deal; only the typical ones have been flagged for the draftsperson’s consideration.

Loans extended to emerging businesses often will not include financial or performance covenants. As noted in the covering memo of the Financial Covenants Supplement, because the borrower’s future growth trajectory is uncertain, it may be practically difficult to come up with meaningful metrics at closing that can accurately predict the company’s growth prospects and its ability to comply with financial or maintenance covenants while the loan is outstanding. As such, the parties may agree to include more deal-specific reporting mechanisms for such performance metrics rather than more traditional leverage and fixed charge maintenance covenants. If financial and performance covenants are included, they are expected to be heavily negotiated and well-tailored to the borrower, its business, and the relevant industry.

Because EBCA loans typically have only one lender, we drafted this form as a bilateral credit agreement, thus enabling us to streamline the form further by not including the typical LSTA agency provisions. However, if the deal is being made on a club basis, agency provisions can be included, particularly if the deal is secured or includes more than a small number of non-affiliated lenders. A sample Agency Supplement has been included for cases where the deal requires an agent.

In this market, lenders will often want the borrower to use its or an affiliates’ banking services. This form requires as a closing condition that the borrower shall have arranged for its bank services to be with the lender. Lenders should consider tailoring these services, but they must also bear in mind any applicable anti-tying regulations.

As with all forms of agreements, we have attempted to flag issues and provide a starting point for parties to consider and adapt to the borrower’s business. This is particularly true for the representations and covenants. The parties must of course consider the nature of the representations and covenants that are suitable for the borrower and its business as they determine which ones to include.

Finally, before we were due to publish the EBCA, the Office of the Comptroller of the Currency (OCC) issued detailed guidance on November 1, 2023 (the “Guidance”), to address risk management standards and safe and sound lending practices for venture lending. We reviewed that guidance and added a new note 12 to the cover memo of the form to highlight it to members. Venture lending is defined by the Guidance to include certain characteristics and provides exclusions for certain types of loan products (for example, asset-based lending that meets certain criteria is excluded from the definition of “venture lending”). The OCC seems to be responding to concerns following the recent failures of certain banks active in venture lending, and the Guidance signals that the OCC is more closely considering banks’ standards for evaluating venture lending. The impact of the Guidance on current venture lending structuring and documentation practices remains to be seen. For transactions that fall within the definition of venture lending (as defined by the Guidance), a careful review of the Guidance is advisable.

We would like to thank Thomas Mellor and Sean Zoltek of Morgan, Lewis & Bockius LLP for their excellent drafting and advice on this project. Their extensive knowledge of this market is reflected in the final form.

Handling the sale of a company in financial distress presents a multitude of challenges: preserving the value of the assets; maintaining some level of operations; treating creditors, stakeholders, and employees fairly and legally; and contracting for and effectuating the sale of the business in an orderly fashion. These issues are common to the sale of assets of any distressed company, regardless of where it may be located. However, there are additional complications when the entity or its assets are located outside the United States.

The American Bar Association (ABA) Business Law Section publication Using Legal Project Management in Merger and Acquisition and Joint Venture Transactions included a checklist showcasing important items to consider in connection with the sale of assets of a distressed company pursuant to Section 363 of the U.S. Bankruptcy Code. The Mergers and Acquisitions Committee of the ABA Business Law Section (“M&A Committee”) has undertaken a project to provide country-specific commentary to the original checklist for items to consider in the sale of assets by an international distressed company (collectively, the “Reports”). The authors of these Reports are senior lawyers practicing throughout the world who specialize in mergers and acquisitions and insolvency.

The initial tranche of the Reports provides commentary from multiple regions, including Europe (Germany, Italy, Luxembourg, Netherlands, Spain, and the United Kingdom), North America (Canada, Mexico, and the United States), South America (Brazil), and Asia (India, Japan, and Singapore). It is anticipated that additional Reports spanning other regions will be published in the future. The publication of these Reports is an important addition to the legal literature on mergers and acquisitions. In this global economy, it is important that practitioners have a resource that compares, in outline form, the laws of many countries with respect to asset acquisitions.

Each of these Reports seeks to provide such a resource to readers who come across international acquisitions in §363-type scenarios. Section 363 asset acquisitions are a mix of fields between insolvency and M&A. They also present challenges in other areas of the law, which lawyers involved should be prepared to deal with. The jurisdiction where the company is located and its applicable laws and legal system can have a profound impact on how the sale of the distressed company and its assets is structured and managed. In this regard, each of these Reports is an exercise in comparative law, which requires intellectual rigor and an open mind to be able to conciliate U.S. legal concepts with those of other nations.

The Reports provide a preliminary overview of issues arising under each country’s law and should not serve as a substitute for detailed legal research and advice based upon the facts and circumstances of particular transactions. The material is based upon the laws of each country as of November 2023. It is noteworthy that each author is admitted to the practice of law in his/her respective jurisdiction.

This work product was conceived and coordinated by Agustín Berdeja-Prieto initially under the auspices of the M&A Legal Project Management Task Force and its co-chairs at the time, Dennis J. White and Byron S. Kalogerou. Our gratitude to them for their receptiveness and support. Subsequent efforts were completed with the effective and proactive assistance of current M&A Committee chair Michael G. O’Bryan, M&A Committee Legal Project Management Initiative chair Sachin V. Java, and members of the International M&A Subcommittee. Finally, we acknowledge the very able and timely editing assistance provided by Professor Don De Amicis and Schylar Jacobs of Georgetown Law’s Center on Transnational Business and the Law. We sincerely thank them all.

