This article is adapted from The Shield of Silence by Lauren Stiller Rikleen, published in May 2019.
The backlash to #MeToo has significant potential to further diminish opportunities for women at work, as some men claim to be fearful of engaging in mentoring and other relationships important to career advancement. In but one example, a survey reported that “65% of men say it’s now ‘less safe’ to mentor and coach members of the opposite sex.” Some survey respondents expressed concern that the work environment has become too sterile and that women are not being held accountable for their work because managers fear being accused of gender bias.
Days after the Harvey Weinstein story broke, a New York Times article identified a “heightened caution” experienced by men who fear their own careers could be ended as a result of “one accusation or misunderstood comment.” The article also noted the potential negative career impacts on women who lose valuable mentors and sponsors when men take steps to protect themselves from hypothetical accusations: “But their actions affect women’s careers, too—potentially depriving them of the kind of relationships that lead to promotions or investments.” Further to those career impacts, the article identified one survey in which 64 percent of senior men and 50 percent of junior women indicated that they avoided interactions that could give rise to the risk of rumors.
This analysis by the New York Times of industry sectors where men reported their fears and avoided interaction with professional women provided a sweeping—and worrisome—indication that women are at risk of losing career-critical relationships. In identifying where the potential impact on women was greater, the article reported a wide range of workplace settings: “People were warier in jobs that emphasized appearance, as with certain restaurants or TV networks; in male-dominated industries like finance; and in jobs that involve stark power imbalances, like doctors or investors.”
Business sectors are expressing fears that, ironically, will result in further disadvantaging women in the workplace. An article about the potential backlash in the legal profession noted: “The fallout is that some male lawyers are so fearful of being tainted with sexual harassment charges that they’re running for the hills, dodging close working relationships with women.” Similarly, in an article about backlash in the financial services field, the author wrote: “I’ve heard men say that they’re less likely to hire or associate with women as a result of the intensity of MeToo. . . . I have heard directly from male executives at two prominent Wall Street firms that they are moving their female direct reports to female bosses.”
The sad fact is that these fears are countered by significant research demonstrating the infrequency with which actual victims report sexual harassment. The notion that the #MeToo movement has put men at greater risk is contrary to the actual consequences women have faced from reporting, the continued power dynamics in the workplace that disfavor women, the greater likelihood that silence governs behaviors, and even the complicity of the courts in protecting the accused.
As discussed previously, research demonstrates that the court system has failed to adequately protect workers, erecting procedural, evidentiary, and other barriers for employees bringing discrimination, harassment, and retaliation claims. As documented in the book Unequal: How America’s Courts Undermine Discrimination Law, there are a variety of reasons that the law has evolved to favor employer over employee rights.
One such reason is the argument, adopted in a Supreme Court decision, that narrow rulings are warranted to protect employers from false claims. Yet research has shown this argument is not grounded in actual facts. For example, in 2013, there were 39 percent fewer cases involving civil rights employment claims than were brought ten years earlier in 2003. As the authors documented:
The number of federal civil rights claims is also not significant when compared to the total number of people in the workforce. In the twelve-month period ending in March 2013, only 12,665 cases were filed in comparison to 143,929,000 people employed in the civilian workforce. In other words, only a tiny fraction of the workforce files a discrimination suit in any given year. . . .
Available social science evidence does not support any significant faker problem. Instead, it actually shows that employees are reluctant to believe that their employers discriminated against them. In circumstances when they believe discrimination has occurred, they are reluctant to complain to their employer, the EEOC, or a state agency. People can be reticent to make discrimination claims because they may fear retaliation.
In Heather Mac Donald’s 2018 Hillsdale College speech. Mac Donald feeds the narrative that the #MeToo movement is bad for the workplace—indeed, bad for the economy—yet she seems unencumbered by the extensive research that undermines her arguments. She expresses concern that the #MeToo movement will lead to greater calls for diversity and gender equity, which will negatively impact decisions made on merit. For example, she referred to a public radio show’s series on gender and racial inequities in classical music as “irresponsible,” noting that, throughout history, “the greatest composers have been male. . . . We should simply be grateful—profoundly grateful—for the music these men created.”
But what about the music we have never been able to hear because female composers lacked the opportunities and networks to help their music reach the public? To Mac Donald, it is simply because the male composers had greater merit. Then how does she explain the transformation in the gender composition of most major orchestras in the decades since auditions have been conducted behind a screen, the candidate’s gender unknown to those responsible for hiring?
Mac Donald also pushed back on concerns about the lack of women in STEM fields:
Despite the billions of dollars that governments, companies, and foundations have poured into increasing the number of females in STEM, the gender proportions of the hard sciences have not changed much over the years. This is not surprising, given mounting evidence of the differences in interests and aptitudes between the sexes. . . . Females on average tend to choose fields that are perceived to make the world a better place, according to the common understanding of that phrase.
Her data point for this sweeping assertion? Mac Donald referenced a preschool teacher who was profiled in an article and who, notwithstanding a bachelor’s degree in neuroscience, chose not to go to medical school so she could work with poor and minority children. Mac Donald concluded her speech by acknowledging the abuses of power revealed by #MeToo, even as she again attacked any underlying effort for greater equality:
The #MeToo movement has uncovered real abuses of power. But the solution to those abuses is not to replace valid measures of achievement with irrelevancies like gender and race.
Mac Donald’s speech sets forth a comprehensive attack on #MeToo as a rationale for resisting gender equality, a pairing that seems to be a particularly pernicious form of backlash. The dismissal of gender and race as irrelevant to the way in which achievement has been measured ignores decades of research demonstrating otherwise. Those who sow the seeds of a #MeToo backlash only serve to exacerbate the silence.
Functus Officio is a Latin term meaning that once the purpose of the task at hand is completed, there is no further force or authority to undertake any further measures. When applied to arbitrations, the term means that once a final arbitration award has issued, there is no further authority for the arbitration panel to modify the award for any reason or to clarify the same. The rationale behind the rule is a belief that it is necessary to prevent a reexamination of issues by a nonjudicial officer where there might have been further outside communication or undue influence post-hearing. However, in a recent decision, General Re Life Corporation v. Lincoln National Life Insurance Company, 2018 U.S. App. Lexis 33340 (2d Cir. 2018), the Second Circuit joined the Third, Fifth, Sixth, Seventh, and Ninth Circuits in holding that an exception to this doctrine exists.
The governing arbitration panel had rendered a final arbitration award in 2015 resolving a dispute between the parties concerning the ability of General Re to increase premiums under a YRT Reinsurance Agreement with Lincoln. The panel found that General Re was entitled to increase the premiums under the governing contract and went on to address the recapture rights held by Lincoln. The panel determined that the award would be effective as of April 1, 2014; however, the panel did not address the parties’ rights with respect to transactions and recapture rights arising prior to that date. Thereafter, a dispute between the parties arose concerning the pre-April 2014 time period. Lincoln then sought a clarification from the panel, and General Re opposed, citing the doctrine of Functus Officio as precluding the panel from issuing a clarification; the panel rejected this argument and issued a clarification. General Re then moved to confirm the award without the clarification, and Lincoln cross-moved to confirm the award with the clarification issued by the panel. The district court confirmed the award as clarified, and an appeal was taken to the Second Circuit by General Re.
In affirming the decision, the Second Circuit recognized an exception exists “where an arbitral award ‘fails to address a contingency that later arises or when the award is susceptible to more than one interpretation’” (citation omitted). In the instant case, the court noted that both parties had advanced a different interpretation of the language in question, and the panel in its clarification had concluded something completely different; as a result, the court determined there was ambiguity in the award. The court specifically noted that adopting this exception furthers the general rule that when a court is asked to confirm an ambiguous award, the court should instead remand to the arbitrators for clarification. Based upon this, the Second Circuit noted that if the court can remand an ambiguous award back to a panel, it certainly means a panel can clarify an ambiguous award on direct request. However, the court did note that a panel can issue a clarification only where three specific conditions exist: “(1) the final award is ambiguous; (2) the clarification merely clarifies the award rather than substantively modifying it; (3) the clarification comports with the parties’ intent set forth in the agreement that gave rise to the arbitration.” Thus, at present, counsel should be mindful of the existing split in the circuits when considering the impact and application of this doctrine.
In the recent decision David Xiaoying Gao v. China Biologic Holdings, Inc. (Dec. 10, 2018), the Grand Court of the Cayman Islands considered the following issues:
the propriety of issuing new shares to dilute the voting power of existing shareholders;
the extent to which it is possible for a beneficial owner of shares (i.e., not the registered shareholder) to enforce rights attaching to those shares;
whether a registered shareholder is able to assert an equitable claim in respect of impropriety which occurred before he or she became a registered shareholder; and
whether the right to pursue a claim relating to shares is assignable independently of the shares themselves.
This decision is wide-ranging. It touches and concerns many of the issues that regularly come before the courts of the Cayman Islands, given the international nature of the disputes that the Grand Court faces. It provides valuable, clear jurisprudence to litigators and clients alike.
Background
On August 24, 2018, the defendant, a biopharmaceutical company in the People’s Republic of China, allotted and issued shares to four groups of investors under share purchase agreements (the SPAs) and a board resolution of the same date. The plaintiff, a shareholder, hastily responded by filing a Writ of Summons in the Cayman Islands on August 27, 2018, and Statement of Claim on September 10, 2018. Responding to challenges made by the defendant on the plaintiff’s locus standi to bring a claim, an Amended Statement of Claims was filed on September 20, 2018, and a Reamended Statement of Claim (RASC) on October 31, 2018. Prior to the court granting leave for the plaintiff to advance the third iteration of the Statement of Claim. The defendant, by way of a summons dated October 4, 2018 (which was later amended and filed on October 31, 2018), sought the court’s directions on various questions of law, including whether:
the defendant owed any fiduciary, equitable, contractual, and/or other duty to the plaintiff in respect of its directors’ power to allot/issue shares pursuant to the SPAs dated August 24, 2018 (Relevant Date) in circumstances where the plaintiff was not a registered shareholder of the defendant at the Relevant Date;
the plaintiff had taken any valid assignment from Cede and Co. (the registered owner of a portion of shares and the assignor of all rights and remedies to the plaintiff on October 22, 2018) of a right of action against the defendant; and
the plaintiff had a cause of action against the defendant under the circumstances and, therefore, standing to bring these proceedings.
