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May 25th, 2009

The $17.5 million hard drive

Posted by Robin Harris @ 8:03 pm

Categories: Public policySecurity


Some employers think they own you when all they’re doing is renting your time. It cost 1 company $17.5 million to learn that stealing an employee’s hard drive is really, really stupid.

It’s about time.

Wha’ happened?
An RV sales manager was hired by an RV manufacturer Forest River, told he was going to get a big raise “later,” and when he realized “later” meant “never” started looking for a new job.

The cheapskate company didn’t even provide a notebook, so the guy used his own to build an 11 state sales network, as well as software for tracking sales. When the company Prez got wind that the guy was looking - and before firing him - the Prez stole his notebook, took the hard drive anderased all the files.

The Prez thought the sales manager was going to steal company secrets and figured that was all the justification he needed. He figured wrong.

In the meantime the RV builder got bought by the v deep-pocketedBerkshire Hathaway holding company for legendary investor Warren Buffet.

Wha’ happened then?
The sales manager was a believable witness - despite popular prejudice, most good salesmen are believable - and the jury awarded him his lost sales commissions, $7 million in punitive damages against the RV company and $8 million in punitive damages against the RV company president and founder.



Privilege in an electronic world: cost vs. safety

The next time you check your e-mail in-box, count how many e-mails you received the previous day. Yesterday I received eighty-two. Now, count how many computers with e-mail in-boxes there are in your organization, and multiply. After I did that calculation for our firm, I looked out my window and saw twenty or so highrise office buildings, each filled with people, each person with a computer, each computer with an inbox, and each in-box refilled daily. The number of emails received each minute in downtown Chicago alone is staggering.      

This is a frightening prospect for lawyers and clients who are involved in, or are contemplating litigation with attendant discovery burdens. Ever since e-mail communications became commonplace, courts have struggled to balance attorney-client and attorney work product privileges with practicalities. No judge or barrister practicing at the bar in England in 1577—when the attorney-client privilege was first recognized—could have imagined how the privilege, which excused a solicitor from testifying regarding a matter on which he had been retained, could possibly be applied with justice in our world. Back then, and indeed, until very recently, attorney-client communications were likely to be in person or by letter. Even with the advent of faxes and word processors, though the volume of documents increased, it remained relatively easy to locate and segregate privileged communications— letters and faxes were kept on paper in filing cabinets and could be reviewed. E-mails and other electronic data and information, however, are nearly impossible to review and segregate without enormous cost; and unreviewed materials cannot be produced for an adversary without important risk of disclosure.  

Fortunately, Congress in enacting Rule 502 to the Federal Rules of Evidence last September imposed some uniformity and predictability into the process by addressing the issue with a commonsense approach that is cost effective and that preserves the privileges. The most important change under Rule 502 is that while reducing the costs of discovery in federal courts, it greatly reduces the risk of a waiver of these privileges in other state and federal proceedings.  

Before the adoption of Rule 502, the inadvertent production of a single privileged document could lead to a broad waiver of the privilege regarding all documents relating to the same subject matter. Moreover, the effect of an inadvertent disclosure varied among the several federal circuit courts of appeal and from state to state. As might be expected, to avoid a finding of a broad waiver, counsel or their clients felt compelled to review each document for privileged material. Time-saving e-discovery tools, such as word searches for attorney names, while useful in identifying relevant documents, were not as effective as document-by document review, and more important, were not uniformly recognized as reasonable approaches to protecting the privilege.  

Earlier attempts to create some predictability and cost savings were not enough. In 2006, the Federal Rules of Civil Procedure were amended to allow courts to enter discovery orders based upon agreements of the parties that inadvertent disclosures would not constitute a waiver of a privilege. Those Rules also permitted parties to include “claw-back” and “quick-peek” agreements. Under a “claw-back” agreement, the parties agree in advance to return inadvertently produced documents which will not result in a waiver. Under a “quick-peek” agreement, a party allows the other side to review documents prior to its own review, and lets the other side decide what materials it wants copied. Only then does the producing party review the selected documents for privilege. In addition the new rules provided that in the event a privileged document was inadvertently produced, the receiving party, when notified by the producing party, was required to return, sequester or destroy the document. It could then seek an order declaring that a waiver had occurred.  

These improvements, while helpful, were not sufficient because the federal courts had no authority to bind nonparties or other courts to these non-waiver agreements or discovery orders. If, for example, a party produced privileged documents to the other side pursuant to a nonwaiver agreement in federal court litigation, it was quite possible that when the disclosing party became involved in subsequent litigation with another party in another court, the subsequent court would not follow the prior agreement or court order and would instead determine that the privilege had been waived. As a result, parties remained reluctant to rely upon these agreements and continued to engage in extensive document review.  

New Rule 502 directly addresses this issue by declaring that all federal court orders finding that there has been no waiver or approving the parties’ non-waiver agreement, must be respected in all other proceedings, whether in state or federal courts. Thus, a party can now be confident that whatever order is entered by a federal court regarding waiver will be binding in all subsequent state and federal proceedings wherever conducted. There will no longer be different determinations with respect to disclosure based upon the jurisdiction or location of a subsequent court. These amendments are a great improvement over the former patchwork of decisions in various federal and state courts.  

This Rule is not merely effective when the original proceeding is in a federal court. It also attempts to bring some uniformity in later federal court proceedings regarding the decisions made in prior state courts. A disclosure in a state court proceeding will not operate as a waiver of privilege in a subsequent federal court if it would not be deemed a waiver under Rule 502 or under the law of the state in which it was made. In other words, the federal court will apply whichever law promotes a finding non-waiver. Rule 502 is not only procedural, but also substantive and sets forth the effect of disclosure of a privileged document to a federal agency or in a federal court proceeding. Prior to its enactment, the scope of attorney-client privilege and effect of disclosures were determined by federal common law for cases arising under federal law and by state law for cases arising under state law. The Rule provides a single set of rules for waiver of privilege in federal court.  

Rule 502 (a) provides that such disclosure will be deemed a subject matter waiver i.e., the waiver extends also to non-produced materials, only where (1) the waiver is intentional; (2) the disclosed and undisclosed documents concern the same subject matter; and (3) “they ought in fairness to be considered together.”  

Importantly, Rule 502 limits the effect of inadvertent disclosure. It provides that the privilege is not waived by disclosure to a party in a federal court proceeding or to a federal agency if (1) the disclosure is inadvertent, (2) the holder of the privilege took reasonable steps to prevent disclosure, and (3) the holder of the privilege promptly requested return of the document when inadvertent production is discovered.  

While Rule 502 will not eliminate all of the costs in time and money of protecting the attorney-client and work product privileges—and parties still need to protect privileged documents—it should greatly assist the parties and courts in reaching balanced and cost-effective methods for producing and reviewing documents.

How cloud services impact e-discovery

Considerations for using cloud services to store records
Cloud Security Alert By Tim Greene , Network World , 05/07/2009
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At the recent RSA conference an attorney pointed out that cloud services have an impact on e-discovery - the turning over of electronic documents in response to lawsuits.

