Friday, October 13, 2023
I started by asking the audience members to consider what legal areas are most affected by GAI? Although there are many, I'll focus on data privacy and employment law in this post.
Data Privacy and Cybersecurity
This topic also came up today at a conference at NCCU when I served as a panelist on cybersecurity preparedness for lawyers.
Why is this important?
ChatGPT was banned in Italy for a time over concerns about violations of the GDPR. The Polish government is investigating OpenAI over privacy issues. And there are at least two class action lawsuits in California naming Microsoft and OpenAI. Just yesterday, a US government agency halted the use of GAI due to data security risks.
It’s also much easier for bad actors to commit cybercrime because of the amount of personal data they can scrape and analyze and because deepfake technology allows impersonation of images and voices in a matter of seconds. The NSA and FBI have warned people to be worried about misinformation and cyberthreats due to the technology. On a positive note, some are using GAI to fight cybercrime.
Surveillance and facial recognition technology can violate privacy and human rights. Governments have used surveillance technology to tamp down on and round up dissidents, protestors, and human rights defenders for years. Now better AI tools makes that easier. And if you haven't heard some of the cautions about Clearview AI and the misidentification of citizens, you should read this article. A new book claims that this company could "end privacy as we know it."
What should (you and) your clients do?
- Ensure algorithms minimize collection and processing of personal data and build in confidentiality safeguards to comply with privacy laws
- Build in transparency for individuals to control how data is collected and used
- Turn on privacy settings in all AI tools and don’t allow your data to be used for training the large language models
- Turn off chat history in settings on all devices
- Prevent browser add-ons
- Check outside counsel guidelines for AI restrictions (or draft them for your clients)
- Work with your IT provider or web authority to make sure your and your clients’ data is not being scraped for training
- Use synthetic data sets instead of actual personally identifiable information
- Ensure that you have a Generative AI Security Policy
- Check vendor contracts for AI usage
- Enhance cybersecurity training
- Conduct a table top exercise and make sure that you have an incident response plan in place
- Check cyberinsurance policies for AI clauses/exclusions
What about the employment law implications?
According to a Society for Human Resources Management Member Survey about AI usage:
• 79% use AI for recruiting and hiring
• 41% use AI for learning and development
• 38% use AI for performance management
• 18% use AI for productivity monitoring
• 8% use Ai for succession planning
• 4% use AI or promotional decisions
GAI algorithms can also have significant bias for skin color. The National Institute of Standards and Technology (NIST) released research showing that "not just dark African-American faces, but also Asian faces were up to 100 times more likely to be failed by these systems than the faces of white individuals.”
The Equal Employment Opportunity Commission has taken notice. In a panel discussion, Commissioner Keith Sonderling explained, “carefully designed and properly used, AI has potential to enhance diversity and inclusion, accessibility in the workplace by mitigating the risk of unlawful discrimination. Poorly designed and carelessly implemented, AI can discriminate on a scale and magnitude greater than any individual HR professional.” The EEOC also recently settled the first of its kind AI bias case for $365,000.
What to do
- Use AI screening tools to disregard name, sec, age, national origin, etc.
- Use bots for interviews to eliminate bias because of accents
- Check local laws such as New York City's automated decision tools guidance for employers
- Be careful about training large language models on current workforce data because that can perpetuate existing bias
- Review the EEOC Resource on AI
Questions to Ask Your Clients:
• How are you integrating human rights considerations into your company's strategy and decision-making processes, particularly concerning the deployment and use of new technologies?
• Can you describe how your company's corporate governance structure accounts for human rights and ethical considerations, particularly with regards to the use and impact of emerging technologies?
• How does your company approach balancing the need for innovation and competitive advantage with the potential societal and human rights impact of technologies like facial recognition and surveillance?
• As data becomes more valuable, how is your company ensuring ethical data collection and usage practices?
• Are these practices in line with both domestic and international human rights and privacy standards?
• How is your organization addressing the potential for algorithmic bias in your technology, which can perpetuate and exacerbate systemic inequalities?
• What steps are you taking to ensure digital accessibility and inclusivity, thereby avoiding the risk of creating or enhancing digital divides?
• How is your company taking into account the potential environmental impacts of your technology, including e-waste and energy consumption, and what steps are being taken to mitigate these risks while promoting sustainable development?
• Are you at risk of a false advertising or unfair/deceptive trade practices act claim from the FTC or other regulatory body due to your use of AI?
Whether or not you're an AI expert or use GAI in your practice now, it's time to raise these issues with your clients. Future posts will address other legal issues and the ethical implications of using AI in legal practice.
October 13, 2023 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Employment Law, Ethics, Human Rights, Law Firms, Lawyering, Legislation, Marcia Narine Weldon | Permalink | Comments (0)
Tuesday, January 4, 2022
Perhaps you missed these interesting programs--with super speakers--among all the amazing business associations, securities regulation, business transactions, etc. sessions! I know I did and was glad a friend highlighted them for my attention.
Wednesday, January 5, 2022, 12:35 PM to 1:50 PM
Climate Finance and Banking Regulation: Beyond Disclosure?
Financial Institutions and Consumer Financial Services
U.S. banking regulation has been slower than other forms of financial regulation (and slower than in Europe) to address climate-related financial risks. This panel explores the role of banking regulation in addressing the physical and transition risks from climate change. Possible measures include: mandatory climate risk disclosures by banks; supervisory assessments of climate-related financial risk; capital and liquidity regulation; scenario tests; determination of the appropriate role of banks in mitigating climate risk; financial stability oversight of climate risk; and action (through the Community Reinvestment Act and otherwise) to deter harms to disadvantaged communities and communities of color from climate change.
- Patricia A. McCoy, Boston College Law School, Moderator
- Christina Skinner, Wharton School of the University of Pennsylvania, Speaker
- Graham Steele, Stanford Graduate School of Business, Speaker
- Hilary J. Allen, American University, Washington College of Law, Speaker
- Nakita Cuttino, Georgetown University Law Center, Speaker from a Call for Papers
Sunday, January 9, 2022, 3:10 PM to 4:25 PM
Workers, Boards, and the Global Corporation
Section on Economic Globalization and Governance
The appropriate role and status of employee voice in corporate governance is an evergreen issue for corporate law. In the US, the field has traditionally focused on the interactions between boards of directors, shareholders, and managers, but with an increased emphasis on corporate social responsibility, that view has expanded. Despite widespread embrace of CSR principles, however, many corporations still resist union organizing. The inclusion of worker voice in corporate governance has significant comparative law dimensions, encompassing co-determination and union representation on boards. With the recognition that work is increasingly remote, these issues will become even more salient.
- Miriam Cherry, Saint Louis University School of Law, Moderator
- Lenore Palladino, University of Massachusetts Amherst School of Public Policy, Speaker
- Franklin A. Gevurtz, University of the Pacific, McGeorge School of Law, Speaker
- George S. Georgiev, Emory University School of Law, Speaker
- Matthew T. Bodie, Saint Louis University School of Law, Speaker
Looking forward to seeing many of you on Zoom later in the week!
Monday, September 6, 2021
It is hard to believe (at least for me), but the official calendar marker for the end of the summer now is upon us. It is a time for smoking pork, backyard barbecues, and enjoying the pool and the beach like a kid. It is time after which we are admonished to stop wearing white (until Memorial Day), according to conservative traditions ignored in the breach by me. It is Labor Day.
According to the U.S. Department of Labor website:
Observed the first Monday in September, Labor Day is an annual celebration of the social and economic achievements of American workers. The holiday is rooted in the late nineteenth century, when labor activists pushed for a federal holiday to recognize the many contributions workers have made to America’s strength, prosperity, and well-being.
That history seems so important to remember today, given significant labor dislocations in the United States since the beginning of 2020. The significant amount of illness and death attributable to COVID-19 is just the beginning of the story. Complex social, economic, and legal factors have combined to make for volatility and dissonance in U.S. labor markets. The U.S. Bureau of Labor Statistics recently released its August 2021 report on the national employment situation, describing trends and supplying relevant data.
The news media has offered ongoing commentary. I was especially drawn to an article published by The Washington Post on Saturday entitled "Why America has 8.4 million unemployed when there are 10 million job openings." Misalignments between the available jobs, on the one hand, and the obtainable, qualified labor, on the other hand, have become apparent. "There is a fundamental mismatch between what industries have the most job openings now and how many unemployed people used to work in that industry pre-pandemic," the article offers. The article also mentions that people are resigning and retiring in larger numbers and earlier than projected, at least in some sectors of the economy. Entrepreneurship also is on the rise.
There has been informal and formal debate about the effect that law has had and may continue to have on our labor markets. The mandatory shutdowns (through lockdown and stay-at-home orders) imposed by state governors in 2020, for example, certainly played a role in separating businesses from their workers. Congressionally approved federal unemployment benefits have been blamed for slower-than-expected returns to work, but as Saturday's Washington Post article notes, "in 22 states that already phased out those benefits, workers didn’t flood back to jobs." A September 1 article in The Wall Street Journal entitled "States That Cut Unemployment Benefits Saw Limited Impact on Job Growth" (behind a paywall) offers similar observations. "Economists who have conducted their own analyses of the government data say the rates of job growth in states that ended and states that maintained the benefits are, from a statistical perspective, about the same."
