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

General Healthcare Industry Laws

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

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

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

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

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

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

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

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

Additional Tax Regulations for Nonprofit Entities

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

Best Practices

Implementing best practices may protect against regulatory infractions.

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

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

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

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

[1] 42 U.S.C. § 1320a-7b.

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

[3] 42 U.S.C. § 1395nn.

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

[5] 42 C.F.R § 411.351.

[6] I.R.C. § 501(c)(3).

[7] 26 C.F.R. § 53.4958-4.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[3] Id.

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

[5] Calif. Gov’t Code § 12926.

[6] Id. § 212.1.

[7] Calif. S.B. 188.

[8] See N.Y.C. Admin. Code § 8107.

[9] Id.

[10] N.Y. S.6209A/A.7797A.

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

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

Material Adverse Effect

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

Representations and Warranties

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

Interim Operating Covenants

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

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

Impact on Representations & Warranties Insurance (“RWI”)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Virtual Pro Bono Advice

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

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

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

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

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

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

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

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

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

A Tool for Disaster Relief

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

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

Analyzing Data for Better Preparation

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

Attorneys Provide Brief Legal Advice at Their Convenience

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

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

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

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

ABA Free Legal Answers Is Making an Impact

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

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

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

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

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

In a recent book, a law firm partner observed in respect of the legal profession the following:

The growth of organizational law departments in capability, size, responsibility and confidence has been one of the most important changes in the legal profession in America in recent decades. The key point is that many law departments have become both knowledgeable and competent suppliers of legal services to their employers and, when necessary, knowledgeable and competent buyers of legal services from private practice firms and alternative legal service providers.[1]

Although the growth and increased sophistication of the in-house bar has occurred over several decades, in-house lawyers have become much more sophisticated in how they purchase services from their external service providers.[2] They have come to realize that the service needed varies considerably from situation to situation. Consequently, matching the service provider to the particular type of service needed to achieve a business organization’s objective requires a much more deliberate and, on occasion, detailed process than was the case historically. We should note that as in-house legal departments have grown more sophisticated, the choices available to them for top-drawer legal services have increased. Meeting their internal clients’ greater demands for value while facing more numerous choices of outside service providers (including law firms) has made in-house lawyers’ jobs considerably more complex. Meeting those simultaneous needs tests the project-management training and skills of those in-house counsel.

The increasing sophistication of corporate law departments and their determination to take greater control of the management of the legal service needed by their companies equates to a greater need on the part of outside counsel to understand what in-house lawyers seek from their external counterparts. Firms must manage their client relationships much differently than they once did. Firms no longer provide clients all necessary services. Firms compete with alternative legal service providers (ALSPs) and technology utilizing artificial intelligence (AI). We suggest that the vague mandates of past retentions (e.g., “we need to win this case” or “we expect to acquire another company”) will no longer suffice. Greater precision in such instructions will be needed to meet the client’s expectations and to serve that client in the desired manner. Anything else risks leading to a dissatisfied client. Woe to the firm that allows that to happen by failing to learn what its clients want. In today’s hyper-competitive marketplace, such a client could easily become a former client with little notice.

How can firms today ensure they meet client expectations? The technique revolves around improved and more focused communication (including the all-important, but often overlooked, talents of listening carefully and collaborating willingly). Clients often know what they want, but may not have drilled down to isolate the specific traits of the service or the provider that they need to achieve their business objectives as effectively and directly as possible. It behooves outside lawyers to devote time and energy to exploring their clients’ service-related preferences in order to identify those necessary traits.

To do so firms should focus on more specific factors than they typically do. We suggest using “value-related qualities” (VRQ) for that purpose. A VRQ is an attribute of the service or provider or of the context in which the service is needed that can increase or decrease the utility (and, therefore, the value) of the service for the client in that particular situation. As an example, a business client that lost a senior executive to a competitor and realizes that the executive took with her valuable intellectual property for the benefit of that competitor needs injunctive relief as quickly as possible. In such a situation, speed likely would be the highest-ranked VRQ, even if in other contexts cost would supersede speed as the most desirable characteristic of the firm’s service. Another example is the process of review and discovery for hundreds of thousands of electronic documents and images. Effective and efficient review of a population this size demands high-powered technology with state-of-the-art AI capabilities. ALSPs have seized this space. The related VRQs could encompass accuracy, speed, and costs per terabyte.