First, businesses are legally required to keep certain kinds of records and entrusting them to a cloud service provider can muddy that distinction. You could argue that by hiring a third party to store such records, a business is losing control of it and therefore breaking the rules about keeping it.

In a more concrete sense, if the provider messes up and somehow the records are lost or otherwise inaccessible, the business that entrusted them to the cloud is responsible. That could result in more lawsuits than the one for which the records were being subpoenaed, the attorney says.

Even if the data is accessible from the cloud, lawyers could question its integrity. Has it been altered or been open to alteration while in the cloud? While these issues are known in legal circles and even in IT circles, in this attorney’s experience, businesses rarely address these potentially thorny and costly legal issues.

The flip side of this is that records need to be destroyed. Business policies driven by legal counsel often call for the routine deletion of records that are no longer needed and that, from a liability standpoint, ought to be deleted.

Many businesses have been ignoring this advice. “We never delete our data,” one privacy officer said at RSA. “If you use the cloud, you have to start deleting data. I’m not going to leave everything out there forever.”

So as businesses consider using cloud services to store records, they ought to look at it as an opportunity to improve the data retention policies they’ve been operating under.

Can an E-mail Agreement be a Binding Contract?

Much of today's business is conducted over e-mail, and it's possible to bind yourself to a contract through email, either deliberately or inadvertently.

If an e-mail or chain of e-mails clearly states an offer for entering into a deal with all of the material terms, and the other side responds by email accepting the terms, then there's a good chance that a valid contract has been formed — even though no signatures have been exchanged. So be careful. If all you intend is to negotiate the issues leading to a formal written and signed contract accepted by both parties, make sure you say that in your e-mails.

In addition, in June 2000, President Clinton signed the Electronic Signatures in Global and National Commerce Act, which set a single national standard for using electronic signatures in contracts and other legal agreements. The law allows businesses to send copies of signed documents electronically and to store archived copies of these documents in electronic form. Although there are certain exceptions, many routine commercial transactions are covered under this law. The law even allows for the electronic notarization of legal documents.

The most important consequence is the fact that consumers can now "sign" contracts over the Web by simply pushing a button, clicking a link, or completing some other simple action. This means that two parties can negotiate, sign, and exchange copies of a contract without ever meeting face to face, signing a physical document, or producing a hard copy of an agreement. And, as far as the law is concerned, such an agreement can be just as valid as a written agreement using actual signatures.  The law specifies a list of documents that cannot be signed electronically, including wills, trusts and estates; marriage, divorce, adoption, and other family agreements; court documents and filings; utility service terminations; eviction, foreclosure, and repossession notices; health and life insurance termination notices; and documents referring to the handling or transportation of hazardous materials. State laws may also require that certain types of contracts, such as real estate purchase agreements, need to be in writing and signed by the parties. Source: http://www.allbusiness.com/legal/contracts-agreements/2378-1.html

Good Faith, Bad Faith? Sizing Up the Big Lyondell Decision

By Ashby Jones

lyondellCorporations professors got some more pages to stick in the next edition of their casebook when the Delaware Supremes issued their long-awaited ruling in Ryan v. Lyondell on Thursday. Click here for the opinion, which seems poised to change the landscape for evaluating what boards of directors are required to when sizing up a merger proposal.

The court reversed a ruling from the Vice Chancellor John Noble and granted summary judgment to Lyondell’s directors, finding that they acted in good faith last year when they accepted a merger offer of $48 per share from Basell AF, a Dutch chemical business. Click here for commentary from BYU professor Gordon Smith at the Conglomerate Blog, here for a take from UCLA’s Stephen Bainbridge, here for another take from Creighton’s Eric Chiappinelli; and here for a nice writeup from AmLaw Daily’s Alison Frankel.

The plaintiffs in the case, a group of disgruntled shareholders, had been looking not to break up the merger — the merger was completed at the end of 2008 and the U.S. arm of the merged entity has already filed for bankruptcy — but for monetary damages suffered as a result of the merger.

Here’s the backstory: Dan Smith, Lyondell’s chairman and CEO, first found out about Basell’s interest in an acquisition back in April of 2006. But neither Smith nor Lyondell’s board did much with Basell’s overture until several months later, at which time Basell presented to the company a take-it-or-leave it offer that, Basell insisted, had to be answered within a week. At that time, Smith and the Lyondell board did the best they could to research the offer within the short time window, and ultimately accepted the offer.

A small group of shareholders sued in both Texas and Delaware, claiming that the Lyondell board violated its duty to shareholders by not doing enough to research the deal after Basell’s first overture and then by accepting the deal too quickly once the deadline was imposed. The Texas court ruled the merger could go forward, but the shareholders pressed their lawsuit for damages in the Delaware courts.

The Delaware trial court — the Court of Chancery — granted summary judgment for both Lyondell and Basell, but didn’t grant summary judgment for the Lyondell directors, holding instead that couldn’t conclude, on the limited record before him, that the directors “acted appropriately under the circumstances of this case” and that an “unexplained inaction” — the two months in which the company did very little — allowed an inference that the directors may have shirked their fiduciary duties.

The directors, represented by Richards, Layton & Finger’s Dan Dresibach and Tom Beck, with an assist from Skadden’s Ed Welch and Ed Micheletti (representing Lyondell) appealed the denial of summary judgment to the Delaware Supreme Court.

The long and the short? The directors are off the hook. According to Pace University Law Professor Andrew Lund, the decision was notable for a couple of reasons. First, the court held that the duties put forth in the famed 1986 Revlon decision, did not apply to the Lyondell board during the two month period of relative inactivity. “The problem with the trial court’s analysis,” reads the opinion, “is that Revlon duties do not arise simply when a company is ‘in play.’ The duty to seek the best available price applies only when a company embarks on a transaction . . . that will result in a change of control.” In other words, Revlon kicks in when a board starts a negotiation to sell the company.

Okay, so what about the week-long period after hearing about the offer? Did the directors fail in their duty of good faith to the shareholders? Lund points to a pivotal section late in the opinion in which the court explains: “Only if [the directors] knowingly and completely failed to undertake their responsibilities would they breach their duty of loyalty. The trial court approached the record from the wrong perspective. Instead of questioning whether disinterested, independent directors did everything that they (arguably) should have done to obtain the best sale price, the inquiry should have been whether those directors utterly failed to attempt to obtain the best sale price.”

Lund explains that given this language, it’s going to be hard for shareholders going forward to make “good faith” claims against corporate boards in such circumstances. “It all but eviscerates the ability to bring such a claim.”

Lund also says that the court didn’t need to go this far; it could have just made its Revlon ruling as it pertained to the two month period, and sent the case back to the Chancery court to apply the Revlon analysis to the one-week period. “But the court swung for the fences,” says Lund, by articulating this new “good faith” standard, particularly the “completely” and “utterly” adverbs. “It’s not going to make the plaintiffs’ bar very happy.”