The United States Supreme Court has granted a petition for certiorari in Coinbase v. Suski to review the question of whether the court or the arbitrator should determine whether an arbitration agreement containing a delegation clause can be narrowed by a subsequent agreement that does not contain clauses addressing arbitration or delegation. There is currently a circuit split as to the enforceability of delegation clauses, which are clauses that dictate the arbitrator is authorized to determine threshold issues regarding the arbitration agreement. Currently the First and Fifth Circuits recognize the enforceability of delegation clauses and would allow an arbitrator to decide whether a subsequent agreement narrows the arbitration agreement in a prior agreement, while the Third and Ninth Circuits refuse to enforce delegation clauses where a second agreement narrows an earlier arbitration agreement.

In this case, users of Coinbase, a cryptocurrency exchange, filed a class action in California claiming that Coinbase had misled them regarding the entry requirements for a sweepstakes in violation of state law. Suski v. Coinbase, Inc., 55 F.4th 1227, 1228 (9th Cir. 2022), cert. granted, Coinbase, Inc. v. Suski, No. 23-3, 2023 WL 7266998 (U.S. Nov. 3, 2023). The suit was filed under California’s False Advertising Law, Unfair Competition Law, and Consumer Legal Remedies Act against Coinbase and Marden-Kane Inc., a company hired by Coinbase to design, market, and execute a sweepstakes that the plaintiffs claimed used deceptive practices. Id. at 1229. When creating their accounts with Coinbase, the plaintiffs had signed Coinbase’s User Agreement, which contains an arbitration provision that specifically provided the arbitrator would decide issues relating to the “scope” of the arbitration provision—i.e., the types of claims it covered, not whether it was superseded by a later agreement between the parties. Id. at 1229. Thereafter, the plaintiffs had opted into a second contract, the Coinbase Sweepstakes’ Official Rules, which included a forum selection clause providing that California courts have exclusive jurisdiction over any controversies regarding the sweepstakes. Id. at 1228–29.

Coinbase moved to compel arbitration in reliance upon the arbitration clauses set forth in the underlying user agreements, and the class plaintiffs opposed arbitration, pointing to provisions contained in the sweepstakes’ rules that were issued subsequent thereto containing contrary forum selection clauses. Id. at 1229. The district court denied the motion to compel arbitration, and the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s holding. Id. In affirming the district court, the Ninth Circuit made distinctions between the arbitration delegation clause in Coinbase’s User Agreement and the forum selection clause contained in the Sweepstakes’ Official Rules. Id. at 1229–31.

Regarding the delegation clause, which stated that an arbitrator shall decide “disputes arising out of or related to the interpretation or application of the Arbitration Agreement,” Coinbase argued that the issue of any superseding effect of the Sweepstakes’ Official Rules concerned the scope of the arbitration clause and therefore fell within the User Agreement’s delegation clause. Id. at 1229. In denying the motion to compel arbitration, both the district court and the Ninth Circuit determined that the question concerning the “scope of the arbitration agreement” referred to how widely it could be applied, and as such this was an issue for the court to decide. Id. The Ninth Circuit found that “[w]hether the court or the arbitrator decides arbitrability is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.” Id. (quoting Oracle Am. Inc. v.Myriad Grp. A.G.,724 F.3d1069, 1072 (9th Cir. 2013)). In the Ninth Circuit’s view, the issue of whether the forum selection clause in the Sweepstakes’ Official Rules superseded the arbitration clause in the User Agreement was not delegated to the arbitrator, but rather was for the court to decide. Id.

The Court next looked to whether the forum selection clause in the Sweepstakes’ Official Rules superseded the arbitration clause in the User Agreement. Id. at 1230. The forum selection clause in the Sweepstakes’ Official Rules had provided that the California courts had exclusive jurisdiction over any controversies regarding the sweepstakes. Id. Coinbase argued that the User Agreement contained an integration clause and procedures for amendment of the User Agreement, and therefore the User Agreement could not have been superseded by the Official Rules, which Plaintiff argued exempted the claims from arbitration. Id. at 1231. Coinbase further argued that the Official Rules were focused on a different subject matter from the User Agreement and as such could not be utilized as evidence of the parties’ intent to amend, revise, revoke, or supersede any prior agreement, including the arbitration provision in the User Agreement. Id.

The Ninth Circuit did not agree with Coinbase. Id. Rather, the Court found that under California law, “[t]he general rule is that when parties enter into a second contract dealing with the same subject matter as their first contract without stating whether the second contract operates to discharge or substitute for the first contract, the two contracts must be interpreted together and the latter contract prevails to the extent they are inconsistent.” Id. at 1230 (quoting Capili v. Finish Line, Inc.,116 F. Supp. 3d 1000, 1004 n.1 (N.D. Cal 2015) (quoting 17A C.J.S. Contracts § 574), aff’d, 699 F. Appx. 620 (9th Cir.2017)). The Court acknowledged that Coinbase was correct in stating that the Official Rules contained no language specifically revoking the arbitration agreement contained within the User Agreement, but it found that by including the forum selection clause with the Official Rules, those Rules provided evidence of the parties’ intent not to be governed by the User Agreement’s arbitration clause when addressing controversies concerning the sweepstakes. Id. at 1230–31. As a result, the Ninth Circuit affirmed the district court’s holding that denied Coinbase’s request to compel arbitration. Id. at 1231.