Both business and law (and the lawyers that serve them) may be part of the solution as much as they are part of the problem. Workplaces are changing and workers are changing. The changes in each may foster changes in the other. A June article in The New York Times notes the role of pay and benefits in the return-to-work equation, citing "the proliferation of low-paid jobs with few prospects for advancement and too little income to cover essential expenses like housing, food and health care." Others note that, to attract qualified, desirable candidates, businesses will have to focus core attention not only on worker pay and benefits, but also on other terms and conditions of employment, including the possibility of mandating, promoting, or permitting employees to engage in more remote work (whether for the benefit of the employer or the employee--or both). But government also can refocus its efforts to support sustainable business in this changed and changing socio-economic environment. An opinion piece from back in June in The Washington Post addressing impediments to full employment notes that: "[a]ccess to reliable child care remains a significant obstacle. So does the availability of public transit. Workers may continue to worry about risks to their own or their family’s health if they take public-facing jobs . . . ." A May article in The Washington Post also mentions childcare availability and health care risks as factors in the decision of unemployed people to return to work. If employers are not facilitating access to affordable and appropriate child care and transportation and are not voluntarily providing adequate protections from health care risks in the workplace, then legal or regulatory solutions may be useful if we want those businesses to survive. The coming months will be telling as we continue to address the ongoing pandemic and its direct and indirect effects on productivity.
I have always valued work. Years ago, I found a quote (apparently misattributed, with related quotes, to the Buddha) that resonated with me: "Your work is to discover your work and then with all your heart to give yourself to it." Yes. I certainly have done that to great satisfaction. I am fortunate to hold a position that has survived the effects of the pandemic to date. I feel needed and wanted in my workplace. I am lucky and privileged, indeed.
Congress instituted labor day as a national legal holiday on June 28, 1894, following on the adoption of similar municipal ordinances and state legislation. The Department of Labor's website notes this and concludes its history of the national holiday by highlighting the role that workers have played in the history of the United States.
American labor has raised the nation’s standard of living and contributed to the greatest production the world has ever known and the labor movement has brought us closer to the realization of our traditional ideals of economic and political democracy. It is appropriate, therefore, that the nation pays tribute on Labor Day to the creator of so much of the nation's strength, freedom, and leadership – the American worker.
Today, I hope that we can reflect on this rich history and celebrate both these aggregate contributions and our own individual work notwithstanding current uncertainties in our labor markets.
Friday, October 23, 2020
It’s hard to believe that the US will have an election in less than two weeks. Three years ago, a month after President Trump took office, I posted about CEOs commenting on his executive order barring people from certain countries from entering the United States. Some branded the executive order a “Muslim travel ban” and others questioned whether the CEOs should have entered into the political fray at all. Some opined that speaking out on these issues detracted from the CEOs’ mission of maximizing shareholder value. But I saw it as a business decision - - these CEOs, particularly in the tech sector, depended on the skills and expertise of foreign workers.
That was 2017. In 2018, Larry Fink, CEO of BlackRock, told the largest companies in the world that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society…Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.” Fink’s annual letter to CEOs carries weight; BlackRock had almost six trillion dollars in assets under management in 2018, and when Fink talks, Wall Street listens. Perhaps emboldened by the BlackRock letter, one year later, 181 CEOs signed on to the Business Roundtable's Statement on the Purpose of a Corporation, which “modernized” its position on the shareholder maximization norm. The BRT CEOs promised to invest in employees, deal ethically and fairly with suppliers, and embrace sustainable business practices. Many observers, however, believed that the Business Roundtable statement was all talk and no action. To see how some of the signatories have done on their commitments as of last week, see here.
Then came 2020, a year like no other. The United States is now facing a global pandemic, mass unemployment, a climate change crisis, social unrest, and of course an election. During the Summer of 2020, several CEOs made public statements on behalf of themselves and their companies about racial unrest, with some going as far as to proclaim, “Black Lives Matter.” I questioned these motives in a post I called “"Wokewashing and the Board." While I admired companies that made a sincere public statement about racial justice and had a real commitment to look inward, I was skeptical about firms that merely made statements for publicity points. I wondered, in that post, about companies rushing to implement diversity training, retain consultants, and appoint board members to either curry favor with the public or avoid the shareholder derivative suits facing Oracle, Facebook, and Qualcomm. How well had they thought it out? Meanwhile, I noted that my colleagues who have conducted diversity training and employee engagement projects for years were so busy that they were farming out work to each other. Now the phones aren’t ringing as much, and when they are ringing, it’s often to cancel or postpone training.
Why? Last month, President Trump issued the Executive Order on Combatting Race and Sex Stereotyping. As the President explained:
today . . . many people are pushing a different vision of America that is grounded in hierarchies based on collective social and political identities rather than in the inherent and equal dignity of every person as an individual. This ideology is rooted in the pernicious and false belief that America is an irredeemably racist and sexist country; that some people, simply on account of their race or sex, are oppressors; and that racial and sexual identities are more important than our common status as human beings and Americans ... Therefore, it shall be the policy of the United States not to promote race or sex stereotyping or scapegoating in the Federal workforce or in the Uniformed Services, and not to allow grant funds to be used for these purposes. In addition, Federal contractors will not be permitted to inculcate such views in their employees.
The Order then provides a hotline process for employees to raise concerns about their training. Whether you agree with the statements in the Order or not -- and I recommend that you read it -- it had a huge and immediate effect. The federal government is the largest procurer of goods and services in the world. This Order applies to federal contractors and subcontractors. Some of those same companies have mandates from state law to actually conduct training on sexual harassment. Often companies need to show proof of policies and training to mount an affirmative defense to discrimination claims. More important, while reasonable people can disagree about the types and content of diversity training, there is no doubt that employees often need training on how to deal with each other respectfully in the workplace. (For a thought-provoking take on a board’s duty to monitor diversity training by co-blogger Stefan Padfield, click here.)
Perhaps because of the federal government’s buying power, the U.S. Chamber of Commerce felt compelled to act. On October 15th, the Chamber and 150 organizations wrote a letter to the President stating:
As currently written, we believe the E.O. will create confusion and uncertainty, lead to non-meritorious investigations, and hinder the ability of employers to implement critical programs to promote diversity and combat discrimination in the workplace. We urge you to withdraw the Executive Order and work with the business and nonprofit communities on an approach that would support appropriate workplace training programs ... there is a great deal of subjectivity around how certain content would be perceived by different individuals. For example, the definition of “divisive concepts” creates many gray areas and will likely result in multiple different interpretations. Because the ultimate threat of debarment is a possible consequence, we have heard from some companies that they are suspending all D&I training. This outcome is contrary to the E.O.’s stated purpose, but an understandable reaction given companies’ lack of clear guidance. Thus, the E.O. is already having a broadly chilling effect on legitimate and valuable D&I training companies use to foster inclusive workplaces, help with talent recruitment, and remain competitive in a country with a wide range of different cultures. … Such an approach effectively creates two sets of rules, one for those companies that do business with the government and another for those that do not. Federal contractors should be left to manage their workforces and workplaces with a minimum amount of interference so long as they are compliant with the law.
It’s rare for the Chamber to make such a statement, but it was bold and appropriate. Many of the Business Roundtable signatories are also members of the U.S. Chamber, and on the same day, the BRT issued its own statement committing to programs to advance racial equity and justice. BRT Chair and WalMart CEO Doug McMillon observed, “the racial inequities that exist for many Black Americans and people of color are real and deeply rooted . . These longstanding systemic challenges have too often prevented access to the benefits of economic growth and mobility for too many, and a broad and diverse group of Americans is demanding change. It is our employees, customers and communities who are calling for change, and we are listening – and most importantly – we are taking action.” Now that's a stakeholder maximization statement if I ever heard one.
Those who thought that some CEOs went too far in protesting the Muslim ban, may be even more shocked by the BRT’s statements about the police. The BRT also has a subcommittee to address racial justice issues and noted that “For Business Roundtable CEOs, this agenda is an important step in addressing barriers to equity and justice . . . This summer we took on the urgent need for policing reform. We called on Congress to adopt higher federal standards for policing, to track whether police departments and officers have histories of misconduct, and to adopt measures to hold abusive officers accountable. Now, with announcement of this broader agenda, CEOs are supporting policies and undertaking initiatives to address several other systems that contribute to large and growing disparities.”
Now that stakeholders have seen so many of these social statements, they have asked for more. Last week, a group of executives from the Leadership Now Project issued a statement supporting free and fair elections. However, as Bennett Freeman, former Calvert executive and Clinton cabinet member noted, no Fortune 500 CEOs have signed on to that statement. Yesterday, the Interfaith Center on Corporate Responsibility (ICCR) sent a letter to 200 CEOs, including some members of the BRT asking for their support. ICCR asked that they endorse:
- Active support for free and fair elections
- A call for a thorough and complete counting of all ballots
- A call for all states to ensure a fair election
- A condemnation of any tactics that could be construed as voter intimidation
- Assurance that, should the incumbent Administration lose the election, there will be a peaceful transfer of power
- Ensure that lobbying activities and political donations support the above
Is this a pipe dream? Do CEOs really want to stick their necks out in a tacit criticism of the current president’s equivocal statements about his post-election plans? Now that JPMorgan Chase CEO Jamie Dimon has spoken about the importance of respect for the democratic process and the peaceful transfer of power, perhaps more executives will make public statements. But should they? On the one hand, the markets need stability. Perhaps Dimon was actually really focused on shareholder maximization after all. Nonetheless, Freeman and others have called for a Twitter campaign to urge more CEOs to speak out. My next post will be up on the Friday after the election and I’ll report back about the success of the hashtag activism effort. In the meantime, stay tuned and stay safe.