The defendant applied, in the alternative, to strike out the plaintiff’s claim pursuant to the Grand Court rules and the inherent jurisdiction of the court on the grounds that it did not disclose a reasonable cause of action and/or that it was an abuse of the process of the court.
The Reamended Statement of Claim
The plaintiff alleged in his RASC that he was a director of the defendant since October 2011, chairman from March 2012, and CEO from May 2012. These facts were not controversial. The plaintiff was removed as chairman and CEO on July 1, 2018, and July 12, 2018, respectively. The legality of those removals was not challenged by the plaintiff, although they were characterized by him as a “board coup” in the RASC. The court noted that this “coup” was likely to have been humiliating, and so his urgent reactive response was not surprising.
Other background facts not at issue were that the defendant had received an acquisition proposal from CITIC Capital Holdings Limited (CITIC) to acquire all of its shares not already owned by CITIC. The offer was publicized by the defendant on June 19, 2018. On August 17, 2018, a consortium, of which the plaintiff was a part, submitted an offer to acquire all of the other shares in the defendant. On August 24, 2018, the board of the defendant announced that CITIC’s proposal had been withdrawn and that the bid of the plaintiff’s consortium had been rejected. Instead, the board had decided to issue and allot 5,850,000 shares.
The plaintiff alleged that the share allotment had been made for an improper purpose—namely, to seek to alter the balance of power between the incumbent management consortium and that of the plaintiff, thereby thwarting the offer of the plaintiff’s consortium. He further claimed that the board of the defendant had breached its fiduciary duty to the plaintiff in entering into the SPAs and allotting the shares to the incumbent management consortium.
The plaintiff sought, inter alia, a declaration that the SPAs and the board decision of August 24, 2018, were invalid and unenforceable, together with an order requiring the defendant to rescind the SPAs and to rectify the register of the company accordingly.
The Court’s Approach
Of particular note was the court’s findings in respect of the four questions posed above:
Does a registered shareholder possess legal standing to assert a personal claim for breach of fiduciary duty in respect of a board decision to allot and issue shares for an improper purpose?
The defendant argued that fiduciary duties owed by company directors to act bona fide in the best interests of the company are not owed to individual shareholders,[1] but to the company, and that a “special factual relationship” would have to be established in order to create a right of action in favor of an individual shareholder against a company for breach of duty. Principally, the court was invited to follow the decision of the English Court of Appeal in Bamford v. Bamford,[2] where two minority shareholders sought a declaration that an allotment had been made to block a takeover bid. The issue of whether the shareholders could ratify the allotment was determined as a preliminary issue on the assumption that the allotment had been approved by the directors for an improper purpose. In Bamford, the court at first instance held that the shareholders could ratify the directors’ invalid decision. Dismissing the appeal against this decision, the court held:
It is trite law, I had thought, that if directors do acts, as they do every day . . . because they are actuated by improper motives . . . can, by making full and frank disclosure and calling together the general body of shareholders, obtain absolution and forgiveness of their sins and provided the acts are not ultra vires the company as a whole, everything will go on as if it had been right from the beginning . . . .
The only question is whether the allotment, having been made, as one must assume, in bad faith, is voidable and can avoided at the instance of the company . . . because the wrong, if wrong it be, is a wrong done to the company. . . .
Citing an Australian appellate decision,[3] the plaintiff submitted that there was clear authority in support of the proposition that shareholders could pursue personal claims for breaches of fiduciary duty with a view to invalidating an improperly motivated allotment of new shares which diluted the power of existing shareholders. In the Australian case, the court at first instance held that the plaintiffs (minority shareholders) lacked standing because they did not fall within the exceptions to the rule in Foss v. Harbottle (that subject to certain exceptions, shareholders have no separate cause of action for wrongs committed against the company). The appeal court unanimously rejected the finding:
Diminution of voting power stands on a fundamentally different footing from other detriments resulting from abuse of power by directors. . . . The rule in Foss v Harbottle has no application where individual membership rights as opposed to corporate rights are involved. . . .
In answering this question, the Cayman court in China Biologic held that individual minority shareholders ordinarily have no legal standing to sue for breach of fiduciary duty in relation to a complaint that their voting power has been diluted by a share allotment approved by directors for an improper use. The court considered the comments in Argentine Holding accurately, albeit obiter, to state the law. The court further found:
Shareholders ordinarily acquire their shares on the explicit basis that their only means of controlling the management is by successfully passing resolutions at general meetings. It would be inconsistent with what is essentially a functional rule, and potentially expose companies to limitless litigation, if shareholders were permitted to enforce duties which are not owed to them.[4]
The court rejected the view that the dilution of voting rights constitutes a free-standing exception to the rule in Foss v. Harbottle. Instead, the court found that the general position of a minority shareholder facing a dilution of his or her voting power through an improperly motivated share allotment does not constitute special circumstances giving rise to a fiduciary duty on the directors’ part owed to the shareholders.
Does the beneficial owner of shares possess legal standing to assert a personal claim for breach of fiduciary duty in respect of a board decision to allot and issue shares for an improper purpose?
Citing section 38 of the Cayman Islands Companies Law (2018 Revision), the court found that a “member” is by statutory definition a registered member and quoted with approval the submission of the defendant’s counsel, which relied on the following statement of the court in JKX Oil and Gas v. Eclairs Group:[5]
Companies are, in general, both entitled and obliged to deal with those who are registered as having the legal ownership of their shares. Companies are, in general, entitled to decline to deal with mere beneficial owners . . . .
That principle having been confirmed by the Cayman Islands Court of Appeal in Schultz v. Reynolds[6] (albeit that case was not actually decided on the standing issue) and Svanstrom v. Jonasson,[7] the China Biologic court considered itself bound by those decisions. Notwithstanding that the relevant standing rule is not an absolute one, the plaintiff was unable to make out a case based on special circumstances in this instance.
Does a shareholder who acquires legal title to his or her shares after the impugned board approval of a share allotment have standing to assert a personal claim to set it aside?
The court considered the above question upon the hypothetical premise that it had incorrectly found that the plaintiff had no standing to assert a shareholder claim at all, but was correct in a secondary finding that a beneficial owner cannot assert a personal shareholder claim. This was an altogether more vexing question. The court found that a shareholder does have standing to pursue an equitable claim to impugn an allotment of shares authorized by the directors prior to him or her becoming a registered shareholder. The court posed the question: if prior wrongdoing can be complained of in the absence of statutory language, why, then, should there be a general bar to shareholders complaining of conduct before they became shareholders at all?
In order to answer that question, the court accepted the submission of the defendant’s counsel that an assessment would be necessary as to whether an equitable claim passed with legal title to the shares. The court cited Guest on the Law of Assignment:[8]
A “mere equity,” for example a right to rescind or rectify a contract, is probably not a chose in an action. It is not assignable unless it is transferred as an incident of property conveyed or a chose in action assigned and is not sought to be assigned separately from the property or chose in action to which it is incident.
The court preferred the view that there could be no general prohibition on a new shareholder complaining about a continued wrong that first occurred before he or she became a shareholder. This victory was, in light of the finding, a Pyrrhic one for the plaintiff.
Does the plaintiff have standing to pursue a personal claim based on the Cede & Co assignment?
The court’s consideration of this question revolved around whether Cede & Co had validly assigned the equitable right to sue, which they held as at August 24 (they purportedly assigned all rights and remedies to the plaintiff on October 22, 2018) in respect of shares they continued to hold as the plaintiff’s nominee. The question was a free-standing one, which referenced the document assigning the shares. The assignment was characterized by the court as a “rush job” in order to appease an impatient and aggrieved litigant. The defendant submitted that the document, by virtue of its incoherence and ambiguity, had not assigned any right to pursue proceedings. It was held that the plaintiff’s skeleton argument concluded with a “lifeboat submission”[9]—namely, an application that Cede & Co be joined to the proceedings as co-plaintiff. Unsurprisingly, given the tenor of the court’s remarks, it was held that the assignment did not transfer effectively from Cede & Co to the plaintiff the right to pursue an equitable breach of fiduciary duty claim. The court found the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v. West Bromwich Building Society[10] irresistible:
[W]hat is assigned is the chose, the thing, the debt or damages to which the assignor is entitled. The existence of a remedy or remedies is an essential condition for the existence of the chose in action but that does not mean the remedies themselves are property in themselves, capable of assignment separately from the chose.
Conclusion
The claim was struck out. It is worth noting the fact that the court remarked[11] that the plaintiff had a derivative claim and pointed to it being, potentially, a more appropriate remedy—something for litigants and practitioners to bear in mind when considering their strategy. These proceedings evidence a clear statement of the law in the Cayman Islands—namely, that the dilution of share voting rights does not constitute a free-standing exception to the rule in Foss v. Harbottle.
[1] Citing Smellie, J. (as he then was) in Argentine Holding Ltd v. Buenos Aires et. al [1997] CILR 90 at 104.
On August 30, 2018, the California Supreme Court rendered a long-awaited decision in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc.[1] Primarily, the case considers what disclosures are required under California law to make a client’s “advance” conflict waiver enforceable. The decision also addresses when a dormant client is a “current” client and the extent to which a law firm may be entitled to payment for legal services rendered even in the face of a violation of the Rules of Professional Conduct.
Facts
J-M Manufacturing Co., Inc. (J-M) was sued in a qui tam lawsuit alleging misrepresentations about products sold to approximately 200 public entities nationwide. When the qui tam complaint was unsealed, some of those entities intervened as plaintiffs in the lawsuit.
During the litigation, J-M decided to replace its litigation counsel with Sheppard, Mullin.[2] A conflicts check revealed that an attorney in a different Sheppard Mullin office had represented one of the plaintiffs, South Tahoe Public Utility District (South Tahoe), periodically over the previous eight years but only on employment matters.