In its petition for a writ of certiorari, Coinbase pointed to Supreme Court precedent requiring the enforcement of delegation clauses in arbitration agreements and argued that absent a meritorious challenge to these provisions, they must be enforced if the subsequent agreement does not alter that provision. Brief for Petitioner at 20–21, Suski v. Coinbase, Inc., 55 F.4th 1227, 1228 (9th Cir. 2022) (No. 22-105), 2022 WL 3107708. Coinbase has also argued that since the subsequent rules did not alter or challenge the prior agreement’s delegation provision, it is for the arbitrator to determine this issue. Id. at 9. On November 3, 2023, the Supreme Court granted the petition for writ of certiorari, and the case is scheduled for argument during the Court’s current term. Coinbase, Inc. v. Suski, No. 23-3, 2023 WL 7266998 (U.S. Nov. 3, 2023).

This will be the second time that a decision rendered concerning this dispute involving Coinbase has appeared on the Supreme Court’s docket; the Court previously determined that an appeal from a denial of a petition to compel arbitration automatically stays the proceedings below. Coinbase, Inc. v. Bielski, 599 U.S. 736, 747 (2023). Further, this is the second arbitration case that the Supreme Court has agreed to hear this term, along with Bissonnette v. LePage Bakeries Park St. LLC, 49 F.4th 655 (2d Cir. 2022), cert. granted, No. 23-51, 2023 WL 6319660 (U.S. Sept. 29, 2023). Once again, issues concerning arbitration appear to remain hot topics before the Supreme Court.

Surprisingly, some loan market participants continue to think that the term “open market purchases” included in many syndicated credit agreements today is intended to require the borrower to buy all the loans of a particular tranche on a pro rata basis, or at least make the offer to all lenders of the associated class. As Serta^[1] and other liability management cases take their twists and turns through the courts, lenders are taking note of how an “open market purchase” provision can be utilized by a dominant class of lenders to subordinate a minority class. Much has been written on the need for “Serta protections” and on liability management transactions, but there has been no attempt to ink a definition for the term “open market purchases” in the credit agreements being drafted today, and there have been few, if any, successful attempts to amend the existing concept to protect against future problems. As recently as the Loan Syndications and Trading Association/Loan Market Association (LSTA/LMA) conference last quarter, when asked whether lawyers were seeing a defined term for “open market purchases,” experts drew a blank. They were not aware of any credit agreements that contained a definition, nor of any real attempts at a definition in the amendment process—shocking.

As lenders open their documents for amendments in the new year for any variety of reasons—e.g., loosening covenants, extensions of payment schedules, and enhancements to the collateral and reporting packages—they should consider amending the documents to delete the “open market purchase” option entirely, or define it as the following:

a purchase of loans that is (i) offered to all lenders on a pro rata basis, (ii) conducted on an arm’s-length basis, (iii) made in cash and at the current trading prices, (iv) subject to no default or event of default, and (iv) structured so that that the purchased debt be canceled.

The definition of “open market purchase” must also be included in the list of sacred voting rights that requires an all affected lender consent, together with the release or subordination of collateral. Otherwise, a dominant class of lenders would be able to amend the definition to delete these conditions in the process of structuring a liability management transaction. This should sufficiently neuter the ability of the borrower to utilize this mechanism to subordinate a group of lenders within the same class and strip covenants as was done in Serta and other transactions. By keeping this mechanic in the document undefined as is the status quo, the risk remains high that a portion of the debt will be subordinated in a liability management transaction. The last thing anyone should have to explain to their credit committee in the new year is why there was an “open market purchase” concept in the document that was not defined.

How Did This Concept Arise?

During the Great Financial Crisis of 2007–2008, “open market purchases” came into vogue to permit the borrower to repurchase loans on a one-off, non–pro rata basis. The concept is typically confined to the syndicated term loan B market. “Open market purchases” differed from “Dutch auctions” (where the borrower specifies a ceiling or a range to lenders and then gives the lenders a period of time to offer the debt for sale) in that they permitted a borrower to purchase loans quickly from any one of its lenders without making the offer to other lenders. This was key. During the Great Financial Crisis, financial sponsors and their borrowers saw this mechanism as an easier and more efficient way to buy back distressed debt without having to go through often lengthy and time-consuming auction procedures. Credit agreements originally permitted these “open market purchases” to be made subject to certain conditions, the most common of which were the following: the absence of a default or event of default, proceeds from the revolver could not be utilized to make these purchases, the borrower had to represent that it was not in possession of any material nonpublic information, and finally, the debt had to be canceled. The cancellation of the debt was critical. The borrower and its affiliates were not entitled to hold those loans and exercise voting rights once the debt was purchased.

A fundamental principle in syndicated credit agreements, however, is that all similarly positioned lenders should be treated equally, or, with respect to distributions, on a “pro rata” basis. This makes a lot of sense; in broadly syndicated loans, and even smaller club loans, lenders extending the credit and agreeing to be part of the syndicate (or the club) do so based on the assumption that they are going to be treated the same as the other lenders in the tranche. It is hard to imagine how a lender group could be put together on any other basis. “Sure, I will lend you money for the secured loan, but you can pay someone else back first, and without telling me,” said no senior secured lender ever. Prior to the Great Financial Crisis, most credit agreements did not even permit the borrower or its affiliates to buy back loans, and the borrower and its affiliates were not permitted assignees of the loans. If anything, the purchase was capped, and there were limitations on voting and information rights, as well as waivers of certain rights in bankruptcy. Even the rights of the borrowers’ “debt fund affiliates” were capped.