October 23, 2020 in Contracts, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Employment Law, Ethics, Financial Markets, Human Rights, Legislation, Management, Marcia Narine Weldon, Nonprofits, Stefan J. Padfield | Permalink | Comments (1)
Friday, October 2, 2020
No. You didn't miss Part 1. I wrote about Weinstein clauses last July. Last Wednesday, I spoke with a reporter who had read that blog post. Acquirors use these #MeToo/Weinstein clauses to require target companies to represent that there have been no allegations of, or settlement related to, sexual misconduct or harassment. I look at these clauses through the lens of a management-side employment lawyer/compliance officer/transactional drafting professor. It’s almost impossible to write these in a way that’s precise enough to provide the assurances that the acquiror wants or needs.
Specifically, the reporter wanted to know whether it was unusual that Chevron had added this clause into its merger documents with Noble Energy. As per the Prospectus:
Since January 1, 2018, to the knowledge of the Company, (i), no allegations of sexual harassment or other sexual misconduct have been made against any employee of the Company with the title of director, vice president or above through the Company’s anonymous employee hotline or any formal human resources communication channels at the Company, and (ii) there are no actions, suits, investigations or proceedings pending or, to the Company’s knowledge, threatened related to any allegations of sexual harassment or other sexual misconduct by any employee of the Company with the title of director, vice president or above. Since January 1, 2018, to the knowledge of the Company, neither the Company nor any of its Subsidiaries have entered into any settlement agreements related to allegations of sexual harassment or other sexual misconduct by any employee of the Company with the title of director, vice president or above.
Whether I agree with these clauses or not, I can see why Chevron wanted one. After all, Noble’s former general counsel left the company in 2017 to “pursue personal interests” after accusations that he had secretly recorded a female employee with a video camera under his desk. To its credit, Noble took swift action, although it did give the GC nine million dollars, which to be fair included $8.3 million in deferred compensation. Noble did not, however, exercise its clawback rights. Under these circumstances, if I represented Chevron, I would have asked for the same thing. Noble’s anonymous complaint mechanisms went to the GC’s office. I’m sure Chevron did its own social due diligence but you can never be too careful. Why would Noble agree? I have to assume that the company’s outside lawyers interviewed as many Noble employees as possible and provided a clean bill of health. Compared with others I’ve seen, the Chevron Weinstein clause is better than most.
Interestingly, although several hundred executives have left their positions due to allegations of sexual misconduct or harassment since 2017, only a small minority of companies use these Weinstein clauses. Here are a few:
Except in each case, as has not had and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, to the Knowledge of the Company, (i) no allegations of sexual harassment have been made against (A) any officer or director of the Acquired Companies or (B) any employee of the Acquired Companies who, directly or indirectly, supervises at least eight (8) other employees of the Acquired Companies, and (ii) the Acquired Companies have not entered into any settlement agreement related to allegations of sexual harassment or sexual misconduct by an employee, contractor, director, officer or other Representative.
- Merger between Genuine Parts Company, Rhino SpinCo, Inc., Essendant Inc., and Elephant Merger Sub Corp.:
To the knowledge of GPC, in the last five (5) years, no allegations of sexual harassment have been made against any current SpinCo Business Employee who is (i) an executive officer or (ii) at the level of Senior Vice President or above.
- AGREEMENT AND PLAN OF MERGER BY AND AMONG WORDSTREAM, INC., GANNETT CO., INC., ORCA MERGER SUB, INC. AND SHAREHOLDER REPRESENTATIVE SERVICES LLC:
(i) The Company is not party to a settlement agreement with a current or former officer, employee or independent contractor of the Company or its Affiliates that involves allegations relating to sexual harassment or misconduct. To the Knowledge of the Company, in the last eight (8) years, no allegations of sexual harassment or misconduct have been made against any current or former officer or employee of the Company or its Affiliates.
- AGREEMENT AND PLAN OF MERGER By and Among RLJ ENTERTAINMENT, INC., AMC NETWORKS INC., DIGITAL ENTERTAINMENT HOLDINGS LLC and RIVER MERGER SUB INC.:
(c) To the Company’s Knowledge, in the last ten (10) years, (i) no allegations of sexual harassment have been made against any officer of the Company or any of its Subsidiaries, and (ii) the Company and its Subsidiaries have not entered into any settlement agreements related to allegations of sexual harassment or misconduct by an officer of the Company or any of its Subsidiaries.
Here are just a few questions:
- What's the definition of "sexual misconduct"? Are the companies using a legal definition? Under which law? None of the samples define the term.
- What happens of the company handbook or policies do not define "sexual misconduct"?
- How do the parties define "sexual harassment"? Are they using Title VII, state law, case law, their diversity training decks, the employee handbook? None of the samples define the term.
- What about the definition of "allegation"? Is this an allegation through formal or informal channels (as employment lawyers would consider it)? Chevron gets high marks here.
- Have the target companies used the best knowledge qualifiers to protect themselves?
- How will the target company investigate whether the executives and officers have had “allegations”? Should the company lawyers do an investigation of every executive covered by the representation to make sure the company has the requisite “knowledge”? If the deal documents don't define "knowledge," should we impute knowledge?
- What about those in the succession plan who may not be in the officer or executives ranks?
Will we see more of these in the future? I don’t know. But I sure hope that General Motors has some protection in place after the most recent allegations against Nikola’s founder and former chairman, who faces sexual assault allegations from his teenage years. Despite allegations of fraud and sexual misconduct, GM appears to be moving forward with the deal, taking advantage of Nikola’s decreased valuation after the revelation of the scandals.
I’ll watch out for these #MeToo clauses in the future. In the meantime, I’ll ask my transactional drafting students to take a crack at reworking them. If you assign these clauses to your students, feel free to send me the work product at [email protected].
Take care and stay safe.
October 2, 2020 in Compliance, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Ethics, Lawyering, M&A, Management, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (1)
Friday, July 26, 2019
I'm at the tail end of teaching my summer transactional lawyering course. Throughout the semester, I've focused my students on the importance of representations, warranties, covenants, conditions, materiality, and knowledge qualifiers. Today I came across an article from Practical Law Company that discussed the use of #MeToo representations in mergers and acquisitions agreements, and I plan to use it as a teaching tool next semester. According to the article, which is behind a firewall so I can't link to it, thirty-nine public merger agreements this year have had such clauses. This doesn't surprise me. Last year I spoke on a webinar regarding #MeToo and touched on the the corporate governance implications and the rise of these so-called "Harvey Weinstein" clauses.
Generally, according to Practical Law Company, target companies in these agreements represent that: 1) no allegations of sexual harassment or sexual misconduct have been made against a group or class of employees at certain seniority levels; 2) no allegations have been made against independent contractors; and 3) the company has not entered into any settlement agreements related to these kinds of allegations. The target would list exceptions on a disclosure schedule, presumably redacting the name of the accuser to preserve privacy. These agreements often have a look back, typically between two and five years with five years being the most common. Interestingly, some agreements include a material adverse effect clause, which favor the target.
Here's an example of a representation related to "Labor Matters" from the June 9, 2019 agreement between Salesforce.com, Inc. and Tableau Software, Inc.
b) The Company and each Company Subsidiary are and have been since January 1, 2016 in compliance with all applicable Law respecting labor, employment, immigration, fair employment practices, terms and conditions of employment, workers' compensation, occupational safety, plant closings, mass layoffs, worker classification, sexual harassment, discrimination, exempt and non-exempt status, compensation and benefits, wages and hours and the Worker Adjustment and Retraining Notification Act of 1988, as amended, except where such non-compliance has not had, and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.
c) To the Company's Knowledge, in the last five (5) years, (i) no allegations of sexual harassment have been made against any employee at the level of Vice President or above, and (ii) neither the Company nor any of the Company Subsidiaries have entered into any settlement agreements related to allegations of sexual harassment or misconduct by any employee at the level of Vice President or above.
The agreement has the following relevant definitions:
"Knowledge" will be deemed to be, as the case may be, the actual knowledge of (a) the individuals set forth on Section 1.1(a) of the Parent Disclosure Letter with respect to Parent or Purchaser or (b) the individuals set forth on Section 1.1(a) of the Company Disclosure Letter with respect to the Company, in each case after reasonable inquiry of those employees of such Party and its Subsidiaries who would reasonably be expected to have actual knowledge of the matter in question.