The 2002 South Tahoe engagement letter, renewed in 2006, contained a prospective or “advance” waiver provision similar to what the court quoted from the J-M engagement letter:
Conflicts with Other Clients: Sheppard Mullin . . . has many attorneys and multiple offices. We may currently or in the future represent one or more other clients (including current, former, and future clients) in matters involving [J-M]. We undertake this engagement on the condition that we may represent another client in a matter in which we do not represent [J-M], even if the interests of the other client are adverse to [J-M] (including appearance on behalf of another client adverse to [J-M] in litigation or arbitration) and can also, if necessary, examine or cross-examine [J-M] personnel on behalf of that other client in such proceedings or in other proceedings to which [J-M] is not a party provided the other matter is not substantially related to our representation of [J-M] and in the course of representing [J-M] we have not obtained confidential information of [J-M] material to the representation of the other client. By consenting to this arrangement, [J-M] is waiving our obligation of loyalty to it so long as we maintain confidentiality and adhere to the foregoing limitations. We seek this consent to allow our Firm to meet the needs of existing and future clients, to remain available to those other clients and to render legal services with vigor and competence. Also, if an attorney does not continue an engagement or must withdraw therefrom, the client may incur delay, prejudice or additional cost such as acquainting new counsel with the matter.
Sheppard Mullin’s general counsel analyzed the work the law firm had done for South Tahoe and determined that such employment-law-related legal work was not “substantially related” to the qui tam litigation. This standard, mentioned in the advance waiver provision, might be relevant under the Model Rules of Professional Conduct[3] if South Tahoe had been a former, not a current, client (a question litigated in the case).
Note also that the language at the beginning of the quoted conflicts provision accomplishes nothing: Model Rule 1.10(a) (and now new California Rule 1.10(a)) provides that if one attorney in a law firm has a disqualifying conflict of interest, that attorney’s conflict is imputed to every other lawyer in the firm, regardless of how many attorneys and how many offices the law firm may have.
Sheppard Mullin’s general counsel also concluded that that the advance conflict waiver signed by South Tahoe would authorize the firm to undertake a representation adverse to South Tahoe. The firm did not, at that time, disclose its representation of South Tahoe to J-M but assured J-M that there were no conflicts preventing it from undertaking the proposed representation.
Procedural History
After commencing its representation of J-M, Sheppard Mullin provided additional employment-law-related legal services to South Tahoe. Thereafter, attorneys representing South Tahoe in the qui tam litigation became aware of Sheppard Mullin’s representation of South Tahoe, and in March 2011 wrote Sheppard Mullin to assert the conflict. Sheppard Mullin responded by invoking the advance conflict waiver provision and arguing the adequacy of the firm’s screening procedures (which apparently were established only after being contacted by South Tahoe’s attorneys about the conflict).
When South Tahoe’s counsel moved to disqualify Sheppard Mullin, the firm informed J-M about the alleged conflict for the first time. The disqualification motion argued that a general advance waiver was inadequate under California ethics rules because it did not constitute informed consent. Sheppard Mullin countered that (1) South Tahoe did not carry its burden of proving that it was a “current” client when Sheppard Mullin accepted the representation of J-M; (2) even if South Tahoe was a “current” client, it had signed a prospective waiver to future litigation against it; and (3) even absent the prospective conflict waiver, laches and waiver should preclude South Tahoe from succeeding on its disqualification argument. Sheppard Mullin also noted that in retaining its current law firm in the qui tam litigation, South Tahoe had agreed to a similar prospective waiver provision.
South Tahoe replied that it remained a current client. The scope of the engagement letter encompassed general employment matters, and the attorney-client relationship thereunder terminated only upon (1) written notice from either party or (2) completion of the “Matter,” which by its nature was recurring. Notably, whether Sheppard Mullin’s representation of South Tahoe is properly viewed as continuous or as a series of discrete, sequential engagements, there were many times when the firm was simultaneously representing both, including the representation of J-M adverse to South Tahoe. Furthermore, the putative waiver was arguably inapplicable to the qui tam matter in that Sheppard Mullin had pursued a California Public Records Act (CPRA) request against South Tahoe, while simultaneously providing legal advice to South Tahoe about how to respond to CPRA requests, thereby constituting a “substantially related representation.”
On July 14, 2011, the federal court granted, without opinion, South Tahoe’s motion to disqualify Sheppard Mullin.
Meanwhile, Sheppard Mullin had billed J-M approximately $3 million in the qui tam matter, with approximately $1 million uncollected. When the firm sued to collect the outstanding amount, J-M counterclaimed for breach of contract, breach of fiduciary duty, and fraudulent inducement and sought both an accounting and disgorgement of the $2 million already paid to Sheppard Mullin. Pursuant to the engagement letter, Sheppard Mullin sought compulsory arbitration. J-M resisted, arguing that Sheppard Mullin’s conflict of interest rendered the engagement letter illegal and unenforceable, but the trial court ordered the parties to arbitration, where Sheppard Mullin prevailed.
The arbitrators concluded that the firm’s failure to disclose its representation of South Tahoe and to obtain a specific waiver from J-M was an ethics violation, but not sufficiently serious or egregious to warrant forfeiture or disgorgement of Sheppard Mullin’s fees. The conflict had not caused J-M any damage, and the services Sheppard Mullin rendered to J-M were not “less effective or less valuable.”[4] The arbitrators accordingly awarded Sheppard Mullin $1.3 million in fees and interest.
The Superior Court rejected J-M’s objections and, holding that a violation of the ethics rules does not render a retainer agreement unenforceable, confirmed the award. The California Court of Appeals reversed, however, holding that concurrent representation of J-M and South Tahoe violated Rule 3-310(C)(3), notwithstanding the scope of the conflict waivers in the parties’ respective engagement agreements, and this violation rendered the entire engagement agreement unenforceable. The Court of Appeals remanded the case for a finding as to when that concurrent representation began.
The California Supreme Court Decision
Sheppard Mullin petitioned for review on the following issues: (1) whether a court may invalidate an arbitration award on grounds that the agreement containing the arbitration agreement violates the public policy of the state as expressed in the Rules of Professional Conduct, as opposed to statutory law; (2) whether Sheppard Mullin violated the Rules of Professional Conduct in view of the broad conflicts waiver signed by J-M; and (3) whether any such violation automatically disentitles Sheppard Mullin from any compensation for the work it performed on behalf of J-M. The California Supreme Court granted review and rejected most of Sheppard Mullin’s arguments. “California law holds that a contract may be held invalid and unenforceable on public policy grounds even though the public policy is not enshrined in a legislative enactment.”[5]
Addressing the advance waiver provision, the court interpreted Rule 3-310(C)(3)’s requirement (essentially comparable to Model Rule 1.7(a)(1)) of informed written consent, confirmed in writing, to mean “informing the client of the relevant circumstances and of the actual and reasonably foreseeable adverse consequences to the client. . . .”[6]
The court rejected Sheppard Mullin’s argument that when it began representing J-M, South Tahoe was a “former client” or a “dormant client” of the law firm, and that South Tahoe did not again become a “current client” until after its representation of J-M began. Sheppard Mullin’s engagement letter with South Tahoe was open-ended, with the scope of the representation being described as “in connection with general employment matters (the ‘Matter’)” and, absent an earlier termination by either South Tahoe or Sheppard Mullin, the representation of South Tahoe would terminate “upon completion of the Matter.”[7] Sheppard Mullin had provided employment-law-related legal services to South Tahoe since 2002 and had done so as recently as November 2009, and again on March 29, 2010, less than a month after taking on the qui tam matter.
Under comparable circumstances, where a law firm and a client have had a long-term course of business calling for occasional work on discrete assignments, courts have generally held the fact that the firm is not performing any assignment on a particular date and may not have done so for some months—even years—does not necessarily mean the attorney-client relationship has been terminated. . . . Absent any express agreement severing the relationship during periods of inactivity, South Tahoe could reasonably have believed that it continued to enjoy an attorney-client relationship with its longtime law firm even when no project was ongoing.[8]
This conclusion became the linchpin for the rest of the decision.[9]
This result creates practical difficulties. Applying the current client conflict rules and the rule with respect to imputation of such conflicts makes enforceability of “advance” waiver provisions in engagement letters in the context of the realities of contemporary law practice a matter of grave concern.
The typical “advance” waiver—similar to the one in both the South Tahoe and J-M engagement letters—provides that the client is agreeing, at the outset of representation, that the law firm may undertake other representations adverse to the client so long as that other adverse representation is not “substantially related” to the matter for which the client is retaining the firm. This “substantially related” caveat is not adventitious; rather, it allows a firm to treat a “current client” as a “former client” for conflict-of-interest purposes vis-à-vis ABA Model Rule 1.9, whereby lawyers can be directly adverse to a former client without the need separately to secure the latter’s consent, if the new matter adverse to the former client is not “substantially related” to the matter for which the attorney previously represented the former client. As such, an “advance” waiver is, and should be, a reasonable compromise between the attorney and the occasional or “dormant” client.
Nonetheless, if the California Supreme Court’s conclusion that South Tahoe remained a “current client” of Sheppard Mullin from 2002 to May 2011 is accepted, the court’s rejection of the application of the “advance” conflict waiver in the J-M engagement letter makes sense. That waiver provision attempted to cover both ongoing and future matters adverse to J-M; however, more disclosure was necessary to satisfy the requirements of informed consent.
The court’s assessment of what constitutes informed consent had consequences of long-range significance:
First, the Sheppard Mullin advance waiver provision was inadequate. By not apprising J-M that a conflict was not merely possible in the abstract, but actually existed at the very moment the firm was asking J-M to waive any current or future conflicts, Sheppard Mullin had failed to disclose all relevant information. Disclosure that an actual conflict might exist but not that a concurrent conflict of interest actually exists is inadequate. “Simply put, withholding available information about a known, existing conflict is not consistent with informed consent.”[10]
Second, the court held that “Sheppard Mullin’s concurrent representation of J-M and South Tahoe violated rule 3-310(C)(3) and rendered the engagement agreement between Sheppard Mullin and J-M unenforceable.”[11] The court rejected the argument that violation of ethics rules regarding the obtaining of informed consent did not invalidate the entire engagement letter, which addressed many other issues.
It is true that Sheppard Mullin rendered J-M substantial legal services pursuant to the agreement, and J-M has not endeavored to show that it suffered damages as a result of the law firm’s conflict of interest. But the fact remains that the agreement itself is contrary to the public policy of the state. The transaction was entered under terms that undermined an ethical rule designed for the protection of the client as well as for the preservation of public confidence in the legal profession. The contract is for that reason unenforceable.[12]
Third, the arbitral award was null and void because it arose from a mandatory arbitration provision in an unenforceable contract.