The VRQs for a client should match up against the in-house lawyers’ responsibility to their internal clients. Whether the same as the VRQs that they apply with their outside counsel, business clients should express their service-related needs in terms akin to those utilized by the in-house and outside lawyers for the company.

Where is the list of VRQs? There is no list. Each legal matter will have a handful of VRQs rooted in dynamics that are important to the client. Naturally, the client can rank the VRQs in order of importance. As firms carefully listen to clients during the planning phases of an engagement, firms will likely create VRQs important to them, which will allow for rich dialogue surrounding the management of the engagement, specific accountabilities, and anticipated costs. The VRQ concept allows for the unambiguous establishment of expectations, which will lead both in-house legal departments and firms to the proverbial win-win and help establish a fruitful relationship for years to come.

[1] Michael H. Trotter, What’s To Become Of The Legal Profession? 41 (2017).

[2] For some historical background on the corporate law department, see Carl Liggio, A Look at the Role of Corporate Counsel: Back to the Future—Or Is It the Past?, 44 Ariz. L. Rev. 621 (2002); Steven Harmon & Steven Lauer, Development of the Corporate Law Department and Its Consequences, 29 Of Counsel 12, 6 (Dec. 2010).

Note: This article was drafted before the global COVID-19 outbreak, which has been accompanied by the widespread implementation of emergency business continuity plans for commercial banks allowing employees and clients to work remotely and, often involving adoption of e-signature processes.^[1] It is now more timely than ever given its focus on legal risks for commercial banks to consider when using e-signature to execute commercial lending agreements.^[2]

In today’s digital economy, lenders are eager to implement innovative technological solutions to service clients’ needs faster and more efficiently while reducing costs. E-signature is one such potential solution that is currently receiving significant attention within the commercial banking industry. Replacing wet ink signature with electronic signature in a paperless process can save time and money for both lenders and their customers, reducing document handling time and expense, as well as the need for post-closing re-execution of loan documents to correct mistakes made when originally signing and dating the documentation. Although e-signature usage is widespread by online retail and small business lenders, it has not yet been widely adopted by commercial banks for larger transactions despite its time- and money-saving advantages. In this article, we discuss e-signature laws in a few key markets and highlight some important legal risks for commercial banks to consider before implementing e-signature for larger domestic and cross-border bilateral deals. 

Many countries have enacted laws and regulations governing the enforceability of e-signed documents, establishing a predictable framework for local transacting parties to use e-signature when executing contracts. Although e-signed contracts are generally enforceable in most modern countries, there is no uniform global standard, and laws vary across geographic boundaries and regions. In evaluating the risks of using e-signature for bilateral commercial lending documents in any jurisdiction, one of the first questions lenders should ask is whether e-signed contracts have the same legal effect as wet ink-signed contracts. When e-signature has the same legal effect as wet ink signature, it typically carries a presumption of validity. If a borrower were to challenge the validity of such an e-signature in court, the borrower would have the burden of disproving the validity of such e-signature. In contrast, when e-signature has a lesser legal effect than wet ink signature, it would not typically carry a presumption of validity. If a borrower were to challenge the validity of such an e-signature in court, the lender would have the burden of proving its validity.

In addition to questioning the legal effect, lenders should ask several more questions. First, are additional criteria or technologies required under applicable law for bilateral e-signed loan documents to have the same legal effect as wet ink signature? Second, does local law exclude any key lending documents?^[3] Third, do local security registries accept e-signed collateral agreements or filing or registration to perfect a secured lender’s rights against third parties? Fourth, is the lender engaged in cross-border activity? Cross-border lending creates additional challenges and legal risks for monitoring compliance in multiple jurisdictions and are discussed in more detail below.

Certain jurisdictions, such as the U.S., Canada, and England, have broadly permissive laws recognizing the enforceability of e-signature without specifying technical requirements, creating a predictable e-signature framework for transacting parties. As a general rule, in the United States, through a combination of federal and state law (Electronic Signatures in Global and National Commerce Act 2000 [ESIGN]), Uniform Electronic Transactions Act [UETA] [recommended to states in 1999]), e-signature is generally recognized as having the same legal effect as wet ink signature so long as the transacting parties have consented to its use and all legal requirements for a contract are met. [4] The laws are technologically neutral. Common practice is to include an express consent provision in the body of an e-signed agreement, although it is not specifically required. However, lenders should also be aware of exceptions to the general rule, carving out specific document types from the generally permissive framework by law or practice. For example, wet ink signatures should be required for promissory notes and notarized documents.^[5] In addition, wet ink signatures should also be required for collateral documents, such as mortgages, deeds of trust, and other agreements that are perfected by filing with governmental registries. Although e-signed collateral documents are typically enforceable under the law between contracting parties to the same extent as wet ink signed agreements, many governmental registries have not kept pace with the law and do not accept e-signed collateral documents for recordation. If a collateral agreement requiring filing for perfection purposes is not filed by a registry, then the agreement would be enforceable only between contracting parties but not enforceable against third parties, creating a risk for the secured party against challenge by a third party creditor or bankruptcy trustee.