Drug Approval Is Not a Shield From Lawsuits, Justices Rule

Published: March 4, 2009

WASHINGTON — In one of the most important business cases in years, the Supreme Court on Wednesday ruled that a drug company is not protected from injury claims in state court merely because the federal government had approved the products and its labeling.

The 6-to-3 ruling went in favor of a Vermont woman, a musician, who was awarded more than $6 million after losing much of her arm following a botched injection of an anti-nausea drug. It was a defeat for the Wyeth pharmaceutical company, which had asked the justices to throw out the award, and by extension other companies that might have pursued Wyeth’s line of argument in similar cases.

Ms. Levine had settled a parallel claim against the clinic where she was treated.

The key issue before the justices was whether the Food and Drug Administration’s approval of drug labels should control lawsuits in state courts contending, as Ms. Levine’s did, that the labels did not contain adequate warnings. Wyeth’s lawyers had argued that the company provided “ample, lavish warnings,” as one attorney put it, and that Wyeth should not been held liable, because the Food and Drug Administration had approved the label on the drug in question, Phenergan.

But the high court held, in an opinion by Justice John Paul Stevens, that Wyeth’s reading of the pertinent federal regulation was “cramped” and based on a “fundamental misunderstanding.”

“It is a central premise of the Food, Drug and Cosmetic Act and the F.D.A.’s regulations that the manufacturer bears responsibility for the content of its label at all times,” the majority concluded in Wyeth v. Levine, No. 06-1249.

The majority upheld the Vermont Supreme Court, which in 2006 rejected Wyeth’s argument that it had been put in an untenable position: having to comply with federal law, given its requirement that the F.D.A. approve drug labels, and yet being punished by the state jury’s verdict for not using a different, more inclusive label.

Federal law “provides a floor, not a ceiling, for state regulation,” the Vermont Supreme Court declared in the ruling that the United States Supreme Court affirmed on Wednesday.

Ms. Levine’s suffering began in the spring of 2000 when, suffering from a migraine, she visited a local clinic for a treatment she had received many times: Demerol for pain and Phenergan for nausea.

If Phenergan is exposed to arterial blood, it causes swift and irreversible gangrene. Therefore, it is typically administered by intramuscular injection. Ms. Levine’s lawyers said an intravenous drip is also quite safe.

But a physician used a third method, injecting the drug into what she thought was a vein, using a technique known as “IV push.” The assistant apparently missed a vein and hit an artery instead, causing Ms. Levine’s right hand and forearm to turn purple and black in the following weeks, leading to amputation of much of her arm.

The F.D.A.-approved label warned that “inadvertent intra-arterial injection” can cause gangrene requiring amputation, but it did not rule out administering the drug by the “IV push” method.

The justices who sided with Ms. Levine on Wednesday said that “Wyeth could have unilaterally added a stronger warning about IV-push administration” without running afoul of federal regulations. Justices Anthony M. Kennedy, David H. Souter, Ruth Bader Ginsburg and Stephen G. Breyer joined Justice Stevens, while Justice Clarence Thomas filed an opinion concurring in the overall judgment.

Justice Samuel A. Alito Jr. wrote a dissent declaring, “This case illustrates that tragic facts make bad law.” Joining him with Chief Justice John G. Roberts Jr. and Justice Antonin Scalia.

Bert Rein, an attorney for Wyeth, said the company “fully complied with federal law” in its labeling, and that the F.D.A. “is in the best position to weight the risks and benefits of a medicine.”

Ms. Levine, now 63, was overjoyed. “Oh, my God. I’m so, so happy,” she told The Associated Press in a telephone interview. “I’m just ecstatic. I’m going to have to sit down.”

Surprise! Economy Is Down, Litigation Is Up

According to Portfolio Media Inc.'s Law 360 Litigation Almanacs, 2008 U.S. litigation filings increased over 2007 figures by 9% to 266,398, and class actions are up 8% to 7,661.

I know you're shocked.  Pick yourself up off the floor so you can continue with the next paragraph.

Here's the rest of the figures: 

            antitrust filings up 27% to 1,268 cases;

            product liability filings (other than asbestos cases) up by 20% to 19,709 cases;

            employment filings up by 6% to 31,990 cases;

            intellectual property filings down by 11% to 9,210 cases; and,

            securities litigation filings down by 8% to 1,459 cases.

With layoffs due to the bad economy, employment litigation cases will likely increase even more despite the attempts of the business sector to postpone business-to-business litigation to conserve cash.  Product liability cases rose likely due to the claims arising out of product claims from China.  Intellectual property filings decreases because the music industry slowed down its copyright violation campaign. 

Securities filings decreased due to the economy as well - it's hard to blame decreased stock prices on management when every company is suffering from the same ills.  Antitrust claims increased due to government prosecutions, which lawyers followed with civil lawsuits authorized by private attorney general statutes. 

The rest of the cases are standard, run-of-the-mill tort cases (civil wrongs) that occur every day and aren't generally affected by the economy.  That's one litigation sector that will stay flat, with perhaps a slight increase. 

As cases pile up and statutes of limitations continue to run, we'll likely see more business litigation filings, too. 

The fun never ends. 

Printer friendly page Permalink Email to a friend Posted by J. Craig Williams on Monday, January 19, 2009 at 21:10 Comments Closed (0) | Trackback (0)

Top Five Employer Mistakes Under the FLSA

Some of the most common FLSA mistakes made by employers are easily identified and remedied. Whether you have five or five thousand employees, here are five mistakes you should try to avoid.
By Steven Siegel

ver since the Fair Labor Standards Act’s revised regulations became effective August 23, 2004, overtime has become a hot-button topic for employers and employees alike. Worse, it has also become a prime target area for plaintiffs’ attorneys, because even with the revisions the FLSA is an extraordinarily difficult statute to comprehend and comply with.

    Fortunately, some of the most common mistakes made by employers are easily identified and remedied. Whether you have five or five thousand employees, here are five mistakes you should try to avoid:

1. Believing salaried employees are automatically exempt from overtime
    Just because you are paying an employee a salary, no matter how large, does not mean that he or she is exempt from overtime. Each individual employee must qualify for one of the specific exemptions provided by the statute. Other less common exemptions include the executive exemption, administrative exemption, professional exemption, computer-employee exemption and outside sales exemption.

    Each exemption has specific tests, and each employee to whom you pay a salary must be evaluated to see whether the exemption applies. Don’t forget that job titles and job descriptions aren’t the determining factor any more than paying a salary is—just because you call someone a manager or an assistant manager and pay them a salary does not mean they qualify for the exemption. The courts and Department of Labor construe all of the exemptions narrowly, and the burden of proof always remains with the employer.