Nevertheless, the California Supreme Court rejected the conclusion of the court of appeals that because of the ethics violation Sheppard Mullin was “categorically barred” from recovering any fees. Although the Restatement[13] contemplates that violating a duty to a client may require fee forfeiture, not all violations of the rules of professional conduct rise to that level. “The Restatement instructs, and we agree, that the egregiousness of the attorney’s conduct, its potential and actual effect on the client and the attorney-client relationship, and the existence of alternative remedies are all also relevant to whether and to what extent forfeiture of compensation is warranted.”[14] Despite the stigma of an ethics violation, the decision allowed that recovery in quantum meruit might be possible if Sheppard Mullin could “show that the conduct was not willful, and its departure from ethical rules was not so severe or harmful as to render its legal services of little to no value to the client.”[15] Accordingly, the case was remanded to the trial court with these admonitions:
To be entitled to a measure of recovery, the firm must show that the violation was neither willful nor egregious, and it must show that its conduct was not so potentially damaging to the client as to warrant a complete denial of compensation. And before the trial court may award compensation, it must be satisfied that the award does not undermine incentives for compliance with the Rules of Professional Conduct. For this reason, at least absent exceptional circumstances, the contractual fee will not serve as an appropriate measure of quantummeruit recovery. Although the law firm may be entitled to some compensation for its work, its ethical breach will ordinarily require it to relinquish some or all of the profits for which it negotiated.[16]
Conclusion
The Sheppard Mullin litigation is not a repudiation of “advance” waivers generally, as some might have apprehended. It is, however, a reminder that any client consent to waive a conflict must be an informed one. Thus, when asking a client to sign an engagement letter with an “advance” waiver, lawyers should scrupulously disclose any known conflicts upfront.
Some uncertainty remains as to the treatment of “dormant” clients. Such dormant clients may or may not have a reasonable belief that they are still “current” clients. That places a premium on adequate disclosure to ensure enforceability of engagement letters in general and advance waivers in particular.
[2] The facts set forth herein are derived from the California Supreme Court’s majority opinion, the concurring and dissenting opinions, the underlying California Court of Appeals decision, 244 Cal. App. 4th 590, 198 Cal. Rep. 2d 253 (Cal. Ct. App. 2016), and pleadings in the qui tam action, U.S. v. J-M Manuf., Inc. d/b/a JM Eagle, et al., Case No. 5:06-cv-00055-GW-PJW (C.D. Cal., filed Jan. 17, 2006). Except for key holdings of the California Supreme Court, citations to these documents will, in the interests of space, generally be omitted.
[3] The “substantially related” language appears in Model Rule 1.9 (Duties to Former Clients) but not in Model Rule 1.7 (Conflicts of Interest: Current Clients). The same dichotomy holds true under Rules 1.7 and 1.9 of the new California Rules of Professional Conduct adopted in November 2018. No “substantially related” language appeared in the language of the prior California Rules of Professional Conduct in force at the time this matter arose (Rule 3-310(C)(3)).
[8]Id. at 14–16. The California high court expressly linked an attorney’s duty of loyalty to a current client to the requirement that a conflict waiver, to be informed, requires the attorney to disclose “all material facts the attorney knows and can reveal.” Id. at 16. “An attorney or law firm that knowingly withholds material information about a conflict has not earned the confidence and trust the rule is designed to protect.” Id.
[9]But cf. Ky. Bar Assoc. Ethics Op. E-148 2–3 (July 1976) (internal citations omitted) (expressing doubt whether, absent special circumstances, frequency or length of time of prior employment of a lawyer should be dispositive of current versus former client status, unless the client pays a continuing retainer).
[15]Id. at 20. The court went on to say, “The law firm may have been legitimately confused about whether South Tahoe was [Sheppard Mullin’s] current client when it took on J-M’s defense, or it may in good faith have believed the engagement agreement’s blanket waiver provided J-M with sufficient information about potential conflicts of interest, there being at the time no explicit rule or binding precedent regarding the scope of required disclosure. The conflict was, moreover, not one in which Sheppard Mullin represented another client against J-M.” Id. at 24 (internal citations omitted).
With the growing use and popularity of the internet, more and more people and businesses have made the leap into cyberspace to sell, advertise, or promote their company, name, products, or services. With this growing evolution, the inevitable clash over domain names has also grown.
What exactly is a domain name? Simply put, a domain name is essentially the user-friendly form of the internet equivalent to a telephone number or street address. It is the address of a person or organization on the internet where other people can find them online, and it can also become the online identity of that person or organization. For example, many businesses will register their company name as their domain name. A domain name can function as a trademark if it is used to identify goods or services and is not used simply as a website address. Although providing a staggering global market forum, the internet also provides fertile ground for trademark infringers. One of the most common avenues for infringement on the web is that traveled by “cybersquatters.”
A cybersquatter, sometimes referred to as a cyberpirate, is a person or entity that engages in the abusive registration and use of trademarks as domain names, commonly for the purpose of selling the domain name back to the trademark owner or to attract web traffic to unrelated commercial offers. To provide trademark owners with a remedy and a means by which to evict cybersquatters, two alternatives developed: the Anti-Cybersquatting Consumer Protection Act (ACPA), a federal statute providing the basis for a court action against cybersquatters, and the Uniform Domain Name Dispute Resolution Policy (UDRP or Policy), which provides for an administrative proceeding for the resolution of domain name disputes, much like an arbitration.
The ACPA was enacted in 1999 to redress cybersquatting by allowing trademark owners to bring a civil action against a cybersquatter if that person has a bad-faith intent to profit from the mark and registers, traffics in, or uses a domain name that in the case of a distinctive mark, is identical or confusingly similar to that mark, or in the case of a famous mark, is identical or confusingly similar to, or dilutive of, that mark. Remedies include statutory damages between $1,000 and $100,000 per domain for which the cybersquatter is found liable, actual damages, the transfer or cancellation of the domain name, and/or attorneys’ fees.
The UDRP is a less costly and more efficient alternative to the court system.
Consistent with the ACPA, under the UDRP, the trademark owner must prove that: the allegedly infringing domain name is identical or confusingly similar to a trademark or service mark in which the complainant has rights; the alleged infringer has no rights or legitimate interests in the domain name; and the allegedly infringing domain name has been registered and is being used in bad faith.
Marks in which the complainant has rights includes marks that are federally registered, as well as unregistered marks that have acquired common-law rights. Common-law rights are acquired when the mark becomes a source indicator in commerce through its usage, promotion, marketing, and advertising. For example, it has been accepted in a succession of UDRP decisions that authors and performers may have trademark rights in the names by which they have become well-known. Performers can establish trademark rights either by showing that they have registered their names as marks for certain goods or services, or because, through deployment of the names as source indicators in commerce, they have unregistered or ‘common law’ rights to protection against misleading use.
By way of illustration, the recording artist professionally known as Sade was successful in obtaining transfer of the domain “sade.com,” despite the fact that she had not registered her mark SADE. However, she sufficiently demonstrated her usage of the stage name “Sade” as a mark to distinguish her goods and services as a singer, songwriter, performer, and recording artist, and the establishment of substantial goodwill therein, based upon evidence of her sales of records, CDs, clothing, and other merchandise using the mark SADE, as well as live tours, performances, advertising, and promotion.
Once the complainant has established its rights in the mark, it must establish that the disputed domain name is “identical or confusingly similar” to its mark. Not too surprisingly, where the domain name is identical to the complainant’s mark, the requirement of identity or confusing similarity as required by the UDRP has been found satisfied. The addition of “.com” or some other gTLD suffix is not a distinguishing difference where the domain name is otherwise identical to the complainant’s mark.
Determining “confusing similarity” is decided on a case-by-case basis. One particular scenario that continues to confound the UDRP Panels is the appendage of the term “-sucks” to another’s trademark. In one decision that discusses at length the various approaches taken to analyze this issue, the UDRP Panel transferred to the complainant, a company best-known for its sale of alcoholic beverages under the trademark “Guinness,” the disputed domain names: “guinness-really-sucks.com,” “guinness-really-really-sucks.com,” “guinness-beer-really-sucks.com,” and “guinness-beer-really-really-sucks.com” in addition to a host of other similar variations.
Another common scenario involving confusing similarity involves a form of cybersquatting known as “typosquatting,” where the registered domain is a misspelling of a trademark. In one case involving a notorious typosquatter, Disney Enterprises successfully obtained transfer of a myriad of domains that infringed on its famous DISNEY mark by fully incorporating the DISNEY mark, coupled with slight misspellings of other DISNEY-formative marks, like “Walt Disney World” (for example, the disputed domain names included “disneywold.com,” “disneywolrd.com,” and “disneyworl.com”). When internet users mistakenly entered the disputed domains into their web browsers, pop-up windows appeared containing third-party websites and advertisements for goods and services like music, games, credit approval, and casinos. When these windows were closed, additional pop-up windows would appear, containing still more third-party advertisements or websites in a continuous cycle, despite the fact that Disney was not affiliated with, nor had given permission to use its trademarks to, any of the websites appearing in the perpetual stream of pop-ups (a tactic which, as an aside, is curiously known as mousetrapping, but having no affiliation with or relation to Disney’s icon Mickey Mouse).
Any number of factors has been held to establish a domain name registrant’s lack of rights or a legitimate interest in the disputed domain name. For example, one common factor is where it may be inferred or established that the motive for registering the domain name was to sell it at auction on the internet, without any other apparent right or interest in the domain.
Pursuant to the UDRP, a domain name registrant can establish its rights or legitimate interest in the disputed domain name by demonstrating any of the following:
Registrant used, or made demonstrable preparations to use, the domain in connection with a bona fide offering of goods or services prior to the registrant’s receipt of notice of the dispute. For example, the owner of the domain and mark “sexplanet.com” lost its dispute over the domain name “sexplanets.com,” despite its claim that it was the first and most popular adult website for the download of live, streaming video, where the registrant of “sexplanets.com” demonstrated that the domain was registered without prior knowledge of the complainant’s domain name and it was immediately used to further its business plan of providing bona-fide free hosting services to webmasters of adult websites in exchange for advertising revenue generated from banners displayed on the adult sites hosted. In contrast, recording artist and performer Peter Frampton successfully obtained transfer of the domain “peterframpton.com” where evidence clearly demonstrated that the registrant had deliberately chosen to include Peter Frampton’s well-known trademarked name with the goal of commercially benefitting itself from the inevitable user confusion that would result from their concurrent usage of the domain name and Peter Frampton’s mark. In particular, the registrant, who coincidentally shared the name “Frampton,” clearly sought to capitalize on Peter Frampton’s fame and celebrity reputation where he used the domain to post a website offering goods directly competitive with Peter Frampton in the music industry. Such use was deemed to exploit user confusion and does not constitute bona fide commercial use.