There are a number of provisions that give comfort to the fundamental principle that equally positioned lenders should be treated equally. Most credit agreements include a provision that requires any voluntary or mandatory prepayments be made on a pro rata basis to all lenders. Most credit agreements also include some kind of pro rata sharing clause that requires any lender who receives a payment in excess of its proportion to share the excess with the other lenders (either by way of a purchase of an assignment or participation in each of the other lenders’ loans).

A Call to Action

The lack of a definition to the term “open market purchase,” including any detail on the process by which the borrower repurchases the loans through this method, is directly at odds with the other provisions in the credit agreement, so it is not surprising that this mechanic ended up being the gateway to an often-used liability management transaction structure. Now is the time to build in a definition of “open market purchase” that will include appropriate parameters to protect lenders from “lender-on-lender violence” and restore the syndicated lending market to more predictable restructuring outcomes.

1. In re Serta Simmons Bedding, LLC, No. 23-90020, 2023 WL 3855820 (Bankr. S.D. Tex. June 6, 2023). ↑

As chairs of the American Bar Association’s Private Target Mergers & Acquisitions Deal Points Study (the Private Target Deal Points Study), we are pleased to announce that we published the latest iteration of the study to the ABA’s website on December 18, 2023.

Congratulations! But Wait. What Exactly Is This Private Target Deal Points Study, Anyway?

The Private Target Deal Points Study is a publication of the Market Trends Subcommittee of the ABA Business Law Section’s M&A Committee. It examines the prevalence of certain provisions in publicly available private target mergers and acquisitions transactions during a specified time period. The Private Target Deal Points Study is the preeminent study of M&A transactions, widely utilized by practitioners, investment bankers, corporate development teams, and other advisors.

The 2023 iteration of the Private Target Deal Points Study analyzes publicly available definitive acquisition agreements for transactions executed and/or completed either during calendar year 2022 or during the first quarter of calendar year 2023. In each case, the transaction involved a private target acquired by a public buyer, with the acquisition material enough to that public buyer for the Securities and Exchange Commission to require public disclosure of the applicable definitive acquisition agreement.

The final sample examined by the 2023 Private Target Deal Points Study is made up of 108 definitive acquisition agreements and excludes agreements for transactions in which the target was in bankruptcy, reverse mergers, and transactions otherwise deemed inappropriate for inclusion.

Although the deals in the 2023 Private Target Deal Points Study reflect a broad array of industries, the health care and technology sectors together made up nearly one-third of the deals. Asset deals comprised 18% of the study sample, with the remainder either equity purchases or mergers.

Of the 2023 Private Target Deal Points Study sample, 26 deals signed and closed simultaneously, whereas the remaining 82 deals had a deferred closing some time after execution of the definitive acquisition agreement.

The transactions analyzed in the 2023 Private Target Deal Points Study were in the “middle market,” with purchase prices ranging between $30 million and $750 million; purchase prices for most deals in the data pool were below $200 million.

The Private Target Deal Points Study Sounds Great! How Can I Get a Copy?

• All members of the M&A Committee of the Business Law Section received an email alert from Jessica Pearlman with a link when the study was published. If you are not currently a member of the M&A Committee but don’t want to miss future email alerts, committee membership is free to Business Law Section members, and you can sign up on the M&A Committee’s homepage.
• ABA members who are not currently members of the Business Law Section can sign up to join on the Section’s membership webpage.
• The published 2023 Private Target Deal Points Study is available for download by M&A Committee members from the Market Trends Subcommittee’s Deal Points Studies page on the ABA’s website. Also available at that link are the most recently published versions of the other studies published by the Market Trends Subcommittee, including the Canadian Public and Private Target M&A Deal Points Studies, European Private Target M&A Deal Points Study, US Public Target Deal Points Study, and Strategic Buyer/Public Target M&A Deal Points Study.

How Does the 2023 Private Target Deal Points Study Differ from the Prior Version?

The 2023 version of the Private Target Deal Points Study has a number of features that differentiate it from prior iterations.