2. Misclassifying assistant managers
    Many businesses pay a salary to their assistant-manager-level employees without paying them overtime and without considering whether they truly qualify for the executive exemption. In order to qualify for the executive exemption, an assistant manager must be paid on a salary basis at a rate of at least $455 per week. In addition, the employee must meet each of the following three tests: 1) primary duty is management of the enterprise or of a customarily recognized department or subdivision; 2) customarily and regularly direct the work of two or more other full-time employees or the equivalent; and 3) have the authority to hire or fire, or make suggestions and recommendations as to hiring, firing, advancing, promotions or other status changes that are given particular weight.

    For example, if you have a store that regularly has a manager, assistant manager and a few hourly employees on duty, it is unlikely that both the manager and assistant manager will qualify for the exemption. With respect to hiring and firing decisions or recommendations, if assistant managers have that authority it should be included in their job descriptions in an effort to prevent later disputes over the exemption. Although many assistant managers will qualify for the exemption, many others will not, and each employee must be reviewed on an individual basis.

3. Automatic deductions for meal breaks
    Many employers automatically dock their hourly employees for a 30- or 60-minute meal break each day. Although this is not illegal, it is a frequent subject of litigation and liability. If you are sued by an employee or audited by the Department of Labor, it is your burden to prove the hours actually worked by your hourly employees. If employees later claim that they worked through lunch most days, it will be extremely difficult for you to prove that each of your employees actually took a full lunch break each and every day for which an automatic meal break deduction is made. These automatic deduction cases usually become collective actions and can become very expensive for employers who have such a policy.

    Fortunately, there is an easy solution: require your hourly employees to clock out and in for their meal breaks. It is imperative that during this meal break the employee is completely relieved from duty and is not performing any work whatsoever, but it is not necessary that employees be allowed to leave the company premises during the meal break. In order to discourage workers from working through this meal break in order to get extra pay each day, make it mandatory that the meal breaks are taken each day, and discipline employees who refuse to take the meal break. Additionally, if for some reason an employee works through a meal break one day, that employee can be sent home early on another day in the same pay week so that overtime does not kick in for that week.

4. Not paying for overtime that has not been approved in advance
    Many companies have a policy requiring employees to seek approval in advance before working overtime. The problem arises when an employer refuses to pay an employee for non-approved overtime. The FLSA, unfortunately, does not distinguish between approved and non-approved overtime—if the employee works the overtime, you are required to pay time and one-half the regular rate for that overtime. But the company is not without recourse: An employee who violates a company policy by working non-approved overtime can be disciplined or terminated for that violation of policy.

5. Allowing employees to "waive" their right to overtime
    Another common mistake, particularly among small businesses, is believing that an employee can waive his or her right to time and one-half pay for all overtime hours. What frequently happens is that an employee requests extra hours and agrees that he needs only to receive his regular pay for those hours. Sometimes this request is made out of a belief that other employees might be hired and everyone’s hours will be cut, or sometimes out of an employee’s particular need for some extra money.

    Despite your good intentions, any type of deal with an employee that results in the nonpayment of overtime is void and will not be a defense if the employee later files suit. A related problem sometimes arises when employees are paid out of two different locations or two companies owned by the same person. By way of example, an employer might own two ice cream stores, each of which is separately incorporated. If an employee works at both stores during a workweek for a combined total of more than 40 hours, that employee must be paid time and one-half for all hours beyond 40.

    The individual owner of stores cannot circumvent the overtime requirement (whether intentionally or otherwise) by paying an employee out of different stores or corporations. Not only will the courts or the Department of Labor likely find the companies liable under a joint or single employer theory, but the individual will also be liable as well.

The bottom line
    Compliance with the FLSA is a task you must take seriously. The number of lawsuits involving these claims is growing at an alarming rate, and the effects can be devastating for businesses of all sizes. Because the FLSA has a penalty provision that allows plaintiffs in some circumstances to recover twice their actual back wages, and because it automatically entitles prevailing plaintiffs to their attorneys’ fees, even a minor violation can wind up being very expensive. And many of these cases become collective actions, where the plaintiff invites all other similarly situated employees to join the litigation.

Workforce Management Online, September 2006 -- Register Now!

Steven Siegel, a partner in the Fort Lauderdale office of Fisher & Phillips LLP, is based in Fort Lauderdale, Florida. E-mail editors@workforce.com to comment.

Consultant: Firms, Legal Departments Are 'At War With Each Other'

While the pressure is on law firms to increase billable hours, companies are trying to reduce legal costs

Katheryn Hayes Tucker
Fulton County Daily Report
July 2, 2008

Changes in the business climate have created different kinds of management challenges for chief legal officers compared with those faced by law firm leaders -- in some ways putting them at odds with each other -- according to Doug Richardson, a consultant who writes about leadership for Altman Weil's Report to Legal Management.

"Large legal departments are becoming more like law firms. A lot of them now track their time -- not for billing but as a management tool," Richardson said in a conversation recently. At the same time, he said, "law firms are becoming more like businesses and less like professional men's clubs."

But rather than making them more alike, these trends have created more tensions between the two. For the law firm, the driving force is "selling time for money," and the pressure is on to increase billable hours to generate revenue. "For in-house lawyers, the opposite is true. The main way they are getting leaned on is they have to reduce legal costs," Richardson said. "By definition, they are at war with each other."

The increasing cost control tensions are changing the relationships, Richardson suggested. "The relationship between in-house lawyers and outside firms are becoming a lot less friendly," he said. "There's a lot more pressure. It's a lot more adversarial. There are a lot more times when their interests are not the same."

Richardson writes a column called "The Leadership Dimension" for the Altman Weil publication. Asked whether his leadership advice for law firms applies to in-house lawyers, Richardson answered in a way that said more about the differences than the similarities.

For example, Richardson said his strongest focus with law firms is to urge them to be more collaborative "instead of a bunch of egos connected with central heat." But in corporate legal departments, power relationships are defined by an organizational chart.

But it's more complicated than that.

"Yes, it demands classic leadership ability to motivate the troops, but increasingly, it involves the ability to think strategically," he said. In-house lawyers have to support the business goals of a company while they follow the law and manage a department.

"Law firms are order takers. They provide a service," Richardson said. Corporate legal departments have to figure out how to get those services at lower costs -- through alternative billing or flat rates or taking more work in-house -- and they have to figure out how to say yes instead of no to their operational counterparts in their companies.

"Globalization and technology are creating a whole new array of business challenges," Richardson said. "Lawyers don't want to be deal killers. If your response is always 'no, it's dangerous and risky,' you're a pain in the neck."

Top executives "want to know how to do things, not how not to do things," Richardson said. Chief legal officers are under constant pressure to find a way to say yes to the business interests and stay out of jail -- and at the same time cut costs.

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Corporate Democracy is a Myth

Posted by Carl Icahn June 18, 2008 : 1:00 PM

Recently, there has been a great deal of outrage concerning the huge pay and severance packages awarded to a number of CEOs. There has been much criticism of the fact that CEOs earn 520 times that of the average worker. A great deal has been made of the scandalous actions of a number of CEOs and boards concerning the backdating of options. Sadly, a much deeper, more pernicious, more threatening problem of the future of our economy exists at today’s corporations: many corporate boards and managers are doing an abysmal job. The lack of competent leadership makes our companies less competitive day by day, causing an upward spiraling trade and current account deficit, as well as a near meltdown of the financial sector. The buildup of incompetent boards and managers is the result of poor corporate governance. Poor corporate governance now threatens more than just potential shareholder value; it threatens this country’s very economic survival.