Registrant has been commonly known by the domain name, even if it has acquired no trademark rights. For example, the musician Sting almost got stung by the registrant of the domain “sting.com” where the registrant argued his eight year use of the nickname “Sting”, most recently on the internet in connection with global online gaming services. However, the UDRP Panel was not persuaded that the registrant had established that he has been “commonly known” by the domain as the UDRP contemplates; rather, it determined that the word “sting” is not distinctive, most likely used by numerous other people in cyberspace and, in practice, merely provided the registrant with anonymity rather than a name by which he was commonly known. Unfortunately for the musician Sting, these findings were not sufficient to prevent denial of his complaint where the Panel accepted that he was world famous under the name “Sting,” but had not demonstrated his rights to it as an unregistered trademark or service mark, given that the personal name in this case is also a common word in the English language with a variation of meanings.
Registrant is making a legitimate noncommercial or fair use of the domain name without intent for commercial gain to misleadingly divert consumers or to tarnish the trademark at issue. Examples include parody sites, fan sites, and sites dedicated to criticism or commentary. Recording artist Pat Benatar, for example, was denied transfer of the domain name “patbenatar.com” where the registrant had created a fan website that provided a wide range of information concerning Pat Benatar, including detailed band history, chronology of her albums, and past and future appearances. The website contained clear disclaimers that it was strictly operated as a fan site and was unauthorized by, had no affiliation with, and was not endorsed by, Pat Benatar, her band, or agents. Equally important, there was no evidence that the registrant obtained any commercial benefit from the website, which may well have led to a different result. In a more extreme case, Eddie Van Halen of legendary rock fame was denied transfer of the domain “edwardvanhalen.com” from a fan who registered the domain with the alleged intent of putting up a fan site, even though the site never had any content added to it. In contrast, the law firm Hunton & Williams successfully obtained transfer of the domains “huntonandwilliams.com” and “huntonwilliams.com” where the registrant made a failed attempt at a parody website by posting content that was found to merely disparage the firm as greedy, parasitical, and unethical, including the text “PARASITES—no soul . . . no conscience . . . no spine . . . NO PROBLEM!!!” against a background of human skulls, together with a myriad of definitions of the term “parasite” and of advertised products, as opposed to imitating any distinctive style of the firm for comic effect or in ridicule.
Under the UDRP, both the registration and use of the disputed domain must be in bad faith. Evidence includes:
registration primarily for the purpose of selling, renting, or otherwise transferring it to the trademark owner or its competitor (e.g., in a proceeding initiated by the famous actress Julia Roberts, she successfully obtained transfer of “juliaroberts.com” where the registrant had registered and used the domain in bad faith by, among other things, putting it up for eBay auction).
registration to prevent the trademark owner from reflecting the mark in a corresponding domain name, provided that the registrant has engaged in a pattern of such conduct (e.g., also in the “juliaroberts.com” case, the registrant had admittedly registered other domain names, including several famous movie and sports stars).
registration primarily for disrupting a competitor’s business (e.g., Ticketmaster successfully obtained transfer of the domains “ticketmasters.com,” “wwwticketsmaster.com,” and “ticketsmasters.com” where the registrant had deliberately used various misspelling of its well-known mark (typosquatting) to attract internet users who mistype or misspell Ticketmaster’s name and, instead, were redirected to registrant’s competing website).
by using the domain, the registrant has intentionally attempted to attract, for commercial gain, internet users to its website, by creating a likelihood of confusion with the complainant’s mark as to the source, sponsorship, affiliation, or endorsement of its website or location or of a product or service on its website or location (e.g., the registrant’s automatic hyperlink of the domain to a competing website or a pornographic site, such as in a case disputing the domain name “bodacious-tatas.com,” where Tata Sons Limited successfully obtained cancellation of the domain, which directed to a pornographic website. In so doing, registrant was held to have registered and used the domain in bad faith where, among other things, it had unlawfully placed the complainant’s trademarked “TATA” in the meta-tags of its domain address so that when internet users performed an internet search using the “TATA” trademark in any internet search engine (e.g., Google), the search results would include the registrant’s unauthorized pornographic website which, the UDRP Panel held, could induce a potential customer or client of Tata Sons into believing that the porn site was licensed, authorized, or owned by Tata Sons).
The legal profession has moved at a slow pace in addressing issues of diversity and inclusion. Reports in the United States and Canada indicate that lawyers of color, lawyers with disabilities, LGBTQ2+ lawyers, and women lawyers (collectively, “diverse lawyers”) are not well-represented in the profession, particularly at the partner level or in leadership or management roles.
The Numbers
The American Bar Association reported in 2018 that 85 percent of lawyers in the United States were Caucasian/white, and 36 percent identified as female. A 2018 Report on Diversity in U.S. Law Firms by the National Association for Placement reported that, inter alia, (i) minority women continue to be the most underrepresented group at the partnership level, (ii) there are wide geographic disparities in the number of LGBT lawyers, (iii) reporting of lawyers with disabilities is scant, and (iv) representation of Black/African-American lawyers among partners has barely increased since 2009.
In Canada, demographic data is not as readily available. The Canadian legal profession has transformed over the course of the current decade; however, diverse lawyers continue to be under-represented. The Canadian Bar Association partnered with the Canadian Centre for Diversity and Inclusion to conduct a survey tracking law firm diversity in Canada. The study reported that women, lawyers with disabilities, and racialized lawyers are significantly under-represented, and there is a continued trend of Caucasian males occupying senior leadership positions.
Challenges Faced in Retention and Advancement
In recent years, law firms and corporate legal departments have improved recruiting and hiring practices, but inclusion and retention must be addressed. Although individual merit plays a key role in advancement, it is not often the reality. Barriers exist in both countries that impede the retention and advancement of diverse lawyers, such as in-group bias, unconscious bias and stereotyping, diversity fatigue, and the lack of a sponsor or champion. In order to increase inclusion and retention, the legal profession must address these underlying issues.
Diversity and Inclusion in the United States and Canada
A true comparison of the U.S. and Canadian experience is not possible given the historical and cultural differences in both countries. Nevertheless, both countries have similar challenges in recruitment, retention, and advancement and can benefit from their respective experiences and strategies. Best practices that can be used in the United States and Canada include:
Active and meaningful participation and support of senior leadership and management. It is difficult to effect change where those in leadership are not supportive of or active in moving the needle. The involvement and support of senior leadership and management is imperative for having an inclusive workplace.
RFPs, open letters, and other public support of diversity and inclusion from clients. Genuine strategy must be put in place to monitor outside counsel’s diversity and inclusion efforts and to hold them accountable. Meaningful strategies include a thorough examination of the members of the legal team, the percentage of work allocated to diverse lawyers, and the representation of diverse lawyers in senior positions within the firm. Many large financial institutions require quarterly reporting on these items, which allows them to track the outside firm’s commitment to and focus on diversity and inclusion.
A concerted focus on inclusion. This includes creating and maintaining a culture and work environment that is welcoming and allows lawyers to bring their full (professional) selves to the workplace.
Hiring from a broad pool of candidates to recruit diverse talent, and training those interviewing and hiring lawyers (e.g., unconscious bias training).
Internal accountability measures such as tying compensation to efforts of diversity and inclusion.
Law schools implementing diversity strategies, such as The Coelho Center for Disability Law, Policy & Innovation.
Ensuring that diverse lawyers have equal access to advancement opportunities. Challenging, high-profile, and career-advancing files should be assigned based on merit and work ethic, rather than nepotism, as may be the case.
Conclusion
The legal profession in the United States and Canada continue to address the challenges related to diversity and inclusion. Data generated from reports and studies highlight the need to formulate and implement appropriate strategies to address these issues. The initiatives of law firms and organizations in the United States and Canada have played a significant role in the diversity discourse. There are best practices that both countries should draw upon to enhance the recruitment, retention, and advancement of diverse lawyers.
Referrals are sometimes called networking gold. In strategic networking, referrals are an end product of a plan focused on meeting specific people who are able to introduce you to potential clients and relevant sources. The purpose of referral-focused strategies is to identify and meet those people who can help you reach your goals.
The process of making referrals is partly art because it requires sensitive balancing to put people together and the best referrers seem to have a sixth sense about connections and timing. Of course, for referrers, making introductions is also a strategy in that the referrer needs to decide which requests to fill, whom to ask to take a referral, and so on.
Anyone can be a referrer. Good referrers hear the need for introductions in ordinary conversation. For example, a young mother talks about being worried about going back to work. A good listener will broaden the conversation to ask if the woman needs a nanny or a referral to a day care center. Or, an accountant says he is looking for more restaurant clients. The good listener may probe to find out what kind of restaurants and then be able to offer introductions.
Effective referrers usually have large heterogenous networks, resource-rich due to a wide variety of weak and strong links. If your network is reasonably large and diverse it increases the likelihood that someone you know may be helpful to someone else.
Often, people ask for introductions to personal service people who may have nothing to do with your day job but may be in your network because you know them.
Or, they are going to a conference in another city where you have contacts you can suggest they meet.
Or, professionals interested in a new subject may ask a weak link in their own net-work to introduce them to people they know who can help them.
The key to successful referral requests is specificity. If you ask to meet anyone who might need someone who does what you do, the possibilities seem infinite. Too vague a request is difficult for the referrer to remember. If you make the request very specific—I’d like to meet the in-house lawyer for the teamsters union—it is easier for referrers to help you reach the specific person.
In addition to helping a networker implement his/her plan, the process of referring makes people feel good. Emotionally, as a species, we are hardwired to collaborate. We want to help other people in our group, our tribe, our network. Helping others and being helped by them adds an emotional component to strategic requests. When someone accepts a referral request both people feel good.
Larry Hutcher, co-managing partner of a midsize firm and a master referrer, says, ‘Good networkers are givers. Give first because it always comes back to you. I always ask, “How can I help you?” Later I explain what my firm does and follow by saying, “I’d love to represent you.”’