Even though I like the idea of these reps. in theory, I have some concerns. First, I hate to be nitpicky, but after two decades of practicing employment law on the defense side, I have some questions. What's the definition of "sexual misconduct"? What happens of the company handbook or policies do not define "sexual misconduct"? The Salesforce.com agreement did not define it. So how does the target know what to disclose? Next, how should an agreement define "sexual harassment"? What if the allegation would not pass muster under Title VII or even under a more flexible, more generous definition in an employee handbook? When I was in house and drafting policies, a lot of crude behavior could be "harassment" even if it wouldn't survive the pleading requirements for a motion to dismiss. Does a company have to disclose an allegation of harassment that's not legally cognizable? And what about the definition of "allegation"? The Salesforce.com agreement did not define this either. Is it an allegation that has been reported through proper channels? Does the target have to go back to all of the executives' current and former managers and HR personnel as a part of due diligence to make sure there were no allegations that were not investigated or reported through proper channels? What if there were rumors? What if there was a conclusively false allegation (it's rare, but I've seen it)? What if the allegation could not be proved through a thorough, best in class investigation? How does the target disclose that without impugning the reputation of the accused?
Second, I'm not sure why independent contractors would even be included in these representations because they're not the employees of the company. If an independent contractor harassed one of the target's employees, that independent contractor shouldn't even be an issue in a representation because s/he should not be on the premises. Moreover, the contractor, and not the target company, should be paying any settlement. I acknowledge that a company is responsible for protecting its employees from harassment, including from contractors and vendors. But a company that pays the settlement should ensure that the harasser/contractor can't come near the worksite or employees ever again. If that's the case, why the need for a representation about the contractors? Third, companies often settle for nuisance value or to avoid the cost of litigation even when the investigation results are inconclusive or sometimes before an investigation has ended. How does the company explain that in due diligence? How much detail does the target disclose? Finally, what happens if the company legally destroyed documents as part of an established and enforced document retention and destruction process? Does that excuse disclosure even if someone might have a vague memory of some unfounded allegation five years ago?
But maybe I protest too much. Given the definition of "knowledge" above, in-house and outside counsel for target companies will have to ask a lot more and a lot tougher questions. On the other hand, given the lack of clarity around some of the key terms such as "allegations," "harassment," and "misconduct," I expect there to be some litigation around these #MeToo representations in the future. I'll see if my Fall students can do a better job of crafting definitions than the BigLaw counsel did.
July 26, 2019 in Compliance, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Ethics, Law School, Lawyering, Litigation, M&A, Management, Marcia Narine Weldon, Teaching | Permalink | Comments (0)
Monday, July 8, 2019
Avid BLPB readers may have noticed that I failed to post on Monday of last week. I was traveling from Portugal to Spain that day. I did plan to make this post then, but travel scrambles (thanks to the Porto metro) and delays (thanks to Ryanair) prevented me from getting to a computer with Internet access until late in the day. By then, I was too exhausted to post. So, you get last Monday's post this Monday! No harm done; this post is not time-sensitive.
Ever heard of Graham's port? The Graham's port lodge was founded by brothers William and John Graham back at the beginning of the 18th century. Fast-forward 150 years, and the Graham family sells the then-very-successful Graham's port business to another family. That second family still runs the Graham's business today.
But a Graham descendant still wanted to be in the port business. He thought he had a "better way." So, 11 years after the Graham family sold Graham's, John Graham (not the same one, obviously!) established the Churchill port lodge. Here's what the Churchill's website says about its formation as a business:
Churchill’s was founded in 1981 by John Graham, making it the first Port Wine Company to be established in 50 years. The Founder wanted to continue his family’s long Port tradition but at the same time create his own individual style of Port. He named the Company after his wife, Caroline Churchill.
I went to a port wine tasting at the Churchill's lodge in Vila Nova de Gaia, Portugal last Monday with my husband and daughter. We tasted the uniqueness of the Churchill's product. (My daughter, who is not a port wine fan, actually enjoyed what she tasted at Churchill's.) The wine is less sweet than one would expect from a port wine. John Graham himself explains why:
My Ports are made with as much natural fermentation, and with as little fortification brandy, as possible. I like to make wines in the most natural way. Above all I look for balance. I believe I brought this balance to Churchill’s Ports. There is a consensus around the characteristics that define our house style which are easily identified.
While we were at the tasting, we took a tour and learned the basic facts I relate here.
I was enchanted by the business story! Headline: A Graham founds Churchill's after the Graham family sells Graham's. A bit confusing, but a great narrative involving family business, M&A (and corporate finance more generally), intellectual property, business formation, and more. We learned, for example, that the grapes are foot-treaded (stomped on by human feet). Imagine the interesting employment questions. (The shifts are twelve hours and there are stems and seeds in with the grapes . . . .) And the tasting is still done by John Graham himself, raising questions about key man insurance and business succession planning. (We were told that John Graham has chosen a successor taster--not a member of the family. But we did not ask about management.) Finally, a major real estate acquisition--buying a vineyard (Quinta da Gricha) with a special terroir--is part of the tale.
I am scheming to find ways to integrate what I learned into my teaching this year. I know I will find places to work aspects of the story in--particularly in Advanced Business Associations and Corporate Finance. Because I teach on a dry campus, no wine tasting will take place during the lessons. But maybe an optional out-of-class session could be planned. Hmmm . . . .
Tuesday, November 20, 2018
Tom Rutledge posts the following over at the Kentucky Business Entity Law Blog:
LLC Members Are Not the LLC’s Employees
There is now pending before the Eighth Circuit Court of Appeals of a suit that may turn on whether the relevant question, namely whether an LLC member is an employee of the LLC, has already been determined by a state court. In that underlying judgment, the Circuit Court of Cole County, Missouri, issued a judgment dated October 9 18, 2017 in the case Joseph S. Vaughn Kaenel v. Warren, Case No.: 15 AC-CC 00472. That judgment provided in part:
As an equity partner of Armstrong Teasdale, LLP, [Kaenel] is not a covered employee protected by the Missouri Human Rights Act.
I am curious as to which case this is that is pending. Tom knows his stuff and knows (and respects) the differences between entities, so I assume there is more to than appears here.
For example, the fact that a state court determined that an LLP equity partner is not an employee does not inherently answer the question of whether an LLC member is an employee. It could, but it does not have to do so.
In addition, I'd want to know more about the relationship between the LLC member and the entity. I am inclined to agree that an LLC member is not generally an employee merely by virtue of being a member. But I am also of the mind that an LLC member could also be an employee. In fact, there are times when counsel would be wise to advise a client who is an LLC member to also get an employment contract is she wishes to get paid. I am assuming there is not an employment contract here for the Eighth Circuit case.
However, suppose in the operating agreement all the members agree to pay one member for certain services. Or perhaps the compensated member gets priority payouts because of her agreement to do certain work for the entity. That would, as far as I am concerned, at least muddy the waters.
I'll be interested to see where this one goes (and, perhaps, what I have missed). But as far as I am concerned, LLC members can also be LLCs employees, even though the general answer is that they are not.
Tuesday, October 23, 2018
Employee Stock Options in Unicorns: Scholarship At the Intersection of Securities Law and Employee Benefits
Friend of the Business Law Prof Blog Anat Beck recently posted a draft of her article entitled Unicorn Stock Options - Golden Goose or Trojan Horse? on SSRN. I heard presentations on earlier versions of this piece, which I personally find quite intricate and interesting. An excerpt fro the SSRN abstract follows:
This article examines a contemporary puzzle in Silicon Valley – is there a shift in unicorn employees expectations that results in labor contracting renegotiations? It explores the challenges faced by unicorn firms as repeat players in competitive technology markets. It offers the following possible solutions. First, new equity-based compensation contracts, and critiques them. Second, alternatives to the traditional liquidity mechanisms, and critiques them.
It concludes with proposals to remove legal barriers to private ordering, and new mandatory disclosure requirements.
The article has been picked up by the Harvard Law School Forum on Corporate Governance and Financial Regulation and linked to in a Matt Levine column for Bloomberg. This is a good read, especially for those of you interested in entrepreneurial business law (which is Anat's speciality).
Saturday, September 1, 2018
Did I lose you with the title to this post? Do you have no idea what a DAO is? In its simplest terms, a DAO is a decentralized autonomous organization, whose decisions are made electronically by a written computer code or through the vote of its members. In theory, it eliminates the need for traditional documentation and people for governance. This post won't explain any more about DAOs or the infamous hack of the Slock.it DAO in 2016. I chose this provocative title to inspire you to read an article entitled Legal Education in the Blockchain Revolution.
The authors Mark Fenwick, Wulf A. Kaal, and Erik P. M. Vermeulen discuss how technological innovations, including artificial intelligence and blockchain will change how we teach and practice law related to real property, IP, privacy, contracts, and employment law. If you're a practicing lawyer, you have a duty of competence. You need to know what you don't know so that you avoid advising on areas outside of your level of expertise. It may be exciting to advise a company on tax, IP, securities law or other legal issues related to cryptocurrency or blockchain, but you could subject yourself to discipline for doing so without the requisite background. If you teach law, you will have students clamoring for information on innovative technology and how the law applies. Cornell University now offers 28 courses on blockchain, and a professor at NYU's Stern School of Business has 235 people in his class. Other schools are scrambling to find professors qualified to teach on the subject.