• A new elegant look and feel. We thought it was time for a refresh on fonts and color scheme, and we utilized gray for prior study data to help current-year data stand out more.
• New data points and correlations. We didn’t think we had enough work on our plates, so we added new data points and correlations throughout. Look for the “new data” flags (see samples below) to make them easy to spot.
  • New Representations and Warranties Insurance (RWI) correlations. We’ve taken a large number of existing data points throughout the study and correlated those points by deals that reference use of reps and warranties insurance, so you can see how that changes things.
  • #MeToo nuances. Based on input from Ally Coll of The Purple Campaign, we have included a more nuanced look at #MeToo representations. 57% of all transactions analyzed in the 2023 Study included a stand-alone #MeToo representation, as compared to 37% of deals in the 2021 Study pool. The new nuanced data points that we added measure whether the representation includes language regarding corrective action (5% of #MeToo representations in our data set do), settlement agreements (74% of #MeToo representations in our data set do, with 11% qualified by the knowledge of the party making the representation), or allegations of sexual harassment (all #MeToo representations in our data set do, with 37% so knowledge-qualified).
  • Closer looks at fraud carve-outs. We wanted to see how often a deal that had an express fraud carve-out to the non-reliance provision also had such a carve-out to the exclusive remedy provision, so we added a new slide exploring just that. Likewise we added a new data point for how often the fraud carve-out to the exclusive remedy provision is limited to fraud as to the reps/transaction documents.
  • Breach of covenants as stand-alone indemnity. We have added to this year’s Study a data point on how often breach of covenants appears as a stand-alone basis for indemnification. Interestingly, not all deals included breach of covenants as a stand-alone indemnity—only 94% had this formulation.
• RWI: The use of RWI decreased for the first time since we have been measuring this data point but maintained a majority position. During the period covered by the 2023 Study, 55% of deals referenced RWI (our proxy for whether a transaction utilized RWI), as compared to 65% of the deals during the period covered by the 2021 Study.
• Earnouts: Earnouts became more prevalent and displayed some buyer-friendly features. Use of earnouts increased significantly—by 30% (i.e., from 20% during the period covered by the 2021 Study to 26% during the period covered by the 2023 Study). Earnouts are often used to address valuation gaps, and this data point suggests growing valuation gaps during the period covered by the 2023 Study (2022 and Q1 2023).
• Anti-Sandbagging: Express anti-sandbagging provisions decreased. The percentage of deals that were silent with respect to sandbagging continued to increase, to 76% in the 2023 study as compared to 68% in the 2021 Study and 59% in the 2019 Study. As a reminder, silence may have a different effect under the laws of different states, so the parties need to consider the effect of being silent under applicable law.

Please join us in extending a huge thank-you to everyone who worked so hard on this study, from leadership to advisors to issue group leaders to the working groups, all of whom are listed in the credits pages.

For more information, there will be an In the Know webinar with the Chairs and Issue Group Leaders providing analysis and key takeaways from the results of the Private Target M&A Deal Points Study—details on time/date to follow.

In the intricate world of legal proceedings, courts globally depend heavily on evidence and testimonies to render fair and informed decisions. A critical component of this process is the role of expert witnesses, whose specialized knowledge and insights are invaluable in helping courts understand complex issues that lie beyond the purview of lay understanding. However, the criteria for determining the credibility of an expert’s opinion and the standards for who qualifies as an expert witness vary significantly across different countries. In this article, we embark on a comparative analysis of how nations like the United States, Australia, Brazil, Canada, Israel, Japan, South Africa, and the United Kingdom approach these pivotal questions.

Our exploration of expert witness standards comes at a particularly pivotal moment, as legal systems around the world are actively updating their frameworks to address new challenges and complexities. A prime example of this evolution is the recent modification to the Federal Rules of Evidence, specifically Rule 702, in the United States.^[1] These changes, which officially took effect on December 1, 2023, have sparked significant debate and discussion within the legal community.^[2] The amendments to Rule 702 are aimed at refining the criteria for admissibility of expert testimony, with the goal of ensuring that such testimonies are not only relevant but also reliably grounded in sound scientific and technical principles.^[3] This development underscores the ongoing efforts to balance the need for reliable and credible expert testimonies with the principles of fairness and justice that are foundational to the legal system.

By examining the practices employed in various countries, we aim to uncover common trends and distinctive approaches that each nation adopts. This exploration reviews the underlying reasons for these diverse rules, considering each country’s unique cultural, historical, and legal contexts. Our objective is to paint a comprehensive global picture of expert witness regulations, extracting valuable insights that could potentially inform and enhance these systems universally. Through this study, we hope to contribute to the ongoing discourse on refining the standards and practices surrounding expert witness testimonies, ensuring that they continue to serve the cause of justice effectively in different legal landscapes.

Comparison

United States: The Judge as Gatekeeper

In the United States, Rule 702 of the Federal Rules of Evidence places the judge in the role of a gatekeeper, responsible for assessing expert witnesses’ qualifications and the reliability of their methodology. Judges must ensure that the testimony meets four criteria: relevance to the case, sufficiency of facts and data, reliability of principles and methods, and the application of methods to the facts of the case.^[4]

While this approach aims to standardize expert testimony, it has its limitations. Judges are not always familiar with the methodologies employed in specialized fields, which may result in errors in judgment.^[5]

Furthermore, amended Rule 702 expressly places the burden of proving admissibility on the proponent of the testimony. Previously, many courts in the United States presumed admissibility of expert opinion, leaving it to juries to weigh the merits of the witness testimony. Under the amended rule, admissibility must be determined prior to the presentation to the jury. To rebut challenges by the opposition, a litigator must be sufficiently comfortable with the methodologies and technical aspects of the expert evidence.^[6]

Australia: The ‘Hot Tubbing’ Technique

Australia is renowned for its “hot tubbing” method, officially known as concurrent expert evidence.^[7] This unique approach brings expert witnesses from opposing sides together in the courtroom to discuss their methodologies and answer questions simultaneously.^[8] This interactive setting allows for direct comparison and a dynamic dialogue, highlighting the strengths and weaknesses of each expert’s approach.^[9] It’s a less formal yet effective method that facilitates robust discussions, aiding judges in making well-informed decisions.^[10]

Brazil: An Inquisitorial Model

Brazil employs an inquisitorial model that persists despite reform efforts that sought to make it more adversarial.^[11] In this setup, judges have a proactive role and can request expert examinations.^[12] Parties may not cross-examine directly; instead, the judge has authority to filter questions in pursuit of truth.^[13] While judges do not solely decide on the admissibility of expert testimony, they play an influential role in weighing the credibility and methodology of the evidence presented.