Likewise, Canadian federal and provincial law (Bank Act [Canada] [BA], e.g. Electronic Commerce Act, 2000 [Ontario]^[6] and the equivalent legislation in other Canadian common law provinces), are generally permissive in relation to the use of e-signature so long as the e-signature technology used is reliable and meets the basic characteristics of an enforceable e-signature (i.e. (1) the electronic signature is reliable for the purpose of identifying the person; and (2) the association of the electronic signature with the relevant electronic document is reliable). The laws are technologically neutral, and market practice is to include explicit consent provisions in e-signed contracts (as previously mentioned), although such provisions are not specifically required. However, lenders should also be aware of exceptions to the general rule. Wet ink signatures should be required for certain documents, including promissory notes, personal guarantees, notarized mortgage documents, and security registered with the Bank of Canada.^[7]

 Similarly, under English law, through a combination of legislation, case law, and common law principles, e-signature is broadly recognized as having the same legal effect as wet ink signature so long as the transacting parties intend to authenticate the document and have adhered to all formalities relating to execution (Electronic Communications Act 2000 [ECA 2000]).^[8] The law does not specify the technology required for enforceability and does not require express consent provisions; however, market practice is to include express consent provisions in e-signed contracts. Like in the U.S. and Canada, the generally permissive legal framework in England is subject to certain exceptions. For example, wet ink signatures should be obtained for guarantees and other documents created in the form of a deed requiring witnessing. English law does not recognize remote witnessing of deeds. A witness must be in the physical presence of the signer when a deed is executed, making e-signature of such deeds impractical. As in the U.S., not all English security registries accept e-signed collateral documents for filing. Lenders should either be assured in advance of the policies of a particular registry or, for ease of monitoring, adopt a blanket policy of requiring wet ink signatures for all collateral documents to be filed with security registries.

In order to create a predictable framework for e-signature use by transacting parties across borders in EU member countries, the Council of the European Union adopted an e-signature regulation (Regulation [EU] No. 010/2014 [eIDAS Regulation]) applicable to all EU members. Similar to local law in the U.S., Canada, and England, the EU regulation provides that among member countries, e-signature cannot be denied legal effect simply because it is in electronic form. However, unlike the law in the U.S., Canada, and England, in order for e-signature to have the same legal effect as wet ink signature, the e-signature must meet the heightened criteria of a “qualified electronic signature (QES).” The QES criteria focus on verifying the identify and authenticity of the signer and require, among other things, the use of a “qualified electronic signature creation device” such as a configured USB token or smart card when creating the e-signature, and e-signature certification by a “qualified trust service provider.” a pre-approved commercial or governmental authority. QES has been slow to gain acceptance among commercial parties outside of a few regulated industries due to the impracticalities of complying with the eIDAS requirements. Before implementing e-signature, lenders in EU member countries should consider whether their commercial clients are willing to comply with the QES requirements in order to deliver e-signed loan documents with the same legal effect as wet ink signature. 

Outside the EU, there is little harmony across geographic regions or country borders with respect to e-signature requirements and laws. Like in the EU, many countries also require the use of heightened digital technology and/or certification by governmental authorities for e-signed loan agreements to have the same legal effect as wet ink signature. In certain Latin American countries, key credit and lending documents are expressly excluded from protection under e-signature statutes, while in some Middle Eastern countries, courts have been known to reject e-signed lending agreements despite legislation recognizing their enforceability. The lack of global uniformity is significant for commercial cross-border lending transactions where the jurisdiction of the documents’ governing law, as well as the jurisdiction of formation for each borrower and guarantor, must be taken into account in order to avoid potential challenges to enforceability by borrowers or guarantors under the applicable law of their own jurisdiction of formation, in addition to the jurisdiction of the documents’ governing law. For lenders engaged in cross-border lending activity, monitoring compliance with the laws of multiple jurisdictions can be unwieldy, time consuming, and expensive, creating new challenges and legal risks to be weighed against the benefits of using new technology to streamline processes, improve customer experience, and reduce internal costs.