To paraphrase Winston Churchill, "democracy might not be the greatest system there is but it is the greatest system mankind has invented so far." Many American corporations are dysfunctional because corporate democracy is a myth in the United States. They run like a decaying socialistic state. Our boards and CEOs exist in a symbiotic relationship where the boards nourish the CEO with massive stock options that are re-priced downward if the companies stock declines - making them forever valuable. They reward the CEO with pay packages and bonuses when the stock is floundering or the CEO is leaving the company. Corporate performance and the shareholders welfare seldom enter the picture. What kind of democracy is this? There is no accountability.

The inherent quid pro quo is to pay the board huge retainers for attending several meetings per year and rubber stamp ill conceived CEO proposals. In turn, a CEO can fly around the world on the company’s private jet on the "business" of visiting all the world’s greatest golf courses while he runs the company – and the value of your stock – into the ground. The average shareholder can do nothing about it. A great example is the subprime mortgage mess that has cost our economy and the populace untold billions of dollars and personal hardship. These losses did not stop boards from awarding huge severance packages to the CEOs most responsible for the current carnage.

It is the board’s responsibility to hold a CEO accountable, and remove the CEO if he or she is not producing results. But exacting such a measure requires effort and strategic consideration, and boards are often too lazy and/or passive to rock the boat, especially since the company will continue to pay and pamper and even indemnify them under almost any circumstances. Board members receive expensive tickets to important sporting events, the theatre, and are also treated to use of the company’s fleet. Worst of all, the board itself is not made accountable because corporate board elections are generally a joke.

Board meetings are often a complete travesty. I know because I have sat and do sit on a number of boards where I am in the minority. Because of this, today our economy is in a major crisis. Many of our companies are incapable of competing. Additionally our banking system has issued mortgages that cannot and will not be paid back. We are in this situation because there is no leadership in the executive suite. Why did we get here? Because in corporate America there are no true elections. It is tyranny parading as democracy. It’s a poison running through the blood of corporate America. Perhaps, with enough public support, the lawmakers and regulators will take note.

When you rid a company of a fruitless board, the rewards are often enormous because the underlying company and its employees can be excellent. It is the top level management that hangs like an albatross around the company’s neck. Years from now historians will marvel why we the shareholders – the legitimate owners of companies – did not do something effective about removing terrible managements. We can do something about the current situation. I will discuss in future entries how simple it can be and what has constrained us from taking action. 

June 19, 2008

Court sides with employee in benefits case


Filed at 11:09 a.m. ET

WASHINGTON (AP) -- The Supreme Court said Thursday that courts should consider an insurance company's potential conflict of interest when reviewing the denial of an employee's health or disability benefits claim.

The court ruled 6-3 in the case of an Ohio woman who sued MetLife Inc. over a disability claim. She contended insurance companies have a financial incentive to deny claims and that conflict of interest should weigh heavily in employees' favor when they challenge benefit claims in court.

A federal appeals court ordered Wanda Glenn's benefits reinstated. The Supreme Court upheld that ruling.

Writing for the majority, Justice Stephen Breyer said federal law imposes a special standard of care on insurers requiring full and fair review of claim denials. Breyer noted that MetLife had emphasized a medical report that favored denial, de-emphasized other reports suggesting benefits should be granted and failed to provide MetLife's vocational and medical experts with all relevant evidence.

Dissenting, Justice Antonin Scalia said the court is using the wrong standard in dealing with potential conflicts of interest. Scalia said there must be evidence that a conflict improperly motivated a denial of benefits. In the MetLife case, there was no such evidence, Scalia said. Justices Clarence Thomas and Anthony Kennedy also dissented.

MetLife administered a disability plan for Sears, where Glenn worked for 14 years. The insurance company paid benefits for two years but in 2002 said her condition had improved and refused to continue the benefit payments. MetLife saved $180,000 by denying Glenn disability benefits until retirement, her lawyers said in court filings.

The 6th U.S. Circuit Court of Appeals ordered Glenn's benefits reinstated in September 2006, ruling that MetLife acted under a conflict of interest and made a decision that was not the product of a principled and deliberative reasoning process. MetLife argued that the standard used by the 6th Circuit would encourage participants with dubious claims to file suit, which in turn would raise the costs of benefit plans to both companies and employers.

The case is Metropolitan Life v. Glenn, 06-923.

June 10, 2008

Bratz Designer Erased Computer Files: Lawyers

Note to potential clients: don't do this. And if you do, I don't want to know. Ever.

Filed at 9:06 p.m. ET

RIVERSIDE, California (Reuters) - A jury will learn that the creator of the popular Bratz doll erased files from his computer two days before handing it over as evidence in a federal trademark infringement lawsuit filed by Mattel Inc <MAT.N>, a judge in California ruled on Tuesday.

Mattel has sued family-owned MGA, claiming it owns the original Bratz concept drawings and that doll's creator, Carter Bryant made them and other Bratz drawings and models while he was under contract to Mattel as a Barbie designer.

Mattel contends that MGA poached Bryant to shore up sagging toy offerings, then tried to hide the connection when Bratz became a runaway hit in 2001.

At a hearing before testimony began on Tuesday, lawyers for both sides said Bryant had erased files, but they disagreed what he intended to erase.

U.S. District Judge Stephen Larson said the fact that Bryant used a program called Evidence Eliminator on his computer a few months after Mattel sued him and Bratz maker MGA Entertainment Inc in 2004 "is relevant to his credibility as a witness" in the trial now under way in Riverside, Calif.

Defense attorneys for MGA, which is battling to keep its rights to the urban chic dolls, contended that Bryant had merely intended to erase sexually explicit pop up ads.

The lost files possibly included documents relevant to the case, such as emails or drawings, Mattel attorneys said.

The program, sold as a security utility, touts "secure deletion processes similar to US Government Military Standards," according to its Web advertisements.

Mattel reached a confidential settlement with Bryant before the trial started on May 27. Bryant is expected to testify later this week.


Also on Tuesday, MGA founder and Chief Executive Isaac Larian spent his third day on the witness stand explaining, under questioning from his company's attorney, what Mattel had portrayed as attempts to hide Bryant's involvement with Bratz.

Larian has characterized the lawsuit as a "David versus Goliath" battle, and has repeatedly denied on the witness stand that he intentionally tried to hide Bryant's identity.

He testified on Tuesday that MGA had conversations with Mattel representatives about the bigger company licensing and distributing the soon-to-be launched Bratz in February of 2001.

And MGA attorney Thomas Nolan pointed out a 2003 Wall Street Journal article, in which Larian credits Bryant, "a former member of the Barbie team," with creating Bratz.