Canada: A Balanced Approach

Canadian courts follow a somewhat flexible approach regarding expert witnesses.^[14] Known as the Mohan criteria, the Canadian system examines relevance, necessity, absence of an exclusionary rule, and the qualifications of the expert.^[15] In particular, Canadian courts emphasize the importance of objectivity and absence of bias in experts, but these courts tend to be more accommodating than their American counterparts.^[16]

Under the Canadian system, the initial question of admissibility requires the expert to testify under oath or to attest that his or her primary duty is to the court—not the party retaining the expert.^[17] Once this threshold is met, the Canadian model relies on the adversarial system and cross-examination to challenge the expert’s ability to fulfill this duty, as well as to uncover any flaws in methodology or qualifications that would indicate that the risk of allowing the evidence to be admitted outweighs the benefits of admission.^[18]

Israel: An Adversarial Approach

Israel adopts an adversarial system like that of the United States, but with less emphasis on the judge as a “gatekeeper.” All judicial proceedings in Israel are bench trials.^[19] Thus, there is less need to vet expert witness testimony prior to presentation to the fact finders. The court has full discretion concerning whether or not to accept the expert’s conclusions.^[20]

Parties are largely free to introduce expert witnesses, who are then subjected to cross-examination during trial.^[21] The focus here is on the in-trial adversarial process to vet the reliability of the expert’s methodology rather than pretrial judicial assessment. In addition, the court has authority to appoint its own experts.^[22]

Japan: Judges and Advisory Experts

Japan uses a combination of judge-centered and expert-guided approaches. District courts are often divided into multiple divisions, with disputes being assigned to a particular division where the judge has relevant expertise.^[23] If the topic is complex and beyond a judge’s understanding, advisory experts may be appointed to clarify technical aspects.^[24]

Experts are appointed by the court at the request of a party but can be challenged by any opposing party.^[25] These advisers provide independent advice to the court, subject to cross-examination.^[26] The goal is to help the judge to comprehend the methodology, albeit leaving the ultimate decision to the judge.^[27]

South Africa: Adversarial with a Twist

South Africa follows an adversarial system, where the admissibility of expert testimony largely depends on the qualifications of the witness and the relevance of the testimony to the case at hand.^[28] What makes South Africa distinct is the lack of reliance on expert testimony.^[29] Rather, South African courts see expert testimony as one bit of evidence in a narrative of events.^[30] Thus, litigants should take care to emphasize the expert’s professional integrity to convince the fact finders of the value of the testimony.^[31] Likewise, clarity of the expert’s presentation is also important in helping craft the narrative most helpful to the party’s interests.^[32]

United Kingdom: A Less Stringent Approach

The UK takes a less stringent approach than the United States. The courts generally allow expert witness testimony unless there is a clear reason to doubt the expert’s qualifications or methodology.^[33] However, the legal teams on both sides usually subject the expert’s testimony to intense scrutiny through cross-examination. If an expert is found to lack credibility or their methodology is questionable, it can be challenged and discredited in court.^[34] This system places more faith in the adversarial process than in the judge’s discretion to ensure reliable expert testimony.

Merits and Limitations

Different countries have adopted varied approaches based on their legal traditions, cultural norms, and particular needs. It is not possible to determine which country most effectively vets expert witness testimony. Each method has its merits and limitations. Below are some aspects to consider.

Standardization

The US system aims for a high degree of standardization through Rule 702 of the Federal Rules of Evidence. This approach seeks to filter out unreliable methodologies before they can be presented in court. However, this system places a heavy burden on judges and litigators, who may not be experts in specialized fields.

Adversarial Scrutiny

The UK and Israel rely heavily on the adversarial system and believe that rigorous cross-examination will expose any weaknesses in an expert’s testimony. While this allows for a broader range of expert input, it may also permit less reliable testimony to enter into evidence if not adequately challenged.

Collaborative Scrutiny

Australia’s “hot tubbing” technique provides a unique platform for collaborative scrutiny. It enables judges to compare methodologies directly and question experts in real time. This system, however, requires experts who can think on their feet and engage in academic debate, which is not a skill that every expert possesses.

Flexibility

Canada’s Mohan criteria offer a flexible framework for assessing expert testimony, balancing both judge-driven and adversarial elements. However, this flexibility might also lead to inconsistencies in how expert testimony is evaluated.

Pursuit of Truth

Brazil’s inquisitorial model leaves questioning of experts to the judge, in an independent pursuit of truth. While this approach may reduce partisan spin, it also leaves open the real risk of judicial bias and possible corruption.

Ethical Responsibility

South Africa’s system places a high premium on the ethical responsibility of the expert, adding an additional layer of vetting that focuses on integrity rather than just qualifications or methodology.

Specialized Assistance

Japan’s use of advisory experts can be seen as a way to bridge the knowledge gap for judges, though it adds another layer of complexity.

Cultural and Legal Factors

It’s important to note that what works well in one country may not necessarily be effective in another due to various factors, including legal traditions, the role of the judiciary, and cultural attitudes toward authority and expertise.

Closing

Expert witness testimonies are a cornerstone of justice systems globally, providing critical insights that can sway judicial outcomes.

Our exploration reveals how various countries have tailored their approaches to expert witness testimonies, each reflecting a unique blend of cultural, legal, and historical contexts. From the structured approach of the US system to Australia’s interactive “hot tubbing” method to South Africa’s focus on ethical integrity, these diverse methodologies are custom designed to suit the specific needs of each jurisdiction.