This excerpt was adapted from an upcoming ABA Business Law Section book entitled Corporate Social Responsibility Deskbook.
I. Introduction
Sustainability is about the long-term well-being of society—an issue that encompasses a wide range of aspirational targets, including the sustainable development goals (SDGs) of the 2030 Agenda for Sustainable Development adopted by world leaders that went into effect on January 1, 2016. Among other things, the SDGs include ending poverty and hunger; ensuring healthy lives and promoting well-being for all; ensuring inclusive and equitable quality education and promoting lifelong learning opportunities for all; and promoting sustained, inclusive, and sustainable economic growth, full and productive employment, and decent work for all. The goals listed above are based on the recognition that society in general is vulnerable to a number of significant environmental and social risks, including failure of climate-change mitigation and adaptation, major biodiversity loss and ecosystem collapse, man-made environmental disasters (e.g., oil spills), failure of urban planning, food crises, rapid and massive spread of infectious diseases, and profound social instability.[1]
Clearly the challenges described above are daunting, and for most businesses it may be difficult to see how they can play a meaningful role in addressing them. Although it is common for “society” to be identified as an organizational stakeholder, the reality is that one company cannot, acting on its own, achieve all the goals associated with societal well-being. However, every company, regardless of its size, can make a difference in some small, yet meaningful way in the communities in which they operate, and companies are focusing more and more attention on the impact they have within their communities.[2] Focusing on the community level allows an organization to set meaningful targets and implement programs that fit the scale of its operations and that provide the most immediate value to the organization and its stakeholders. Societal well-being projects and initiatives must ensure that the organization does not compromise, and instead improves, the well-being of local communities through its value chain and in society at large.
II. Legal and Regulatory Requirements
The legal issues associated with the community engagement and investment activities of an organization will depend on its decisions regarding the types of contributions that will be made (i.e., cash, in-kind, human resources, etc.), the nature of the projects and activities that will be supported, and the specific topical areas of interest. All businesses must determine the appropriate legal and organizational structures for their community-focused activities, and this often means that a decision must eventually be made about whether to form a separate legal entity, owned and controlled by the parent company, through which community investments will be funneled (i.e., a corporate foundation). Other common legal issues include mitigating potential legal risks associated with employee volunteer programs, sponsoring and/or hosting community events, and entering into joint ventures and other types of alliance arrangements with local nonprofit organizations. Specialized legal guidance will be required when businesses get involved in complex and highly regulated areas, such as helping to provide financial services for low-wealth and underserved communities; supporting public and private financing of community cultural facilities; participating in community-based efforts to preserve open space while expanding the availability of affordable housing; and assisting local courts in positively and proactively addressing juvenile delinquency by providing vocational training and job opportunities.
III. Voluntary Standards, Norms, and Guidelines
Businesses have long been called upon to comply with a range of formal laws and regulations in various areas related to sustainability-related responsibilities, including those pertaining to the environmental impact of their operations, the employment relationship, working conditions, and health and safety standards. However, apart from satisfying the requirements of local governments with respect to permits and licenses necessary for engaging in certain activities in the community, businesses generally are not heavily constrained by legal guidelines with respect to their community involvement and development activities. This is an area in which voluntary standards have played an important role in providing business with ideas for objectives for their community involvement.
Since the late 1990s there has been a proliferation of transnational, voluntary standards for what constitutes CSR, including state-developed standards; public/private partnerships; multistakeholder negotiation processes; industries and companies; institutional investors; functional groups such as accountancy firms and social assurance consulting groups; NGOs; and nonfinancial ratings agencies.[3] Although voluntary standards focusing specifically on the relationship of businesses and the communities in which they operate are still evolving, lessons can be drawn from many widely recognized normative frameworks, principles, and guidelines such as the United Nations Sustainable Development Goals, the United Nations Global Compact, the OECD Guidelines for Multinational Enterprises (OECD Guidelines), the United Nations Guiding Principles on Business and Human Rights, and the Future-Fit Business Framework.[4] Specialized standards can be used as reference points for support of sustainability-related initiatives in local communities, such as requiring that recipients of grants and other investments for sustainable sourcing and agricultural activities adhere to the guidance developed by the Sustainable Agriculture Initiative Platform.
Although many of the standards and guidelines discussed herein can reasonably be characterized as aspirational, the International Organization for Standardization (ISO) seeks to provide organizations with easy access to international “state-of-the-art” models that they can follow in implementing their management systems. ISO has developed and distributed ISO 26000 Guidance on Social Responsibility which, although not a management system standard, is a useful guide for improvement of organizational practices with respect to social responsibility. ISO 26000 identifies and explains various core subjects, such as organizational governance, human rights, labor practices, the environment, fair operating practices and consumer issues, and, notably for purposes of this discussion, explicitly includes community involvement and development among its core subjects.[5] The issues for businesses relating to community involvement and development identified in ISO 26000 include community involvement and respecting the laws and practices of the community; social investment (i.e., building infrastructure and improving social aspects of community life); employment creation (i.e., making decisions to maximize local employment opportunities); technology development (i.e., engaging in partnerships with local organizations and facilitating diffusion of technology into the community to contribute to economic development); wealth and income (i.e., using natural resources in a sustainable way that helps to alleviate poverty, give preference to local suppliers, and fulfill tax responsibilities); education and culture (i.e., supporting education at all levels and promoting cultural activities); health (i.e., promoting good health, raising awareness about disease, and supporting access to essential health care services); and responsible investment (i.e., incorporating economic, social, environmental, and governance dimensions into investment decisions along with traditional financial dimensions).[6]
IV. Governance and Compliance
Community engagement and investment is a multifaceted activity that requires formal management and planning. Working with and in the community is part of the broader CSR activities of the company, which means that management should begin at the top of the hierarchy with the board of directors or, in most cases, the committee of the board that has been delegated responsibility for overseeing CSR activities on behalf of all of the directors. The CSR committee, working in collaboration with senior management of the company and specialists working specifically on community-related matters, should be tasked with developing strategies and policies relating to community engagement and investment; deciding on the optimal organizational structure for community-related activities, including perhaps the formation of an affiliated corporate foundation; ensure that procedures are in place for conducting due diligence on prospective recipients of grants and other resources from the company and potential partners in community development projects; developing and approving projects; overseeing implementation of projects, including preparation of definitive agreements with community partners, monitoring progress, and measuring impact; and compiling and analyzing relevant information regarding community activities for presentation in the company’s sustainability reporting.
V. Community Engagement
Community engagement and dialogue—sharing information with and listening to community members to provide them with a voice on matters that impact them—is the cornerstone of everything a company does vis-à-vis the community in which operates. Community engagement appears in many of the voluntary standards relating to sustainability and reporting on sustainability-related matters. For example, the OECD Guidelines call on enterprises to seek and consider the views of community members before making decisions regarding changes in operations that would have major effects on the livelihood of employees and their family members living in the community and the community as a whole (e.g., proposed closures of facilities), and take steps to mitigate adverse effects of such decisions on the community. The Sustainability Reporting Standards created by the Global Reporting Initiative, and discussed in more detail below, call for reporting organizations to discuss their management approach with local communities by describing the means by which stakeholders are identified and engaged; which vulnerable groups have been identified; any collective or individual rights that have been identified that are of particular concern for the community in question; how it engages with stakeholder groups that are particular to the community (for example, groups defined by age, indigenous background, ethnicity, or migration status); and the means by which its departments and other bodies address risks and impacts, or support independent third parties that engage with stakeholders and address risks and impacts.[7]
VI. Reporting
Although more and more companies produce reports that emphasize the importance of being a good “community citizen” and effectively managing their relationships with community members and the community environment, those same reports often reflect difficulties in identifying and describing specific goals for community involvement and the impact that company activities are having on the community. As with all aspects of sustainability reporting, practices of companies regarding their disclosures relating to community engagement and investment have been evolving as time has passed and stakeholder interest in such activities has increased. Although mandatory reporting requirements have been slow to emerge, the need to keep communities informed has found its way into global standards such as the OECD Guidelines, which provide that enterprises are expected to ensure that timely, regular, reliable, and relevant information is disclosed to the community regarding the activities, structure, financial situation, and performance of the enterprise and relationships between the enterprise and its stakeholders, as well as communicate information to the community regarding the social, ethical, and environmental policies of the enterprise and other codes of conduct to which the enterprise subscribes (including voluntary standards relating to community involvement and development).
The Sustainability Reporting Standards developed by the Global Reporting Initiative (GRI) are the most widely used standards on sustainability reporting and disclosure around the world and include several types of disclosure categories that cover various aspects of community involvement, investment, and impact. The GRI reporting framework covers a wide range of performance indicators and disclosure standards in three categories: economic, environmental, and social. With respect to operations and other activities that might directly or indirectly have a material impact on their communities, organizations that have adopted the GRI framework are expected, among other things, to make disclosures regarding the impact that their investments and other support of infrastructure and local services has had on their stakeholders and the economy; the indirect economic impacts their operations and activities have had on their communities; community investment activities; engagement with local communities; the actual and potential negative impacts of their actions on local communities; and their managerial approach to community issues.
A framework for reporting promoted by the London Benchmarking Group (LBG), which is managed by Corporate Citizenship, a global corporate responsibility consultancy based in London with offices in Singapore and New York, is an effective tool for quantifying and organizing information about their corporate community investment activities and, most importantly, assessing and reporting on the impact of their relationships with communities and how to manage it.[8] LBG explained its framework as being “a simple input output model, enabling any [corporate community investment] activity to be assessed consistently in terms of the resources committed and the results achieved.”[9] Applying the framework begins with inputs (i.e., what resources did the company provide to support a community activity), continues with outputs (i.e., what happened within the community and the company as a result of the activity, and what additional resources were brought to bear on a particular issue as a result of the company’s contributions and participation in the activity), and finishes with identifying and measuring the impacts achieved on various groups (i.e., the changes that occurred for people, organizations, and the environment within the community and for the involved employees and overall business of the company).