Commercial banks seeking to implement e-signature solutions should evaluate the risks described above. We suggest creating an internal working group of stakeholders and risk stewards from across business products and functions to develop an integrated and iterative approach for using e-signature for each of the various types of documentation involved in a commercial lending transaction. As an additional step, we suggest piloting the proposed solution with a small team of bankers and their clients. In the course of the pilot and wider roll-out, the working group should continue to address new challenges and risks as they arise.

^[1] This article is a summary of the CLE Program Panel entitled “What’s Ink Got to Do With It: Enforceability of Electronic And Technology-Based Commercial Loan Documentation,” presented in September 2019 at the Business Law Section’s Annual meeting. Special thanks to our co-panelists, Linda Filardi, Elizabeth Leckie, Charles Morgan, and Steve Weise. Program materials and audio can be accessed by Section members at https://www.americanbar.org/groups/business_law/resources/materials/2019/annual_materials/whats_ink/; a video summary is also available at American Bar Association, Business Law Today, “Program Spotlight: Jon Rubens Interviews Kiriakoula Hatzikiriakos and Tracy Springer on Digital Signatures,” https://businesslawtoday.org/video/program-spotlight-jon-rubens-interviews-kiriakoula-hatzikiriakos-tracy-springer-digital-signatures/ (14-11-2019).

[2] The views and opinions expressed in this article are solely those of Tracy Springer and Kiriakoula Hatzikiriakos in their personal capacities and do not represent those of their respective employers.

^[3] The discussion in this article is limited to bilateral commercial lending agreements, and, as a result, we do not discuss other types of documents that typically require wet ink signatures under the laws of many jurisdictions. In addition, the exceptions discussed are examples only and are not intended to be an exhaustive or comprehensive list. Lenders should always engage counsel for legal advice in connection with implementing an e-signature program.

[4] The Tribar Opinion Committee published its “Comment concerning use of electronic signatures and third-party opinion letters” on March 24, 2020, available at https://www.americanbar.org/content/dam/aba/administrative/business_law/buslaw/tribar/materials/esignatures.pdf.

^[5] Please note that in order to accommodate a workforce largely working from home due to COVID-19, by Executive Order No. 202.7 on March 19, 2020, Gov. Andrew Cuomo temporarily permitted notarial acts under New York State law to be performed using audio-video technology provided certain conditions are met.

^[6] SO 2000, c 17, https://www.canlii.org/en/on/laws/stat/so-2000-c-17/latest/so-2000-c-17.html.

^[7] See e.g. Guarantees Acknowledgment Act (Alberta), RSA 2000, c. G-li s. 3; Alberta Regulation 66/2003, Schedule; Farm Security Act (Saskatchewan), SS 1998, c. S-171, s. 31(1) (applies to guarantees to farmland or other assets used in farming). In Quebec, the Chamber of Notaries of Quebec announced that certain measures will be taken as of April 1, 2020 to allow for technological solutions for passing notarial deeds, see www.cnq.org.

^[8] In 2016, the U.K. Law Society published a practice note on the execution of a document using an electronic signature, see www.lawsociety.org/uk/support-services/advice/practice-notes/execution-of-a-document-using-an-electronic-signature/. The U.K. Law Commission confirmed the validity of electronic signature in September 2019, see www. https://www.lawcom.gov.uk/electronic-signatures-are-valid-confirms-law-commission/.

Parties to business transactions and their counsel seldom gather in the same location to exchange manually-signed agreements and other documents; virtual closings have been and are the norm.* The COVID-19 crisis has resulted in increased focus on the widespread practice of giving opinions on the execution of agreements signed electronically. This Comment explains the legal basis for the conclusion underlying those opinions that the electronic signatures on those agreements have the same legal effect as manual signatures.

The Uniform Electronic Transactions Act (UETA) is the law in all but a few United States jurisdictions, and the Electronic Signatures in Global and National Commerce Act, 15 USCA §§ 7001 et seq. (E-SIGN), is federal law.  E-SIGN provides substantially the same rules as UETA.