However, one constant in this varied landscape is the ongoing evolution of these systems. As we navigate through an ever-changing world marked by advancements in knowledge, technology, and shifting societal values, the rules and practices governing expert witnesses are also adapting. This adaptability reflects the dynamic nature of justice and the relentless effort to strike a balance between reliability and fairness in legal proceedings.

This comparative study highlights the importance of international collaboration and the exchange of best practices. By gaining insights into the varied approaches adopted by judiciaries around the world, we can continually refine and enhance our own systems. This is particularly vital in today’s fast-paced era, where the accuracy and credibility of expert testimonies are more critical than ever. As we move forward, ensuring that expert witnesses remain a dependable and integral part of the legal process will be key to upholding the principles of justice and fairness in an increasingly complex and interconnected world.

1. Hon. Patrick J. Schlitz, Jud. Conf. of the U.S., Committee on Rules of Practice and Procedure: Report of the Advisory Committee on Evidence Rules 5–8 (2022). ↑

2. See, e.g., Kristen M. Bush & Kayla M. Kuhn, Proposed Amendments to Federal Discovery Rule of Evidence 702 and Their Impact on Expert Discovery, Brief, Winter 2023, at 54. ↑

3. Ayako Russell & Jay Thomas, Proposed Changes to Federal Rule of Evidence on Expert Witness Testimony, Glob. Investigations & Compliance Rev., Apr. 10, 2023. ↑

4. Fed. R. Evid. 702. ↑

5. Bush & Kuhn, supra note 2. ↑

6. Russell & Thomas, supra note 3. ↑

7. Peter Caillard, Hot-Tubbing—The Experts Friend?, HKA Glob. Ltd., Feb. 14, 2023. ↑

8. Id. ↑

9. Id. ↑

10. Id. ↑

11. Ludmila Ribeiro et al., Decision-Making in an Inquisitorial System: Lessons from Brazil, 56 L. & Soc. Rev. 101, 105 (2022). ↑

12. Id. ↑

13. Id. ↑

14. See Brad D. Booth et al., Lessons from Canadian Courts for All Expert Witnesses, J. Am. Acad. Psychiatry L., May 16, 2019, at 1. ↑

15. Id. at 2–3. ↑

16. Id. at 6–7. ↑

17. White Burgess Langille Inman v. Abbott & Haliburton Co., [2015] 2 S.C.R. 182, para. 46 (Can.). ↑

18. Id. paras. 47–48. ↑

19. Sivon Wulkan-Avisar & Akiva Fund, Guide to Litigation in Israel: Israeli Legal System and Service of Process, Lexology, Apr. 18, 2023. ↑

20. David Fohrer, Found. Int’l Ass’n Def. Couns., Survey of International Litigation Procedures: A Reference Guide: Israel § 14 (2014). ↑

21. Id. § 9. ↑

22. Id. § 15. ↑

23. Craig I. Celniker et al., Litigation and Enforcement in Japan: Overview, Thomson Reuters Prac. L., 2016, § 3. ↑

24. Id. § 19. ↑

25. Id. ↑

26. Id. ↑

27. Id. ↑

28. Lirieka Meintjes-Van Der Walt, The Proof of the Pudding: The Presentation and Proof of Expert Evidence in South Africa, 47 J. Afr. L. 88, 94–99 (2003). ↑

29. Id. at 89. ↑

30. Id. at 103–04. ↑

31. Id. at 92. ↑

32. Id. at 95–99. ↑

33. See Crown Prosecution Serv., Prosecution Guidance: Expert Evidence (Nov. 20, 2023). ↑

34. Id. ↑

Sustainability and corporate social responsibility (“CSR”) have become mainstays of business activities, and the percentage of companies of all sizes professing to practice some form of sustainability and CSR has been steadily increasing. Sustainability reporting is gradually becoming the norm, particularly for large global businesses. Traditionally, companies practiced CSR through philanthropic activities; however, today’s definition of CSR has expanded to include strategizing to identify and exploit internal and external activities that can deliver value to the company, all its stakeholders (not just shareholders), and society at large.

The first step in bringing a CSR strategy to life is the development and formal adoption of CSR commitments, which are the policies or instruments of a company that indicate what it intends to do to address its social and environmental impacts. CSR commitments ensure that the company’s organizational culture is consistent with CSR values; help align and integrate the company’s business strategy, objectives, and goals; provide guidance to employees about how they should conduct themselves, which is particularly important for companies whose employees are widely dispersed in locations all around the world; and communicate the company’s approach to addressing its societal and environmental impacts to business partners, suppliers, communities, governments, the general public, and others. Commitments also provide a basis that senior management and stakeholders can use to benchmark and assess the company’s CSR performance.