To understand the hype, read the article on the future of legal education. The abstract is below:
The legal profession is one of the most disrupted sectors of the consulting industry today. The rise of Legal Tech, artificial intelligence, big data, machine learning, and, most importantly, blockchain technology is changing the practice of law. The sharing economy and platform companies challenge many of the traditional assumptions, doctrines, and concepts of law and governance, requiring litigators, judges, and regulators to adapt. Lawyers need to be equipped with the necessary skillsets to operate effectively in the new world of disruptive innovation in law. A more creative and innovative approach to educating lawyers for the 21st century is needed.
For more on how blockchain is changing business and corporate governance, come by my talk at the University of Tennessee on September 14th where you will also hear from my co-bloggers. In case you have no interest in my topic, it's worth the drive/flight to hear from the others. The descriptions of the sessions are below:
Session 1: Breach of Fiduciary Duty and the Defense of Reliance on Experts
Many corporate statutes expressly provide that directors in discharging their duties may rely in good faith upon information, opinions, reports, or statements from officers, board committees, employees, or other experts (such as accountants or lawyers). Such statutes often come into play when directors have been charged with breaching their procedural duty of care by making an inadequately informed decision, but they can be applicable in other contexts as well. In effect, the statutes provide a defense to directors charged with breach of fiduciary duty when their allegedly uninformed or wrongful decisions were based on credible information provided by others with appropriate expertise. Professor Douglas Moll will examine these “reliance on experts” statutes and explore a number of questions associated with them.
Session 2: Fact or Fiction: Flawed Approaches to Evaluating Market Behavior in Securities Litigation
Private fraud actions brought under Section 10(b) of the Securities Exchange Act require courts to make a variety of determinations regarding market functioning and the economic effects of the alleged misconduct. Over the years, courts have developed a variety of doctrines to guide how these inquiries are to be conducted. For example, courts look to a series of specific, pre-defined factors to determine whether a market is “efficient” and thus responsive to new information. Courts also rely on a variety of doctrines to determine whether and for how long publicly-available information has exerted an influence on security prices. Courts’ judgments on these matters dictate whether cases will proceed to summary judgment and trial, whether classes will be certified and the scope of such classes, and the damages that investors are entitled to collect. Professor Ann M. Lipton will discuss how these doctrines operate in such an artificial manner that they no longer shed light on the underlying factual inquiry, namely, the actual effect of the alleged fraud on investors.
Session 3: Lawyering for Social Enterprise
Professor Joan Heminway will focus on salient components of professional responsibility operative in delivering advisory legal services to social enterprises. Social enterprises—businesses that exist to generate financial and social or environmental benefits—have received significant positive public attention in recent years. However, social enterprise and the related concepts of social entrepreneurship and impact investing are neither well defined nor well understood. As a result, entrepreneurs, investors, intermediaries, and agents, as well as their respective advisors, may be operating under different impressions or assumptions about what social enterprise is and have different ideas about how to best build and manage a sustainable social enterprise business. Professor Heminway will discuss how these legal uncertainties have the capacity to generate transaction costs around entity formation and management decision making and the pertinent professional responsibilities implicated in an attorney’s representation of such social enterprises.
Session 4: Beyond Bitcoin: Leveraging Blockchain for Corporate Governance, Corporate Social Responsibility, and Enterprise Risk Management
Although many people equate blockchain with bitcoin, cryptocurrency, and smart contracts, Professor Marcia Narine Weldon will discuss how the technology also has the potential to transform the way companies look at governance and enterprise risk management. Companies and stock exchanges are using blockchain for shareholder communications, managing supply chains, internal audit, and cybersecurity. Professor Weldon will focus on eliminating barriers to transparency in the human rights arena. Professor Weldon’s discussion will provide an overview of blockchain technology and how state and nonstate actors use the technology outside of the realm of cryptocurrency.
Session 5: Crafting State Corporate Law for Research and Review
Professor Benjamin Edwards will discuss how states can implement changes in state corporate law with an eye toward putting in place provisions and measures to make it easier for policymakers to retrospectively review changes to state law to discern whether legislation accomplished its stated goals. State legislatures often enact and amend their business corporation laws without considering how to review and evaluate their effectiveness and impact. This inattention means that state legislatures quickly lose sight of whether the changes actually generate the benefits desired at the time off passage. It also means that state legislatures may not observe stock price reactions or other market reactions to legislation. Our federal system allows states to serve as the laboratories of democracy. The controversy over fee-shifting bylaws and corporate charter provisions offers an opportunity for state legislatures to intelligently design changes in corporate law to achieve multiple state and regulatory objectives. Professor Edwards will discuss how well-crafted legislation would: (i) allow states to compete effectively in the market for corporate charters; and (ii) generate useful information for evaluating whether particular bylaws or charter provisions enhance shareholder wealth.
Session 6: An Overt Disclosure Requirement for Eliminating the Duty of Loyalty
When Delaware law allowed parties to eliminate the duty of loyalty for LLCs, more than a few people were appalled. Concerns about eliminating the duty of loyalty are not surprising given traditional business law fiduciary duty doctrine. However, as business agreements evolved, and became more sophisticated, freedom of contract has become more common, and attractive. How to reconcile this tradition with the emerging trend? Professor Joshua Fershée will discuss why we need to bring a partnership principle to LLCs to help. In partnerships, the default rule is that changes to the partnership agreement or acts outside the ordinary course of business require a unanimous vote. See UPA § 18(h) & RUPA § 401(j). As such, the duty of loyalty should have the same requirement, and perhaps that even the rule should be mandatory, not just default. The duty of loyalty norm is sufficiently ingrained that more active notice (and more explicit consent) is necessary, and eliminating the duty of loyalty is sufficiently unique that it warrants unique treatment if it is to be eliminated.
Session 7: Does Corporate Personhood Matter? A Review of We the Corporations
Professor Stefan Padfield will discuss a book written by UCLA Law Professor Adam Winkler, “We the Corporations: How American Businesses Won Their Civil Rights.” The highly-praised book “reveals the secret history of one of America’s most successful yet least-known ‘civil rights movements’ – the centuries-long struggle for equal rights for corporations.” However, the book is not without its controversial assertions, particularly when it comes to its characterizations of some of the key components of corporate personhood and corporate personality theory. This discussion will unpack some of these assertions, hopefully ensuring that advocates who rely on the book will be informed as to alternative approaches to key issues.
September 1, 2018 in Ann Lipton, Compliance, Conferences, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Human Rights, Intellectual Property, International Business, Joan Heminway, Joshua P. Fershee, Law School, Lawyering, LLCs, Marcia Narine Weldon, Real Property, Shareholders, Social Enterprise, Stefan J. Padfield, Teaching, Technology, Web/Tech | Permalink | Comments (0)
Friday, April 6, 2018
Within the next few weeks, the Supreme Court will decide a trio of cases about class action waivers, which I wrote about here. The Court will decide whether these waivers in mandatory arbitration agreements violate the National Labor Relations Act (which also applies in the nonunion context) or are permissible under the Federal Arbitration Act.
I wonder if the Supreme Court clerks helping to draft the Court's opinion(s) are reading today's report by the Economic Policy Institute about the growing use of mandatory arbitration. The author of the report reviewed survey responses from 627 private sector employers with 50 employees or more. The report explained that over fifty-six percent of private sector, nonunion employees or sixty million Americans must go to arbitration to address their workplace rights. Sixty-five percent of employers with more than one thousand employees use arbitration provisions. One-third of employers that require mandatory arbitration include the kind of class action waivers that the Court is looking at now. Significantly, women, low-wage workers, and African-Americans are more likely to work for employers that require arbitration. Businesses in Texas, North Carolina, and California (a pro-worker state) are especially fond of the provisions. In most of the highly populated states, over forty percent of the employers have mandatory arbitration policies.
Employers overwhelmingly win in arbitration, and the report proves that the proliferation of these provisions has significantly reduced the number of employment law claims filed. According to the author:
The number of claims being filed in employment arbitration has increased in recent years. In an earlier study, Colvin and Gough (2015) found an average of 940 mandatory employment arbitration cases per year being filed between 2003 and 2013 with the American Arbitration Association (AAA), the nation’s largest employment arbitration service provider. By 2016, the annual number of employment arbitration case filings with the AAA had increased to 2,879 (Estlund 2018). Other research indicates that about 50 percent of mandatory employment arbitration cases are administered by the AAA (Stone and Colvin 2015). This means that there are still only about 5,758 mandatory employment arbitration cases filed per year nationally. Given the finding that 60.1 million American workers are now subject to these procedures, this means that only 1 in 10,400 employees subject to these procedures actually files a claim under them each year. Professor Cynthia Estlund of New York University Law School has compared these claim filing rates to employment case filing rates in the federal and state courts. She estimates that if employees covered by mandatory arbitration were filing claims at the same rate as in court, there would be between 206,000 and 468,000 claims filed annually, i.e., 35 to 80 times the rate we currently observe (Estlund 2018). These findings indicate that employers adopting mandatory employment arbitration have been successful in coming up with a mechanism that effectively reduces their chance of being subject to any liability for employment law violations to very low levels.