VII. The Case for Community Engagement and Investment
Although the potential benefits of community engagement and investment for businesses are often framed as readily apparent, it is useful to consider ideas about the specific aims and objectives of corporate community involvement. One comprehensive list included making people inside and outside the community aware of various problems in the community; ensuring that investment and development efforts occur across all sectors of the community and in multiple areas, including education, health, recreation, and employment; motivating members of the community to participate in community welfare programs; providing equal opportunities within the community for access to education, health, and other facilities necessary for better well-being; building confidence among community members to help themselves and others; generating new ideas and changing patterns of life within the community in positive ways that do not negatively interfere with traditions and culture; bringing social reforms into the community; promoting social justice; developing effective methods to solve community programs, including better communications between community members and local governments; and creating interest in community welfare among community members and mobilizing those members to participate in the collective work for community development.
Surveys have shown that commitment to CSR and related activities, including community involvement, is an important driver of employee engagement, and employees care a great deal about how their employer is perceived with respect to social responsibility in the communities in which they operate. Community engagement and investment activities provide organizations with important opportunities to leverage the impact of their contributions, given that businesses typically rely on their local communities as a source of talent for the employee base, for contractors for services that the organization seeks to outsource and, of course, as a market for the organization’s products and services. By contributing to educational and health programs in the community, an organization can increase the skills base of potential workers, thereby reducing training costs when new employees are hired and lowering the risk of adverse impacts to productivity due to illnesses among its employees or their immediate family members, either of which can cause employees to miss time at work. Organizations can provide financial support, as well as licensed technology, to launch a local network of engineers, scientists, and/or software developers to generate innovations that not only benefit the organization, but also provide new opportunities for other members of the community, thus improving overall community well-being. Finally, the proximity of local customers makes it easier for organizations to develop and communicate their marketing messages and seek and obtain feedback on the effectiveness of those messages and the quality and value of the product and services distributed by the organization. In fact, one of the compelling reasons for investing in community involvement at all levels is the relative ease of collecting and analyzing information relating to operational performance. Proximity to the human, technical, and other resources that can be developed and nurtured through community engagement and investment also allows organizations to move more quickly to seize opportunities and obtain a competitive advantage.
[1] The Global Risks Report 2017 (12th ed.) (Geneva: World Economic Forum, 2017), at 61–62.
[2] Communities have been described as individuals linked by issues (i.e., people concerned with the same issue); identity (i.e., people who share a set of beliefs, values, or experiences related to a specific issue, such as the environment or public health); interaction (i.e., people who are linked by a set of social relationships); and geography (i.e., people who are in the same location). See Engage Your Community Stakeholders: An Introductory Guide for Businesses 3 (Network for Business Sustainability, 2012).
[5]See International Organization for Standardization, ISO 26000 Guidance on Social Responsibility: Discovering ISO 26000 (2014); Handbook for Implementers of ISO 26000, Global Guidance Standard on Social Responsibility by Small and Medium Sized Businesses (Middlebury VT: ECOLOGIA, 2011) (hereinafter Handbook for Implementers).
[6] Handbook for Implementers, supra note 5, at 32–33.
[7] GRI 413: Local Communities 2016 (Amsterdam: Global Sustainability Standards Board, 2016).
[8] From Inputs to Impact: Measuring Corporate Community Contributions through the LBG Framework—A Guidance Manual 4 (London: Corporate Citizenship, 2014).
A federal district court has opened the door for professional athletes to file lawsuits in the United States against foreign professional sports teams—and potentially the international conglomerates that own them—to resolve employment disputes.
In Lutz v. Rakuten, Inc. et al., Civ. Action No. 17-3895 (U.S.D.C. E.D. Pa.), Zach Lutz, a former Major League Baseball (MLB) player for the New York Mets, filed suit against Rakuten Baseball, Inc., a Japanese baseball company that owns and operates the Tohoku Rakuten Golden Eagles (the Golden Eagles), and Rakuten Inc., a Japanese e-commerce company and corporate parent of the Golden Eagles (Rakuten), for reneging on an agreed-upon contract for Lutz to play for the Golden Eagles for the 2015 season.
The Golden Eagles are a Japanese professional baseball team that plays in Nippon Professional Baseball’s Pacific League, one of two Japanese professional baseball leagues and the Japanese equivalent of MLB. The Golden Eagles are a wholly owned subsidiary of Rakuten, a Tokyo-based holding company that is often referred to as the “Amazon of Japan.” Through its subsidiaries and affiliates, Rakuten operates numerous e-commerce and internet services companies globally. In 2018, Rakuten’s consolidated businesses earned revenues of 1.1 trillion Japanese yen—close to 10 billion U.S. dollars. Although Rakuten may not be a household name in the United States, basketball and soccer fans may recognize Rakuten as the jersey sponsor of the NBA’s Golden State Warriors and La Liga’s FC Barcelona.
Lutz played for the Golden Eagles in 2014, but after injuring his thumb during the season, he returned to his home in Pottstown, Pennsylvania. During that time, the Golden Eagles monitored Lutz’s injury, subsequent surgery, and rehabilitation and began negotiating a new contract for the 2015 season (and beyond). For several months, Lutz and the Golden Eagles exchanged numerous communications via text message, e-mail, and telephone concerning his physical condition and the new contract. The Golden Eagles requested medical records from Lutz’s doctors in the United States, which he provided, and paid for Lutz’s medical insurance for physical therapy and rehabilitation during this period.
In December 2014, Lutz and the Golden Eagles agreed to a one-year deal for the 2015 season, which guaranteed Lutz $700,000 in base salary plus incentive bonuses and reimbursement for expenses. On December 4, 2014, a written contract was e-mailed to Lutz in Pennsylvania, and he signed and returned it to the Golden Eagles two days later.
However, the Golden Eagles never countersigned the contract. Lutz alleged that weeks after returning the signed contract, the Golden Eagles reneged on the deal and instead signed Gaby Sanchez, a better-known MLB player. Lutz remained on the team’s “reserve list,” which under the Nippon Professional Baseball Organization’s rules meant that he was barred from negotiating a new contract with any team in the world. Lutz remained on the reserve list for several weeks before he was released and eventually signed a contract with the Doosan Bears of the Korean Baseball Organization for $550,000—$150,000 less than his Golden Eagles contract, with no incentive bonuses or paid expenses, and a less attractive deal overall than the one he had accepted from the Golden Eagles.
In August 2017, Lutz filed suit in the U.S. District Court for the Eastern District of Pennsylvania against Rakuten and the Golden Eagles alleging fraud, negligent misrepresentation, and promissory estoppel. Rakuten and the Golden Eagles moved to dismiss Lutz’s complaint under Rule 12(b)(2) for lack of personal jurisdiction, and under Rule 12(b)(6) for failure to state a claim. Rakuten and the Golden Eagles primarily argued that the federal court lacked both general and specific personal jurisdiction over both entities such that litigation in a Pennsylvania court would violate the constitutional principles of due process. Specific jurisdiction requires that a defendant have sufficient “minimum contacts” with the forum and that the claims arise out of those contacts. General jurisdiction, on the other hand, subjects a foreign defendant to the court’s jurisdiction if its nonclaim-related contacts with the forum state are so continuous and systematic that the defendant can be considered “at home” there.
Rakuten and the Golden Eagles argued that the court lacked specific personal jurisdiction over them because neither entity conducts business or has a physical location in Pennsylvania, and because the Golden Eagles representatives did not set foot in Pennsylvania to negotiate or communicate with Lutz; in Rakuten’s case, its representatives were not involved in the contract negotiations with Lutz. The Golden Eagles argued that their contacts with Lutz were location-agnostic; they sent e-mails and text messages not knowing where Lutz was physically located at the time. Rakuten asserted that general personal jurisdiction over it was improper because, as an international conglomerate based in Japan, it does not engage in business that directly targets or solicits Pennsylvania residents.
In opposition, Lutz argued that specific personal jurisdiction was proper because representatives from the Golden Eagles communicated directly and frequently with him in Pennsylvania concerning his injury and a new contract for the 2015 season. Lutz argued that general personal jurisdiction over Rakuten was appropriate because Rakuten overtly promotes on its website that all of its business endeavors, including owning and operating the Golden Eagles, are part of an integrated global “ecosystem” that markets the Rakuten brand internationally, including in Pennsylvania.
On April 22, 2019, U.S. District Judge Chad F. Kenney issued a detailed opinion, holding that the federal court had personal jurisdiction over the Golden Eagles but lacked personal jurisdiction over Rakuten. Judge Kenney found that the Golden Eagles “knowingly reached into Pennsylvania to recruit and employ [Lutz] to play baseball for the Golden Eagles.” The court found specific personal jurisdiction over the Golden Eagles because it “purposefully directed its activities at Pennsylvania” by: (1) knowing that Lutz was a Pennsylvania resident, evidenced by the fact that they wired money to his Pennsylvania bank account for his 2014 salary; (2) communicating via e-mail, text message, and telephone with him while he was in Pennsylvania regarding his recovery and the 2015 contract; and (3) paying for his medical insurance for his physical therapy and rehabilitation, most of which occurred in Pennsylvania.
The court determined that it lacked personal jurisdiction over Rakuten, however. There was no specific personal jurisdiction because Lutz’s allegations implicated only the Golden Eagles and not Rakuten. The court also found that general personal jurisdiction was lacking because Rakuten, as a holding company, does not (1) sell any goods or services in Pennsylvania, (2) have any locations in Pennsylvania, or (3) directly target or solicit Pennsylvania citizens. Instead, the court applied the test set forth in Zippo in finding that Rakuten passively marketed its global “ecosystem” and “is more akin to an advertisement of the overall Rakuten brand.” The court refused to attribute the activity of websites managed by third parties, who were affiliates but not wholly owned subsidiaries of Rakuten, to Rakuten itself even though such websites bear the Rakuten name and logo and promote the overarching Rakuten brand.
Although Judge Kenney’s opinion dismissed Rakuten, the court denied the defendants’ Rule 12(b)(6) motion, allowing Lutz’s claims against the Golden Eagles to proceed. Even though he dismissed Rakuten, Judge Kenney implicitly endorsed the notion that an international conglomerate such as Rakuten could be subject to personal jurisdiction in a federal district court if its marketing strategy targets citizens of a particular state and is central to its business.
This decision should send shockwaves to foreign professional sports teams because it opens the door for U.S.-based professional athletes to litigate employment disputes in American courts. By actively reaching into the forum state to recruit and employ an athlete, such actions may be considered to be “purposefully directed” at the forum and may subject the foreign teams to jurisdiction there. This is a crucial development for the legal rights of U.S.-based professional athletes for two primary reasons.