CSR commitments have been broken out into two types, which are closely related. The first type, aspirational commitments, typically focus on articulating the long-term goals of the company. They are usually written in general language that is disseminated through vision, mission, values, and ethics statements. Examples of aspirational commitments include moving to “zero emissions,” “eliminating any negative impacts our company has on the environment,” and celebrating balanced emphasis on “people, process, product, place, and profits.” Aspirational commitments offer a basis for a shared view of what the company stands for and where it is heading that can be referenced by people throughout the organization as a guide when they implement the tactics of the CSR initiative. However, the real tactical nitty-gritty appears in the second type of commitment, “prescriptive commitments” such as codes of conduct and standards that lay out more specific behaviors to which the company explicitly agrees to comply. Some companies choose to develop their own set of prescriptive commitments tailored to their own specific circumstances; however, this can be a time-consuming process. Other companies have found it easier to incorporate and publicly sign on to an existing CSR code or standard for their sector (i.e., codes and standards developed for a particular issue, such as human rights or climate change, or a specific industry, such as mining or agriculture) or another CSR instrument such as the United Nations Global Compact. Prescriptive commitments can be quite extensive and cover a range of legal and CSR-related topics, including the following:

• regulatory compliance
• financial responsibility
• fair competition
• prohibitions on bribery and corruption
• conflicts of interest
• customer relationships
• supply chain relationships
• workplace conditions and employee well-being
• environmental responsibility and community relations
• environmental policies
• human resources policies
• principles of responsible purchasing

Since the development and dissemination of CSR commitments is pivotal to the launch and success of a company’s CSR initiative, companies should follow a deliberative process that includes the following steps.

• Scanning CSR commitments already in use: This step involves researching and analyzing existing CSR commitments that other companies have made. This can help identify best practices and areas where the company can improve.
• Understanding existing organizational norms, values, and strategies: This step involves identifying the company’s existing norms and values and understanding how they relate to CSR. This can help ensure that the company’s CSR commitments are aligned with its overall mission and values. The development of commitments should also deploy traditional strategic planning techniques such as SWOT (strengths, weaknesses, opportunities, and threats) analysis.
• Discussions with major stakeholders: This step involves engaging with key stakeholders, such as employees, customers, suppliers, and investors, to understand their expectations and concerns regarding CSR. This can help ensure that the company’s CSR commitments are relevant and meaningful to its stakeholders. Engagement with customers is important because research shows that they are more likely to support and buy from companies that share their values and address the environmental and social issues that they care about. Developing CSR commitments that employees can be proud of, and which have been adopted with their participation, builds loyalty in the workforce, and it ensures that employees will be engaged ambassadors for the causes selected by the company.
• Identifying the company’s key CSR perspectives (i.e., material CSR topics and issues): This step involves identifying the most important CSR topics and issues for the company, based on factors such as stakeholder expectations, industry standards, and regulatory requirements. This can help ensure that the company’s CSR commitments are focused on the most relevant and impactful areas. Be sure to choose commitments that are aligned with the company’s business model, expertise, and values so that the strengths and resources of the company can be effectively leveraged to create maximum positive impact and value for all stakeholders, including shareholders, employees, and customers.
• Creation of a working group to develop the list of commitments: This step involves assembling a team of individuals from across the organization to develop the company’s CSR commitments. This can help ensure that the commitments are comprehensive and representative of the company’s various functions and perspectives.
• Preparation of a preliminary draft of the commitments: This step involves drafting the company’s CSR commitments based on the input and feedback received from stakeholders and the working group. This can help ensure that the commitments are specific, measurable, and achievable.
• Identifying performance targets for the commitments, followed by consultation with affected stakeholders: This step involves setting specific performance targets for each of the company’s CSR commitments, and consulting with stakeholders to ensure that the targets are relevant and meaningful. This can help ensure that the company’s CSR commitments are aligned with its overall goals and objectives. This is the point where the company should assess current performance and impact for each of its commitments to establish a baseline against which future performance can be measured. Target goals should be SMART (specific, measurable, achievable, relevant, and time-bound).
• Revision and publication of the commitments: This step involves finalizing the company’s CSR commitments, based on the feedback received from stakeholders and the working group, and publishing them publicly. This can help ensure that the company’s CSR commitments are transparent and accountable.
• Continuous monitoring of the external environment: This step involves monitoring the external environment, such as changes in regulations, stakeholder expectations, and industry standards, to ensure that the company’s CSR commitments remain relevant and up to date.
• Identifying and pursuing business opportunities aligned with the commitments: The CSR program should not be separated or isolated from core business activities, and commitments should be made in areas where there will be reasonable and attractive opportunities for creation of shared value for the business and society, such as developing products or services that solve social or environmental problems, partnering with NGOs or social enterprises, or investing in social innovation.
• Implementation of the commitments and reporting progress: This step involves implementing the company’s CSR commitments and tracking and reporting progress against the performance targets. This can help ensure that the company’s CSR commitments are integrated into its overall operations and culture, and that it is making meaningful progress toward its CSR goals. Reporting—using transparent and credible standards and frameworks—ensures that the company continuously communicates its achievements and challenges to its stakeholders and sets an agenda for reiteration of the entire process to ensure that commitments remain relevant and achievable.

It often seems easier to merely adopt, without customization, the standards laid out in recognized third-party CSR instruments. However, doing so misses opportunities to expand organizational understanding of CSR and engage stakeholders in the process in a way that leads to an end product that is focused on their specific needs and expectations, and that is feasible given the company’s available resources. For example, a smaller company is best served by adopting a relatively short list of commitments that can be realistically implemented and achieved rather than creating a voluminous collection of policies and procedures that are not taken seriously.

To learn more, see the author’s book Business and Human Rights: Advising Clients on Respecting and Fulfilling Human Rights, published by ABA Publishing.

Copyright © 2023 by Alan S. Gutterman. All the rights of a copyright owner in this Work are reserved and retained by Alan S. Gutterman; however, the copyright owner grants the public the non-exclusive right to copy, distribute, or display the Work under a Creative Commons Attribution-NonCommercial-ShareAlike (CC BY-NC-SA) 4.0 License.