That article came about five months after an email to Larian in which an MGA executive remarks that the company "wants to keep Carter under wraps."

Larian testified, however, that he had already received a cease and desist letter from Mattel over a Bratz fan site and feared the success of his pouty-lipped, big headed doll line would draw his larger rival's ire.

"Mattel had sued literally anybody who got into the fashion doll business," he said.

He advised his sales staff in a June 2001 email that "MGA has full, free and clear rights to Bratz trademark and Bratz dolls. I have been advised that Mattel is spreading rumors that there are legal issues regarding Bratz. This is untrue."

(Reporting by Gina Keating; editing by Carol Bishopric)


June 6, 2008, 3:39 pm

Khalid Sheik Mohammed On Same-Sex Marriage, Value of Counsel

Posted by Dan Slater

WSJ Supreme Court reporter Jess Bravin, who is in Gitmo this week covering the appearance of Khalid Sheik Mohammed and four other alleged Sept. 11 conspirators before a military judge, has sent along a couple more interesting dispatches from his notebook. Click here for an earlier post on yesterday’s hearing.


A closeup of the new, improved Khalid Sheikh Mohammed sketch, with the more flattering nose he suggested be modeled on a shot the FBI issued after his capture. (Credit: Jess Bravin)

Khalid Sheikh Mohammed on same-sex marriage:

For the past five years, Khalid Sheikh Mohammed has been under the care of federal civilian and military employees who have taken an oath to “support and defend the Constitution of the United States.” The experience apparently has not enamored him of the document.

At his arraignment here Thursday, the alleged 9/11 mastermind said he would not accept any attorney, even a fellow Muslim, “who is sworn to your American constitution.” Displaying a surprising understanding of such concepts as federalism and dual sovereignty, Mohammed referenced recent decisions by state courts in California and Massachusetts under the powers reserved to them under the Tenth Amendment.

“I consider all American constitution” evil, he said, because it permits “same-sexual marriage and many other things that are very bad,” he told the military judge, Col. Ralph Kohlmann. “Do you understand?”

Khalid Sheikh Mohammed on pro se represenation:

Khalid Sheikh Mohammed, who’s insisting on representing himself, told Col. Kohlmann, the military judge, that while he was an “expert in the gospel and the Koran,” he had no training in the common law system. Nonetheless, the alleged terrorist commander’s comments suggested he held sympathy for the 20th century American analytical movement known as legal realism.

When Kohlmann urged Mohammed to “keep an open mind” about the value of having an attorney represent him in his capital trial, Mohammed remarked on the judge’s brusque treatment of civilian attorneys, whom he repeatedly silenced before they could state their objections.

“You tell [David Nevin, a volunteer civilian attorney], ‘Sit down! Sit down! Sit down Sit down!,’” said Mohammed. “It is inquisition, not trial.”

Mohammed continued: “We have been five years under torturing,” he said, and yet are being told to listen to American attorneys they’ve barely met. “All of this has been taken under torturing, and after torturing they transfer us to Inquisitionland in Guantanamo.”

“I hope you can reconcile your concerns” about his religious duty with the issues involved in self-representation, Kohlmann said.

“You will continue now to the end, to the plea guilty?” Mohammed, more eager than impatient.

“Yes,” the judge said. 


Overstock and Patrick Byrne sue New York over Amazon Tax

2 Jun 2008 16:59

Just like Amazon

® [Printer] [Mobile]

New York's new online tax law is now facing lawsuits from two big-name online retailers.

A month ago, Amazon sued that Empire State over its so-called Amazon Tax, and on Friday, cut-rate e-tailer Overstock.com filed its own suit, reiterating that the Amazon Tax affects more than just Amazon.

Under Governor David Patterson's new $122bn budget, online retailers with New York-based affiliate marketers are considered to have a "physical presence" in the state, and that means they're required to collect and remit sales taxes from New York-based shoppers.

The new legislation took effect yesterday. Amazon has agreed to collect the tax while its lawsuit plays out, but Overstock has not. Before filing its suit, the Utah-based outfit severed ties with approximately 3,400 New York affiliates. As CEO Patrick Byrne told us, his Utah-based outfit can't afford to collect those extra dollars.

"We had two choices: Either raise our prices to New York residents or give up our New York affiliate business," he said. "And since our affiliates make up such a small fraction of our business, cutting affiliates made the most sense.

"Suddenly having to pay [roughly] 8 per cent tax on 10 per cent of our sales would be a really bad trade off."

Overstock also told us that in cutting affiliates loose, it was "sending a message" to New York lawmakers. But it sent a much larger message on Friday. Like Amazon's suit before it, Overstock's complaint insists that Governor Patterson's legislation is illegal under both the New York and US constitutions.

A 1992 US Supreme Court decisions says that retailers needn't collect sales tax unless they have a physical presence in the state where the customer resides. Otherwise, customers are required to declare the tax on their. But few do.

Neither Amazon nor Overstock maintain warehouses or offices in the Empire State. But you can bet that both make an awful lot of money there. And if they're required to collect sales tax, they'd both make less. Shoppers will be more likely to shop elsewhere. ®



Bribery as a modus vivendi is, as anyone with any international business experience, an unspoken given in many parts of the world. My particular experience in that regard is limited to Africa, where tales of bribery would be laughable if they were not so serious. Businesses must be aware of the effects of the Foriegn Corrupt Practices Act which, among other things, makes you report any bribes you do end up paying. What is the impact of the enforcement of that act on everyday business overseas for US businesses? We see from the below article in the WSJ its impact on Siemens in Germany. Not particularly good news for those in the middle. RS

Siemens Probe Could Widen as Trial Begins

May 26, 2008

A large bribes-for-business probe at German engineering firm Siemens AG shifts into higher gear Monday when former executive Reinhard Siekaczek becomes the first company official to go on trial, possibly laying the groundwork for similar proceedings against higher-ranking managers.


The Munich court will hear allegations that Mr. Siekaczek, a sales executive until late 2004, helped steer €24.8 million ($39.1 million) in bribes to potential Siemens customers in several countries earlier this decade. The payments represent a sliver of the €1.3 billion in suspicious transactions flagged by Siemens across its myriad businesses since German police raided the conglomerate's offices in late 2006

The 57-year-old German, the only Siemens executive to be indicted thus far, has become a key witness after agreeing to cooperate with Munich prosecutors. His testimony formed the basis for a Munich court ruling last October that fined Siemens €201 million for €12 million in bribes paid in Nigeria, Russia and Libya. Munich-based Siemens didn't appeal that fine.

Mr. Siekaczek told prosecutors after his arrest in 2006 that bribery was widespread at Siemens and that more-senior executives were aware of the payments, according to interrogation transcripts reviewed by The Wall Street Journal. His testimony could trigger more indictments against individuals and open Siemens up to more fines and possible sanctions in Germany and elsewhere in what could be the largest corporate bribery case ever.

German authorities have focused on at least four former Siemens executive board members, including a former chief financial officer, as criminal suspects in their investigation, according to police and court records. These men deny wrongdoing.