This data makes the Court's upcoming ruling even more critical for American workers- many of whom remain unaware that they are even subject to these provisions.
Friday, February 16, 2018
Corporate Governance, Compliance, Social Responsibility, and Enterprise Risk Management in the Trump/Pence Era
This may be obsolete by the time you read this post, but here are my thoughts on Corporate Governance, Compliance, Social Responsibility, and Enterprise Risk Management in the Trump/Pence Era. Thank you, Joan Heminway and the wonderful law review editors of Transactions: The Tennessee Journal of Business Law. The abstract is below:
With Republicans controlling Congress, a Republican CEO as President, a “czar” appointed to oversee deregulation, and billionaires leading key Cabinet posts, corporate America had reason for optimism following President Trump’s unexpected election in 2016. However, the first year of the Trump Administration has not yielded the kinds of results that many business people had originally anticipated. This Essay will thus outline how general counsel, boards, compliance officers, and institutional investors should think about risk during this increasingly volatile administration.
Specifically, I will discuss key corporate governance, compliance, and social responsibility issues facing U.S. public companies, although some of the remarks will also apply to the smaller companies that serve as their vendors, suppliers, and customers. In Part I, I will discuss the importance of enterprise risk management and some of the prevailing standards that govern it. In Part II, I will focus on the changing role of counsel and compliance officers as risk managers and will discuss recent surveys on the key risk factors that companies face under any political administration, but particularly under President Trump. Part III will outline some of the substantive issues related to compliance, specifically the enforcement priorities of various regulatory agencies. Part IV will discuss an issue that may pose a dilemma for companies under Trump— environmental issues, and specifically shareholder proposals and climate change disclosures in light of the conflict between the current EPA’s position regarding climate change, the U.S. withdrawal from the Paris Climate Accord, and corporate commitments to sustainability. Part V will conclude by posing questions and proposing recommendations using the COSO ERM framework and adopting a stakeholder rather than a shareholder maximization perspective. I submit that companies that choose to pull back on CSR or sustainability programs in response to the President’s purported pro-business agenda will actually hurt both shareholders and stakeholders.
February 16, 2018 in Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Employment Law, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)
Saturday, February 3, 2018
Time's Up for Board Members: Sexual Misconduct Allegations Against CEOs of Wynn and the Humane Society Should Send a Message
Perhaps I'm a cynic, but I have to admit that I was stunned when the news of hotelier Steve Wynn's harassment allegations at the end of January caused a double-digit drop in stock price. What began as an unseemly story of a $7.5 million settlement to a manicurist at one his of his resorts later morphed into a story about his resignation as head of the finance chair of the Republican National Committee. Not only did he lose that job, he also lost at least $412 million (the company at one point lost over $3 billion in value). His actions have also led regulators in two states to scrutinize his business dealings and settlements to determine whether he has violated "suitability standards." Nonetheless, Wynn has asked his 25,000 employees to stand by him and think of him as their father. The question is, will the board stand by him as it faces potential liability for breach of fiduciary duty?
The Wynn board members should take a close look at what happened with the Humane Society yesterday. That board chose to retain the CEO after ending an investigation into harassment allegations. A swift backlash ensued. Major donors threatened to pull funding, causing the CEO to resign. A number of board members also reportedly resigned. However, not all of the board members resigned out of principle. One female director resigned after stating, " Which red-blooded male hasn’t sexually harassed somebody? ... [w]omen should be able to take care of themselves.” Unfortunately, the reaction of this board member did not surprise me. She's in her 80s and in my twenty years practicing employment law on the defense side, I've heard similar sentiments from many (but not all) men and women of that generation. Indeed, French actress Catherine Deneuve initially joined other women in denouncing the #MeToo movement before bowing to public pressure to apologize. We have five generations of people in the workplace now, and as I have explained here, companies need to reexamine the boundaries. What may seem harmless or "normal" for some may be traumatic or legally actionable to someone else.
As the Wynn and the Humane Society situations illustrate, the sexual harassment issue is now front and center for boards so general counsels need to put the issue on the next board agenda. As I wrote here, boards must scrutinize current executives as well as those they are reviewing as part of their succession planning roles to ensure that the executives have not committed inappropriate conduct. Because definitions differ, companies must clarify the gray areas and ensure everyone knows what's acceptable and what's terminable (even if it's not per se illegal).This means having the head of human resources report to the board that company policies and training don't just check a box. In fact, board members need to ask about the effectiveness of policies and training in the same way that they ask about training on bribery, money laundering, and other highly regulated compliance areas. Boards as part of their oversight obligation must also ensure that there are no uninvestigated allegations against senior executives. Prudent companies will review the adequacy of investigations into misconduct that were closed prematurely or without corroboration.Companies must spend the time and the money with qualified, credible legal counsel to investigate claims that they may not have taken seriously in the past. Because the #MeToo movement shows no signs of abating, boards need to engage in these uncomfortable, messy conversations. If they don't, regulators, plaintiffs' counsel, and shareholders will make sure that they do.
Friday, January 26, 2018
On Wednesday, I spoke with Kimberly Adams, a reporter for NPR Marketplace regarding CSX's decision to require its CEO to disclose health information to the board. I don't have a link to post, sorry. As you may know, CSX suffered a significant stock drop in December when its former CEO died shortly after taking a medical leave of absence and after refusing to disclose information about his health issues. CSX has chosen the drastic step of requiring an annual CEO physical in response to a shareholder proposal filed on December 21st stating, “RESOLVED, that the CEO of the CSX Corporation will be required to have an annual comprehensive physical, performed by a medical provider chosen by the CSX Board, and that results of said physical(s) will be provided to the Board of Directors of the CSX Corporation by the medical provider.” Adams asked my thoughts about a Wall Street Journal article that outlined the company's plans.
I'm not aware of any other company that asks a CEO to provide the results of an annual physical to the board. As I informed Adams, I hope the board has good counsel to avoid running afoul of the Americans with Disabilities Act, HIPAA, the Genetic Information Nondiscrimination Act of 2008, and other state and federal health and privacy laws. While I believe that the board must ensure that it takes its role of succession planning seriously, I question whether this is the best means to achieve that. I also remarked that although a CEO would know in advance that this is a condition of employment and would negotiate with the aid of counsel what the parameters would be, I was concerned about the potential slippery slope. How often would the CEO have to update the board on his/her health condition? Who else would have access to the information? Will this deter talented executives from seeking the top spot at a corporation?
One could argue that the health of the CEO is material information. But if that's the case, why haven't more shareholders made similar proposals? Perhaps there haven't been more of these proposals because the CSX situation was extreme. Shareholders were asked to bless the $84 million compensation package of a man who was so ill that he required a portable oxygen tank but who refused to disclose his condition or prognosis. Hopefully, other companies won't take the same approach.
Tuesday, January 23, 2018
As regular readers know, I am particular about language and meaning, especially in the business-entity space related to limited liability companies (LLCs). I think because of that, I was drawn to a new paper from Shu-Yi Oei (Boston College), The Trouble with Gig Talk: Choice of Narrative and the Worker Classification Fights, 81 Law & Contemp. Probs. ___ (2018). The abstract:
The term “sharing economy” is flawed, but are the alternatives any better? This Essay evaluates the uses of competing narratives to describe the business model employed by firms like Uber, Lyft, TaskRabbit, and GrubHub. It argues that while the term “sharing economy” may be a misnomer, terms such as “gig economy,” “1099 economy,” “peer-to- peer economy” or “platform economy” are just as problematic, possibly even more so. These latter terms are more effective in exploiting existing legal rules and ambiguities to generate desired regulatory outcomes, in particular the classification of workers as independent contractors. This is because they are plausible, speak to important regulatory grey areas, and find support in existing laws and ambiguities. They can therefore be deployed to tilt outcomes in directions desired by firms in this sector.
This Essay’s analysis suggests that narratives that are at least somewhat supportable under existing law may be potent in underappreciated ways. In contrast, clearly erroneous claims may sometimes turn out to be hyperbolic yet harmless. Thus, in evaluating the role of narrative in affecting regulatory outcomes, it is not only the obviously wrong framings that should concern us but also the less obviously wrong ones.
There are several interesting points in the piece, and find this part of the conclusion especially compelling:
I cannot prove that the deployment of gig characterization is the only reason certain legal treatments and outcomes (such as independent contractor classification for workers) seem to be sticking, at least for the moment. My narrower point is that while gig and related characterizations appear innocuous and accurate relative to the sharing characterization, this set of descriptors may actually be doing more work in terms of advancing a desired regulatory outcome. The reasons they are able to do more work are that (1) gig characterization speaks to an important and material legal ambiguity, (2) the gig characterization is plausibly accurate, even if deeply contested, and (3) the proponents of gig characterization have been able to use procedural and other tools to shore up gig characterization and defeat its competitors. These observations may be generalized beyond the gig context: While the temptation is to focus on narratives and characterizations that are clearly wrong, this Essay suggests that we should also pay attention to more subtle narratives that are less clearly wrong, because such narratives may be doing more work by virtue of being “almost right.”