First, litigating in foreign jurisdictions is cost prohibitive and logistically challenging for individual plaintiffs. Judge Kenney acknowledged that it would pose a significant burden on Lutz to bring his claims in Japan, whereas the Golden Eagles would face a “substantially smaller burden” to defend itself in Pennsylvania. In addition, international courts and foreign alternative dispute resolution options (e.g., arbitration) often do not protect the same rights and provide the same relief as American courts. As a result, foreign professional teams have avoided making contractual payments to players without much (or any) redress.
Second, foreign professional sports teams are frequently owned by international conglomerates, such as Rakuten, that use the team to promote the overall brand through the team’s exposure to consumers and active content marketing and distribution networks. To the extent that these foreign entities target American consumers through their global branding strategies, they may be subject to personal jurisdiction in American courts. In September 2017, Rakuten entered into a sponsorship deal reportedly worth $60 million with the Golden State Warriors to promote its global “ecosystem” by displaying its logo on the front of the team’s jerseys, arguably targeting consumers in each of the 27 American cities where the Warriors play (including Philadelphia, Pennsylvania) and in millions of households worldwide through television and other media. By sponsoring the Warriors—the most prominent, superstar-packed team in the NBA with more nationally televised games than any NBA team and a massive media and social media following—Rakuten undoubtedly knew that it would gain immense exposure in the United States. A November 2017 Forbes article covering the deal suggested that the Warriors used complex analytics to value such exposure and justify the exorbitant cost of the deal (twice the cost of the next highest NBA team jersey patch deal).
On the other hand, as the defendants raised in their moving papers, had Lutz alleged contract claims against the Golden Eagles, he would have had to contend with a forum selection clause, choice-of-law provisions, and a requirement to arbitrate, all of which would have forced Lutz to resolve this dispute in Japan according to Japanese procedures. Creative pleading allowed Lutz to sidestep any potential contract law issues, but other putative plaintiffs whose claims arise under contract law may not reap the benefits of the Lutz decision. In addition, as Lutz demonstrated, imputing personal jurisdiction on a parent holding company that had no direct involvement in the claim is an uphill battle for a plaintiff. Parent companies often run their businesses through operating subsidiaries specifically to avoid the situation Rakuten confronted (and prevailed on) in this litigation, i.e., opening its deep pockets to resolve a dispute it had no direct role in creating. Moreover, if a plaintiff successfully surpasses the personal jurisdictional threshold, it must still prove that the corporate parent is somehow liable to the plaintiff under a joint-employment or some other legal theory—another uphill battle.
While the Golden Eagles may have had grounds to seek an interlocutory appeal of the court’s denial of their Rule 12(b)(2) motion, seeking to dismiss the entire case, they opted to file an Answer to Lutz’s complaint and move the case forward. This may have been a prudent move as Lutz likely would have cross-appealed, challenging the court’s dismissal of Rakuten – a risk that Rakuten might prefer to avoid as it would allow the appellate court to take a closer look at the record evidence of Rakuten’s deep business entwinement with its subsidiaries, including the Golden Eagles. However, depending on the outcome of the case, an appeal could remain an option, albeit still a risky one. . On a broader scale, although it was persuasive, Judge Kenney’s decision is not binding on other courts. Thus, any appeal by the Golden Eagles runs the risk that the Court of Appeals for the Third Circuit will affirm Judge Kenney’s opinion, thereby setting a precedent for all federal courts in Pennsylvania, New Jersey, Delaware and the U.S. Virgin Islands, in addition to creating a persuasive decision for all other federal courts. For now, however, Lutz’s case will proceed and Judge Kenney’s decision will inevitably serve as a guidepost for professional athletes to pursue lawsuits in the U.S. against foreign professional sports teams, a major turning point for player rights.
After the enactment of the General Data Protection Regulation (GDPR) in Europe, privacy experts foresaw that it would be only a matter of time until similar privacy laws—ones that gave consumers more control over their personal data and the way it was used—were enacted in the United States. Several states have already either implemented new laws or are amending existing laws that surround consumer protection and the privacy of consumers’ information. Of note is the California Consumer Privacy Act (CCPA), which will go into effect on January 1, 2020.[1] Washington State, home of Amazon and Microsoft, recently introduced Senate Bill 5376, the Washington Protection Act (WPA), which will offer consumers a way to oversee and manage their personal data.
The Laws
Like the GDPR, there are business-use exceptions that make it possible for most financial institutions, debt collectors included, to continue using personal data in their businesses without disruption. Both the CCPA and WPA provide exceptions for financial institutions that collect consumer information while complying with the Gramm Leach Bliley Act (GLBA); however, within the framework of these new privacy regulations, ensuring compliance may not be as straightforward as it seems at first glance.
The GLBA governs the privacy of consumer and customer information for financial institutions of all types. It is based on the customer’s/consumer’s relationship with a financial institution or service provider and requires the financial institution to protect information a customer or consumer has given to the financial institution. The institution also must disclose its privacy policy and practices as well as the types of information it may share with others.[2] Put simply, when it comes to information about consumers and customers, financial institutions must disclose how they will use the information, and the GLBA gives consumers the right to opt out of certain types of that use if it means information will be shared with a third party. These conditions apply to certain information given by the consumer in the pursuit of its relationship with the financial services provider or financial institution. In the GLBA, the protected information is called “nonpublic personal information,” which is defined as any information provided by a consumer in order to obtain a financial service or product.[3] This is important when discussing the WPA and CCPA because, as noted above, both acts have an exception for personal information obtained pursuant to the GLBA, although the designation and type of information protected under these acts are very different.
The CCPA and WPA
The CCPA and the WPA protect a broad range of personal information. Although the GLBA is focused on protecting information that is given to an institution in the conduct of business for personal, household, or family purposes,[4] the state acts create rights for consumers to access, delete, and better control the use of nearly any information that can identify them. The CCPA, for example, defines the information that it protects as “any information that identifies, relates to, describes or is capable of being associated with or could reasonably be linked, directly or indirectly, with a particular consumer or household,”[5] and the WPA defines its protected information as “any information that is linked or reasonably linkable to an identified or identifiable natural person.”[6] Both the California act and the pending Washington act offer consumers the right to access and to delete their personal information with some exceptions. There are several types of information that are excepted from both acts, such as the information that is already regulated and protected by certain privacy or information statutes like the Fair Credit Reporting Act, the Federal Driver’s Privacy Protection Act, and, of course, the GLBA; however, unlike the other acts, the exception for information gathered pursuant to the GLBA is not comprehensive.
When the CCPA was originally passed, it excluded “personal information collected, processed, sold or disclosed pursuant” to the GLBA if it was in conflict with that law.[7] The language was changed, removing the caveat that required the CCPA to be in conflict, which effectively excluded all information collected under the GLBA; however, with this change, new language made it clear that consumers would have a private right of action around any GLBA-collected information in case of a breach.[8] Additional language was recently presented with the backing of California’s attorney general that, if passed, would subject information that financial institutions collect pursuant to the GLBA to a private right of action for any consumer whose rights under [the] title are violated.[9] Again, the CCPA creates rights to access, delete, and be notified about personal information for all California residents. As it stands currently, this opens the door for private rights of action against any information about a financial consumer that is not gathered pursuant to GLBA, and will allow consumers to assert their rights for personal information that is collected and processed pursuant to the GLBA. Similarly, the Washington Protection Act excepts information collected under the GLBA, but only if it complies with that law.[10]
Thinking about Compliance, Debt Collection, and Privacy
When collecting a debt, in addition to customer information collected pursuant to the GLBA, an entity may have additional personal data that is part of a loan or collection file. For example, a customer may provide a reference for a loan, or a co-signor’s personal information may be included in the loan file, but not subject to the obligations that financial institutions owe to consumers and customers. The GLBA does not require disclosures for parties affiliated with the customer that may be a part of the financial information that they provide. This information is still personal data as defined in the WPA and CCPA, and because it is not governed by the financial institution’s ongoing GLBA obligations to consumers, it may fall squarely into the states’ acts. Even if such information were considered as “complying with the GLBA” under the WPA, it still may be subject to the private right of action pursuant to the CCPA. Additionally, compliance with the GLBA is not so clear cut. Information that can be considered “publicly available” is not subject to the privacy and protection rules of the GLBA and is often subject to an institution’s reasonable belief about the information.[11]
Ultimately, despite the exemptions provided by the WPA and CCPA for institutions that follow the GLBA, there are likely to be gaps that require thinking about ways to adjust practices to comply with the state laws and to allow Washington and California consumers to exercise their full rights. Debt collectors, both creditors and others who engage in debt collection, must evaluate the nature of the data that they hold and prepare to respond to the exercise of consumer rights implemented by these acts. To prepare, any entity that is involved in debt collection should consider taking additional steps with the information that they receive. Overall, a more holistic approach to consumer data will ease compliance as the privacy landscape continues to change:
Consider data holistically. Consider implementing practices that look at the best way to protect all of the data your entity receives, not just customer or consumer data. Information that comes through marketing, employment, and even that which is offered incidentally to a credit transaction or financial service can change your compliance obligations.
Identify noncustomer personal information. During an application process or the acquisition of a new file for collection, consider noting when a person other than the customer has personal information in the file and denote that it exists.
Segregate noncustomer personal information. Segregating personal information will help avoid risk and assist you or your client in responding to valid consumer requests under the WPA and the CCPA.
Prepare to respond. The rights instituted under the WPA and the CCPA are likely to impact your organization even if it is complying with the GLBA. Mitigate risk by preparing to respond to customer requests for information. Consider the form of the requests that your organization will accept, what your responses will look like, how to minimize the time spent responding, and how to ensure that California and Washington consumers get the best customer service possible. Keep in mind that other states are likely to follow.
Train staff. Training staff to focus on what constitutes personal data will improve their ability to track and preserve it across the organization, reducing the costs of compliance and lowering the likelihood of a lawsuit.
[1] There are multiple proposed amendments that have been presented to change the CCPA, and the amendments cover a variety of subjects. No one is exactly sure what will happen come January 1, 2020.
[2] The FCRA, like the GLBA, provides certain exceptions and restrictions related to affiliate disclosures. These can be found at 15 U.S.C. § 1681s; however, this article is not intended to address those restrictions.