Earlier this month, prosecutors disclosed that they had begun civil proceedings against Heinrich von Pierer, the company's former chairman and chief executive officer, and an unidentified number of other former board members for failed oversight. Mr. von Pierer has denied any wrongdoing.

Debevoise & Plimpton LLP, the U.S. law firm hired by Siemens to investigate the bribery allegations, said last month its preliminary findings also indicate former board members were involved in wrongdoing.

The probe has sparked several high-profile resignations at Europe's largest engineering firm by revenue. Only one executive board member has retained his post since the scandal erupted 18 months ago. Former Chief Executive Klaus Kleinfeld resigned from his post last year. He has denied any wrongdoing.

A lawyer for Mr. Siekaczek, who has been charged with embezzlement, said Mr. Siekaczek continues to cooperate with authorities and that Siemens management was aware of the payments his client carried out on behalf of the company.

Mr. Siekaczek, who faces possible jail time, worked at Siemens for 38 years. He eventually oversaw sales at a branch of a telecommunications-equipment unit that brought in €4 billion in annual revenue and had 15,000 employees. The Munich-based executive reported to the unit's management board, which in turn reported to Siemens's central executive board.

The Munich court may ask top former and current Siemens executives to appear as witnesses during Mr. Siekaczek's trial, scheduling 15 sessions between Monday and the end of July. After the trial concludes, authorities can call on Mr. Siekaczek to testify against other Siemens executives in any future criminal proceedings.

Mr. Siekaczek also could serve as an important witness in legal proceedings outside of Germany.

Siemens has disclosed it is being investigated for bribery in more than 10 countries, including the U.S., and says it is cooperating with authorities. Prosecutors in Switzerland and Italy already have spoken with Mr. Siekaczek, who also is a central figure in a Greek bribery probe.

Mr. Siekaczek's indictment traces transactions in several countries, including Indonesia, Vietnam, Egypt and Saudi Arabia.

Write to Mike Esterl at mike.esterl@dowjones.com and David Crawford at david.crawford@wsj.com


Used to Delay
Cheaper Drugs

May 22, 2008; Page D6

Pharmaceutical companies are using legal settlements with generic drug makers to delay the introduction of cheaper medicines, a government agency said Wednesday.

In a 12-month period that ended last Sept. 30, 14 of 33 agreements to settle patent litigation between brand-name drug companies and generics included both a restriction on the generic company's ability to market a drug and compensation to the generic manufacturer.

The Federal Trade Commission maintains that by jamming the pipeline of cheaper drugs, such agreements harm consumers. The agency has sued to block some agreements and is supporting legislation in Congress that would ban the practice.

The FTC has had limited success in thwarting settlements. Two appeals courts ruled in 2005 that similar agreements reached by Schering Plough Corp. and AstraZeneca PLC with generic companies were legal.

Settlements with restrictions on generic-drug makers increased from three in fiscal year 2005 to 14 in 2006, the same total as last year, the agency's report said. Drug companies are required to report the settlement of patent litigation with generic-drug makers under a 2003 law.

"Pay-for-delay settlements continue to proliferate," FTC Commissioner Jon Leibowitz said in a statement. "That's good news for the pharmaceutical industry, which will make windfall profits from these deals. But it's bad news for consumers, who will be left footing the bill."

Pharmaceutical companies and some generic manufacturers defend the settlements as a way to reduce costly litigation and allow generic companies to introduce cheaper drugs before patents expire.

The Pharmaceutical Research and Manufacturers of America, a trade group for the brand-name drug industry, didn't return a call seeking comment.

The most common form of compensation by the drug companies to generics, included in 11 of the 14 settlements, was an agreement to not introduce a competing generic drug once a generic company is able to introduce its product, the FTC said.


Patent Litigation/Product Liability Lawsuits

Volkswagen Lawyers Raise Challenge to Texas’s ‘Rocket Docket’

Posted by Dan Slater

texasflagFor a long time the Law Blog has spilled pixels over Marshall, Texas, and the rocket-docket that is the Eastern District of Texas. Will the plaintiff-friendly district be no longer?

Yesterday, the Fifth Circuit Court of Appeals heard a decidedly unsexy appeal with decidedly big implications for lawyers who flock to Marshall to file civil suits — particularly patent and product liability cases — and for the lawyers who defend them. In a mandamus case, In Re: Volkswagen, the Fifth Circuit heard arguments over whether a trial judge’s discretion should be limited when a party moves to transfer venue pursuant to — dust off your civ pro books — 28 U.S.C. §1404(a).

Under federal law, plaintiffs may file product-liability suits in “any district in which a defendant resides,” allowing them to file in Marshall, where the judges are known for moving cases expeditiously, and juries have a reputation for doling out fat money judgments. According to today’s story in The Texas Lawyer, the Eastern District of Texas leads the nation in patent suits filed with 359 for the 12-month period ending Sept. 30, 2007.

Danny Ashby, a lawyer for defendant Volkswagen, which is being sued on a product liability theory for allegedly faulty seats, reportedly argued to the 5th Circuit that U.S. District Judge T. John Ward abused his discretion by refusing to transfer the suit out of the Eastern District. Ashby, a partner at K&L Gates in Dallas, argued that “The parties and the witnesses have no connection to Marshall. And the case has no connection to Marshall.” Click here for a Texas Record backgrounder on the issues.

But plaintiffs lawyer Martin Siegel, a solo practitioner in Houston, argued that Judge Ward gave proper weight to his clients’ choice of venue, that the witnesses located where the defendants want to try the case are not important to its resolution and that the defense has not proven that Ward’s venue ruling is an “extraordinary cause” that justifies mandamus.

“It could hurt lawyers all over the state,” especially in Dallas, which has a large contingent of firms that practice in the Eastern District, said Michael C. Smith, a partner in the Marshall office of Siebman Reynolds Burg Phillips & Smith who also represents the plaintiffs in the Volkswagen case.

Permalink | Trackback URL: http://blogs.wsj.com/law/2008/05/23/volkswagen-lawyers-raise-challenge-to-texass-rocket-docket/trackback/

October 10, 2007

RIAA Juror: 'We Wanted to Send a Message'By David Kravets EmailOctober 09, 2007 | 1:17:59 PMCategories: RIAA Trial  

Duluth_sketch0_2 It took the jury in Capitol Records v. Thomas only five minutes to conclude 30-year-old Jammie Thomas infringed recording industry copyrights on 24 music tracks, according to the first juror to speak out on the verdict.

The remaining five hours of deliberation was spent debating the appropriate financial penalty, with jurors haggling for both higher and lower awards, before settling last week on the final $222,000 figure, according to juror Michael Hegg, in an exclusive interview with THREAT LEVEL Tuesday.

At least two jurors, one of them a funeral home owner, wanted to award the Recording Industry Association of America the maximum $150,000 for each of the 24 copyright violations, while one juror held out hours for the $750 minimum for each violation of the Copyright Act, he said.