This last point is one that resonates with me on the LLC front, where people insist on comparing or analogizing LLCs to corporations. There are times when such a comparison or analogy is "almost right," and it is in these circumstances that the perils of careless language can cause the most trouble because the same comparison or analogy can get made later when doing so is clearly wrong.
Wednesday, January 3, 2018
At a time when many boards may be thinking of tax planning and possible M & A deals, they may have to start focusing more on the unseemly topic of their executives' sex lives because the flood of terminations and resignations due to sexual misconduct shows no signs of slowing down. One of the most shocking but underreported terminations in 2017 related to VISA. The CEO, one year into the role, chose to terminate one of his most valuable executives after an anonymous tip about sexual misconduct. He wanted his employees to know that the corporate culture and values mattered. Board members should look closely at the VISA example.
We will continue to see the rise of the #MeToo movement spurred on in part by the messaging from a star-studded task force formed to address Hollywood issues and the establishment of a multimillion-dollar legal defense fund to help blue-collar workers. Even Supreme Court Chief Justice Roberts addressed sexual harassment in the court system in his Year-End Report on the Federal Judiciary. More people than ever may now choose to come forward with claims of harassment or assault. Whether companies choose to terminate wrongdoers or the accused choose to resign "to spend more time with their families," it's a new day. As I've written here, companies will need to re-evaluate policies and training to navigate these landmines.
Board members will need to step up too. Boards of any size institution (including nonprofits) need to take the job of CEO succession planning seriously because the chief executive could leave, retire, or die. Boards must not only consider the possibility of a harassment scandal in the C-Suite but they must also worry about their fellow board members. Unfortunately, a KPMG study revealed that only 14% of board members believe they have a detailed succession plan for themselves. Members of the C-suite will also need to think more clearly about succession planning in the lower ranks. HR may have to redouble efforts to ensure that high-potential employees have no skeletons in the closet that have been swept under the rug.
In the meantime, I and other former members of the Department of Labor Whistleblower Protection Advisory Committee have written an op-ed in the Boston Globe. Even if I had not co-authored the piece, as a former defense-side employment lawyer and compliance officer, I would recommend that company leaders take a look at it. Some of our recommendations for strengthening corporate culture are below:
1) have a trustworthy, independent system, with multiple reporting mechanisms, staffed with the proper skills to conduct swift, full, and fair investigations and to carry them to a just resolution, observing principles of confidentiality and discretion, and including ongoing protection of those who report;
2) make sure that there is a clear, credible anti-retaliation policy that protects accusers and witnesses who come forward in good faith;
3) require strong accountability for all levels of management for reporting and responding to complaints;
4) implement specific policies that direct bonuses, raises, and other incentives and opportunities to those who, in addition to meeting business targets, actively prevent and respond appropriately to harassment, retaliation, and other compliance problems. Consider clawbacks if unsupportive behavior later comes to light. Call out injurious behavior (without necessarily naming names) and credit exemplary behaviors;
5) periodically assess the culture and require an independent outside entity to confidentially administer anonymous surveys and interviews. The best of these use benchmarked and validated questions that can provide insight into the effectiveness of the compliance program and whether employees trust the system; and
6) make sure to involve unions and other formal and informal employee groups in developing new policies.
I wish all of our readers a happy and healthy new year. I wish board members and company executives good luck.
Monday, December 25, 2017
Merry Christmas to all celebrating today. I am enjoying a white Christmas in Pittsburgh, Pennsylvania with my dad and my brother and his husband, joined later today by my son and his fiancée (who had to work the night shift last night--she's a hospital nurse). For the first time in many, many years--I think since before I was married in 1985--I am separated from my husband this Christmas. He is back in Tennessee with my daughter, who celebrated her 26th birthday yesterday. Their work schedules didn't accommodate holiday travel this year. My daughter, in particular, worked yesterday and will work again tomorrow. The working world is a different place now during the holidays than it was when I was a child.
As I sit here with a blood orange mimosa on Christmas morning, that observation set me to thinking about blue laws and Christmas. (Ann and I are thinking along similar lines this week, it seems . . . .) A lot of folks save their shopping--including shopping for alcohol--until somewhat the last minute. This year, Christmas is on a Monday, meaning that Christmas Eve--a prime shopping day--was on a Sunday. I wondered whether any blue laws prevented stores from being open or alcohol from being sold yesterday (or today, for that matter) . . . .
Back in 2006, when Christmas also was on a Monday, National Public Radio's All Things Considered covered this story from a South Carolina perspective. Tennessee law, TCA § 57-3-406(e) (2016), provides as follows:
No retailer shall sell or give away any alcoholic beverage between eleven o'clock p.m. (11:00 p.m.) on Saturday and eight o'clock a.m. (8:00 a.m.) on Monday of each week. No retail store shall sell, give away or otherwise dispense alcoholic beverages except between the hours of eight o'clock a.m. (8:00 a.m.) and eleven o'clock p.m. (11:00 p.m.) on Monday through Saturday. The store may not be open to the general public except during regular business hours. Likewise, all retail liquor stores shall be closed for business on Thanksgiving Day and Christmas Day.
So, folks in Tennessee could not buy drinking alcohol yesterday from any store but can buy spirits today (absent applicable local ordinances to the contrary) from a retail store that is not a liquor store (if I am reading that correctly).
Massachusetts, my immediate former home state, has many exceptions to its blue laws, including allowing certain retail establishments to be open on Sundays, provided that rank-and-file (non-executive, non-administrative over a certain pay grade) retail employees are paid time-and-a-half if the business employs more than seven people. See MGL c. 136, § 6(50). This exception does not apply to any state-defined legal holiday (and to Christmas, when it is on a Sunday), but the exception does apply to the day following Christmas when Christmas occurs on a Sunday. The exception for alcohol sales is more detailed and includes:
The retail sale of alcoholic beverages not to be drunk on the premises on Sundays by retail establishments licensed under section 15 of chapter 138; provided, however, that notwithstanding this chapter, a municipality may prohibit the retail sale of alcoholic beverages on Sundays by licensees under section 15 by vote of the city council or board of selectmen; provided further, that there shall be no such sales prior to the hour of 10:00 a.m. or on Christmas Day if Christmas occurs on a Sunday; and provided further, that establishments operating under this clause which employ more than 7 persons shall compensate all employees for work performed on a Sunday at a rate of not less than one and one-half of the employee's regular rate. No employee shall be required to work on a Sunday and refusal to work on a Sunday shall not be grounds for discrimination, dismissal, discharge, deduction of hours or any other penalty.
Whoever on Sunday keeps open his shop, warehouse, factory or other place of business, or sells foodstuffs, goods, wares, merchandise or real estate, or does any manner of labor, business or work, except works of necessity and charity, shall be punished by a fine of not less than twenty dollars nor more than one hundred dollars for a first offense, and a fine of not less than fifty dollars nor more than two hundred dollars for each subsequent offense, and each unlawful act or sale shall constitute a separate offense.
Even where retail establishments may be open, states may regulate work on Christmas--and on other holidays, too--designated as legal holidays by the state. I grew up with a system of federal and state holidays that serve this purpose. But The Legal Genealogist tells us that Christmas has not been a government-designated holiday from work for very long. The Tennessee list for 2017 can be found here. The Massachusetts legal holiday list is here.
Anyway, lest I bore you with my holiday blue law musings, I will close now by wishing you a happy continuing holiday season from here in Pittsburgh. Enjoy time with and memories of family and friends. From my house to yours, this brings wishes for a lovely holiday week. Enjoy.
Thursday, December 7, 2017
Two weeks ago, I asked whether companies were wasting time on harassment training given the flood of accusations, resignations, and terminations over the past few weeks. Having served as a defense lawyer on these kinds of claims and conducted hundreds of trainings, I know that most men generally know right from wrong before the training (and some still do wrong). I also know that in many cases, people look the other way when they see or hear about the complaints, particularly if the accused is a superstar or highly ranked employee. Although most men do not have the power and connections to develop an alleged Harvey Weinstein-type "complicity machine" to manage payoffs and silence accusers, some members of management play a similar role when they ignore complaints or rumors of inappropriate or illegal behavior.
The head in the sand attitude that executives and board members have displayed in the Weinstein matter has led to a lawsuit arguing that Disney knew or should have known of Weinstein's behavior. We may see more of these lawsuits now that women have less fear of speaking out and Time honored the "Silence Breakers" as the Person of the Year. As I read the Time article and watched some of the "silence breakers" on television, it reminded me of 2002, when Time honored "The Whistleblowers." Those whistleblowers caused Congress to enact sweeping new protection under Sarbanes-Oxley. Because of all of the publicity, companies around the country are now working with lawyers and human resources experts to review and revamp their antiharassment training and complaint mechanisms. As a result, we will likely see a spike in internal and external complaints. But do we need more than lawsuits? Would more women in the boardroom and the C-Suite make a difference in corporate culture in general and thereby lead to more gender equity?
Last week, Vĕra Jourová, the EU Commissioner for Justice and Gender Equality put forth some proposals to redress the gender pay gap in Member States’ businesses. She recommends an increase in the number of women on boards for companies whose non-executive Boards are more than 60% male. These companies would be required to “prioritize” women when candidates of “equal merit” are being considered for a position. Germany, Sweden, and the Netherlands have already previously rejected a similar proposal.