The interplay of UETA and E-SIGN is as follows:

• E-SIGN is the law in states that have not adopted UETA or a statute providing alternative procedures for the use of electronic signatures consistent with E-SIGN.
• If a state has adopted UETA, E-SIGN does not preempt UETA in that state, except to the extent the state’s version of UETA is inconsistent with E-SIGN.
• If a state has adopted alternative procedures for the use of electronic signatures consistent with E-SIGN, E-SIGN does not preempt those procedures.

The net effect of these rules is that every jurisdiction in the United States has substantially the same rules for the use of electronic signatures. (New York has enacted the Electronic Signatures and Records Act, State Technology Law §§ 301-309 (ESRA). ESRA is different from UETA but that should not change the result that an electronic signature will ordinarily be effective because if ESRA is not consistent with E-SIGN, it is preempted by E-SIGN.)

Generally, UETA and E-SIGN provide that a signature may not be denied legal effect solely because it is in electronic form. UETA § 7; E-SIGN, 15 USCA § 7001(a). When the parties to a business contract subject to one of these statutes agree to use an electronic signature, the electronic signature ordinarily will have legal effect.  The agreement of the parties can be implicit and can be based on all the circumstances broadly construed. UETA § 5(b). An opinion, therefore, that a business agreement has been duly executed can be based on the parties’ conduct. Under UETA, the exchange of electronically-signed documents manifests the requisite agreement of the parties to use electronic signatures.[1]  Electronic signatures include signatures in emails, PDFs, and faxes and signatures provided by processes offered by commercial firms, such as DocuSign and Adobe Sign, so long as they are affixed to or associated with the relevant agreement with an intent to sign by the persons providing them.

Except for agreements governed by Articles 2 (sales of goods) and 2A (leases of goods) of the Uniform Commercial Code (UCC), UETA and E-SIGN do not apply to agreements to the extent the agreements are governed by the UCC. The UCC governs only certain aspects of transactions within its scope, leaving the remaining issues to be governed by other law. The definition of “sign” in Article 1 and the definition of “authenticate” in Article 9 provide substantially the same rules as UETA and E-SIGN for the use of electronic signatures. Thus, for example, in cases where an agreement that bears an electronic signature does not qualify as a “negotiable instrument” for UCC purposes because it is not a “writing,” execution by electronic signature pursuant to UETA or E-SIGN (or other consistent state law) is still sufficient to create an enforceable agreement as a matter of contract law.

Agreements sometimes require that they and any amendments be signed manually. When giving a duly executed opinion, therefore, on an agreement or amendment that has been signed electronically, the opinion giver must confirm that the agreement does not prohibit electronic signatures.

As a matter of customary practice,[2] duly executed opinions can be based on an assumption, which may be unstated, that all signatures are genuine. That assumption applies to electronic as well as manual signatures.

The legal effect of the execution of a business agreement by a legal entity could also depend on the statute under which the entity was formed and the provisions in the entity’s constituent documents relating to its internal actions. For example, the entity statutes of some states provide rules for the electronic execution of documents needed to create the entity and written consents authorizing the signing of agreements on its behalf. See, e.g., Delaware Limited Liability Company Act § 18–113; Delaware General Corporation Law §§ 141(f) and 228(d)(1).

*The TriBar Opinion Committee currently includes designees of the following organizations functioning as a single Committee: (i) Special Committee on Legal Opinions in Commercial Transactions, New York County Lawyers’ Association; (ii) Corporation Law Committee, The Association of the Bar of the City of New York, and (iii) Special Committee on Legal Opinions of the Business Law Section, New York State Bar Association.  The Committee also includes members of the state bars of California, Delaware, Georgia, Michigan, North Carolina, Pennsylvania, Texas, and Washington, of the Bar Association of the District of Columbia, and of the Boston Bar Association, and the Chicago Bar Association. The views expressed in this Comment reflect a consensus of the members of the TriBar Opinion Committee and on any particular point are not necessarily those of particular members of the Committee or the law firms and other organizations with which the members are associated.

[1] Although not applicable to the question whether an electronic signature on an agreement is valid, the Committee notes that the Governor of New York issued an Executive Order on March 19, 2020 in connection with the COVID-19 crisis providing for the use of audio-video technology for notarial acts.

[2] See TriBar Opinion Comm., Third-Party “Closing” Opinions, 53 Bus. Law. 591, § 2.3(a) at 615 (1998).