I'm generally not in favor of quotas because I think they produce a backlash. However, I know that many companies here and abroad will start to recruit more female directors and executives in an effort to appear on top of this issue. Will it work? We will soon see. After pressure from institutional investors such as BlackRock and State Street to increase diversity, women and minorities surpassed 50% of S & P open board seats in 2017. Stay tuned.
Tuesday, November 28, 2017
A recent Pennsylvania opinion makes all sorts of mistakes with regard to a single-member limited liability company (LLC), but in dissent, at least some of the key issues are correctly framed. In an unreported opinion, the court considered whether a company (WIT Strategy) that required an individual to form an LLC as a predicate to payment was an employee eligible for unemployment compensation. WIT Strategy v. Unemployment Compensation Board of Review, 2017 WL 5661148, at *1 (Pa. Cmwlth. 2017). The majority explained the test for whether the worker was an employee as follows:
The burden to overcome the ‘strong presumption’ that a worker is an employee rests with the employer. To prevail, an employer must prove: (i) the worker performed his job free from the employer's control and direction, and (ii) the worker, operating as an independent tradesman, professional or businessman, did or could perform the work for others, not just the employer.
Id. at *3. (quoting Quality Care Options v. Unemployment Comp. Bd. of Review, 57 A.3d 655, 659-60 (Pa. Cmwlth. 2012) (citations omitted; emphasis added)).
As to the first prong, the Unemployment Compensation Board of Review (UCBR) determined, and the court confirmed, that WIT Strategy had retained control over the claimant consistent with the type of control one exerts over an employee. I might disagree with the assessment, but the test is correct, and the analysis reasonable, if not clearly correct. Assessment of the second prong, though, is flawed.
The court quotes the UCBR's conclusions:
The [UCBR] does not find that [C]laimant was operating a trade or business, customarily or otherwise. The only reason [C]laimant formed the LLC was because WIT required it, claiming that it needed to pay [C]laimant through the LLC. WIT also claimed that doing so was a ‘common agency model’ for its kind of agency. The [UCBR] does not credit WIT's testimony. Rather, although [C]laimant did perform two projects for other entities, each for under $600 [.00], there is no evidence that [C]laimant solicited business through her LLC since its inception in 2013 through her termination in 2015. [C]laimant worked for WIT 40 hours per week and did not have employees of the LLC to solicit business for her. Further, although WIT claimed that all its team members were required to have additional clients through their LLCs to share with it, WIT did not prove that [C]laimant had such clients. As [C]laimant did not operate a trade or business, but rather the LLC was formed as a type of shell corporation, the fact that [C]laimant was the single-member owner is not dispositive. [C]laimant was not customarily engaged in a trade, occupation, profession or business.
The legal form by which Claimant provided public relations and communications services to WIT-provided clients and to her own clients is irrelevant. A sole proprietor may establish a single-member LLC for many reasons, the obvious being a desire to limit individual liability. It is not known what the Board meant by a “shell corporation,” and there is no evidence on this point. A limited liability company is not even a corporation. The Pennsylvania Associations Code provides as follows:One or more persons may act as organizers to form a limited liability company ....15 Pa. C.S. § 8821. A single-member LLC, such as Jilletante Creative, is a perfectly lawful and valid alternative to a sole proprietorship.
Claimant continued to operate as an LLC even after her separation from WIT. The record includes Claimant's two-page detailed proposal to a potential client on “Jilletante Creative, LLC” letterhead, signed as “Jilletante Creative, LLC; By: Jillian Ivey, sole member.” R.R. 10a-11a. Jilletante Creative is not a sham or “shell” corporation, and characterizing it as such is a red herring in the analysis of whether Claimant worked for WIT clients as an employee of WIT or as an independent contractor.
Thursday, October 5, 2017
On Monday, the Supreme Court heard argument on three cases that could have a significant impact on an estimated 55% of employers and 25 million employees. The Court will opine on the controversial use of class action waivers and mandatory arbitration in the employment context. Specifically, the Court will decide whether mandatory arbitration violates the National Labor Relations Act or is permissible under the Federal Arbitration Act. Notably, the NLRA applies in the non-union context as well.
Monday’s argument was noteworthy for another reason—the Trump Administration reversed its position and thus supported the employers instead of the employees as the Obama Administration had done when the cases were first filed. The current administration also argued against its own NLRB’s position that these agreements are invalid.
In a decision handed down by the NLRB before the Trump Administration switched sides on the issue, the agency ruled that Dish Network’s mandatory arbitration provision violates §8(a)(1) of the NLRA because it “specifies in broad terms that it applies to ‘any claim, controversy and/or dispute between them, arising out of and/or in any way related to Employee’s application for employment, employment and/or termination of employment, whenever and wherever brought.’” The Board believed that employees would “reasonably construe” that they could not file charges with the NLRB, and this interfered with their §7 rights.
The potential impact of the Supreme Court case goes far beyond employment law, however. As the NLRB explained on Monday:
The Board's rule here is correct for three reasons. First, it relies on long-standing precedent, barring enforcement of contracts that interfere with the right of employees to act together concertedly to improve their lot as employees. Second, finding individual arbitration agreements unenforceable under the Federal Arbitrations Act savings clause because are legal under the National Labor Relations Act gives full effect to both statutes. And, third, the employer's position would require this Court, for the first time, to enforce an arbitration agreement that violates an express prohibition in another coequal federal statute. (emphasis added).
This view contradicted the employers' opening statement that:
Respondents claim that arbitration agreements providing for individual arbitration that would otherwise be enforceable under the FAA are nonetheless invalid by operation of another federal statute. This Court's cases provide a well-trod path for resolving such claims. Because of the clarity with which the FAA speaks to enforcing arbitration agreements as written, the FAA will only yield in the face of a contrary congressional command and the tie goes to arbitration. Applying those principles to Section 7 of the NLRA, the result is clear that the FAA should not yield.
My co-bloggers have written about mandatory arbitration in other contexts (e.g., Josh Fershee on derivative suits here, Ann Lipton on IPOs here, on corporate governance here, and on shareholder disputes here, and Joan Heminway promoting Steve Bradford’s work here). Although Monday’s case addresses the employment arena, many have concerns with the potential unequal playing field in arbitral settings, and I anticipate more litigation or calls for legislation.
I wrote about arbitration in 2015, after a New York Times series let the world in on corporate America’s secret. Before that expose, most people had no idea that they couldn’t sue their mobile phone provider or a host of other companies because they had consented to arbitration. Most Americans subject to arbitration never pay attention to the provisions in their employee handbook or in the pile of paperwork they sign upon hire. They don’t realize until they want to sue that they have given up their right to litigate over wage and hour disputes or join a class action.
As a defense lawyer, I drafted and rolled out class action waivers and arbitration provisions for businesses that wanted to reduce the likelihood of potentially crippling legal fees and settlements. In most cases, the employees needed to sign as a condition of continued employment. Thus, I’m conflicted about the Court’s deliberations. I see the business rationale for mandatory arbitration of disputes especially for small businesses, but as a consumer or potential plaintiff, I know I would personally feel robbed of my day in court.
The Court waited until Justice Gorsuch was on board to avoid a 4-4 split, but he did not ask any questions during oral argument. Given the questions that were asked and the makeup of the Court, most observers predict a 5-4 decision upholding mandatory arbitrations. The transcript of the argument is here. If that happens, I know that many more employers who were on the fence will implement these provisions. If they’re smart, they will also beef up their compliance programs and internal complaint mechanisms so that employees don’t need to resort to outsiders to enforce their rights.
My colleague Teresa Verges, who runs the Investor Rights Clinic at the University of Miami, has written a thought-provoking article that assumes that arbitration is here to stay. She proposes a more fair arbitral forum for those she labels “forced participants.” The abstract is below:
Decades of Supreme Court decisions elevating the Federal Arbitration Act (FAA) have led to an explosion of mandatory arbitration in the United States. A form of dispute resolution once used primarily between merchants and businesses to resolve their disputes, arbitration has expanded to myriad sectors, such as consumer and service disputes, investor disputes, employment and civil rights disputes. This article explores this expansion to such non-traditional contexts and argues that this shift requires the arbitral forum to evolve to increase protections for forced participants and millions of potential claims that involve matters of public policy. By way of example, decades of forced arbitration of securities disputes has led to increased due process and procedural reforms, even as concerns remain about investor access, the lack of transparency and investors’ perception of fairness.
I’ll report back on the Court’s eventual ruling, but in the meantime, perhaps some policymakers should consider some of Professor Verges’ proposals. Practically speaking though, once the NLRB has its full complement of commissioners, we can expect more employer-friendly decisions in general under the Trump Administration.
 Murphy Oil USA v. N.L.R.B., 808 F.3d 1013 (5th Cir. 2015), cert. granted, 137 S. Ct. 809, 196 L. Ed. 2d 595 (2017); Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir. 2016), cert. granted, 137 S. Ct. 809, 196 l. Ed. 2d. 595 (2017); Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016), cert. granted, 137 S. Ct. 809, 196 L. Ed. 2d 595 (2017)