In the end, "after bickering," they settled on $9,250 for each song.

"That is a compromise, yes," said Hegg, a 38-year-old steelworker from Duluth, Minnesota. "We wanted to send a message that you don't do this, that you have been warned."

During a 45-minute telephone interview, Hegg said jurors found that Thomas' defense -- that she was the victim of a spoof -- was unbelievable.

"She should have settled out of court for a few thousand dollars," Hegg said. "Spoofing? We're thinking, 'Oh my God, you got to be kidding.' "

"She's a liar," added Hegg, who just returned home following his 14-hour night shift.

Thomas is among 20,000 people the RIAA has sued, and was the first to go to trial.

Thomas and her attorney have announced they're appealing the verdict, in part to contest a jury instruction that said Thomas could be found liable solely for sharing the music over the Kazaa file-sharing network, "regardless of whether actual distribution has been shown."

But Hegg said the jury in U.S. District Court in Duluth would have found her liable even if the plaintiffs had been required to establish that Kazaa users had actually downloaded the music.

"It would have been a lot harder to make the decision," he said. "Yes, we would have reached the same result."

He said the RIAA established that Kazaa existed for the sole purpose of file sharing. Also, a screen shot repeatedly displayed to jurors during the three-day case showed that more than 2 million people were on Kazaa sharing hundreds of millions of songs on Feb. 21, 2005, the night RIAA investigators from Safenet locked on to Thomas' share folder.

Hegg added that the jury believed Thomas' liability was magnified because she turned over to RIAA investigators a different hard drive than the one used to share music. "She lied," he said. "There was no defense. Her defense sucked."

Hegg, a married father of two who said he formerly raced snowmobiles, said he has never been on the internet. He said his wife is an administrator at a local hospital and an "internet guru."

The jury, he said, was convinced that Thomas was a pirate after hearing evidence that the Kazaa account RIAA investigators were monitoring matched Thomas' internet protocol and modem addresses.

Expert testimony from an RIAA witness also showed that a wireless router was not used, casting doubt on her defense that a hacker lurking outside her apartment window with a laptop might have framed her, he said.

Hegg pointed out that Thomas' Kazaa account username was "Tereastarr" -- the same username Thomas chose for her e-mail, online shopping, online dating and MySpace accounts.

"I think she thought a jury from Duluth would be naïve. We're not that stupid up here," he said. "I don't know what the fuck she was thinking, to tell you the truth."

See Also: THREAT LEVEL'S Complete Trial and Post-Trial Coverage


Courtroom sketch: Wired News/ Cate

October 10, 2007

Every business relies, more than we probably realize, on electronic data - emails are just the surface. Imagine for a moment what it is in your business that is DIGITAL. Seriously, take 15 seconds and think about it.  Yes, it's an enormous undertaking just to think about it? Ever think of those halcyon days when the fax machine was new technology? Not too much any more, except when I get one and I ask myself: Why is "X" sending me a fax when for a relatively meager sum, "X" could invest in Adobe's Acrobat and turn all documents into .pdfs and have them sent securely with a password so that the danger of prying eyes on faxes is nearly eliminated? But I quibble. The email that I've copied below is from Bill Gates to me. And umpteen thousand others who subscribe to his Executive Email. It addresses the most pertinent issue in our daily business and dare I say it, personal lives: SECURITY. What does the future hold for keeping our digital world secure?  Please let me know what you think of Mr. Gates' ideas. RS

Enabling Secure Anywhere Access in a Connected World

Published: February 6, 2007 By Bill Gates, Chairman, Microsoft Corporation

During the last decade, digital technology has changed the world in profound and exciting ways. Today we communicate instantly with the people we care about without worrying about traditional limitations of time and location. At work, we collaborate with colleagues in distant cities. Global supply chains enable businesses to manufacture products and move them to market with incredible speed and efficiency. Mobile devices ensure that we are productive no matter where we are.  But these changes are just the beginning. As more and more of the world's information, commerce, and communications moves to digital form, it will open the door to a new world of connected experiences that link our interests and our communities into a seamless whole that extends across home, work, school, and play.

Already, a new generation of technology is transforming expectations for how we will conduct business, communicate, access entertainment, and much more. Increasingly, people envision a world of anywhere access - a world in which the information, the communities, and the content that they value is available instantly and easily, no matter where they are.

Of course we're not quite there yet. But whether we get there or not is no longer a question of the power of our devices and the speed of our connections. The real issue today is security. Ultimately, anywhere access depends on whether we can create and share information without fear that it will be compromised, stolen, or exploited.

The answer lies in trust - in creating systems and processes that are always secure so that people and organizations have a high degree of confidence that the technology they use will protect their identity, their privacy, and their information. This is an imperative that transcends any one company. Success will require hard work and extensive cooperation between companies, governments, and organizations from around the world.

Trust and security are critical priorities for Microsoft. I wanted to share my thoughts with you about the changing nature of security and the work that is being done at Microsoft to advance trust in computing and to help pave the way for future connected experiences based on secure and easy anywhere access.

Connectivity and the Evolving Threat Landscape

Today, connectivity - the basic foundation for anywhere access - can be a double-edged sword. Connectivity that streamlines the flow of information and communications can also open the door to malicious users. Meanwhile, where publicity once motivated many digital attacks, criminal financial gain is behind most security threats today. So in addition to viruses and worms, we must contend with spyware that logs keystrokes; rootkits that are used to hijack computers; and social engineering threats where criminals try to trick people into divulging the personal data needed to exploit digital information.

How widespread is the problem? In the United States last year, security breaches - some inadvertent, some purposeful and criminal - exposed the personal information of more than 100 million people. In 2005, 46 percent of fraud complaints filed with the U.S. Federal Trade Commission were Internet related. A 2006 report from the Cyber Security Industry alliance noted that 50 percent of Internet users are afraid their credit card information will be stolen. No company is immune to the danger. Malware targets products from virtually every software vendor. Every business is vulnerable to the risks that come with unauthorized access to corporate information.

In this changing threat environment, striking the right balance is extremely difficult. Easy access speeds communications but increases the danger that confidential information will be exposed. Stringent security measures reduce risk, but can make it too difficult for employees to access information or communicate with customers and partners and too complex for IT professionals to deploy and manage solutions.

The Road to Trust

Achieving the levels of trust needed to make connected experiences based on anywhere access possible will require an industry-wide effort to change the way we approach digital identities, build networks, and protect information.

The evolution of identity: The proliferation of identities and identity systems is a significant problem and a difficult challenge. We all struggle to remember an ever-growing number of user names and passwords as we move between systems at work and home. Because it is unlikely that a single digital identity system or technology will be universally adopted, a different approach is required - an approach based on creating a system of systems that provides the interoperability needed to link all identity solutions and technologies. This "identity metasystem" will be able to take advantage of the strengths of existing and future identity technologies while enabling the creation of a consistent and straightforward user interface. Solutions built on top of this metasystem will enable digital identities to be managed and protected effectively and easily.

The evolution of networks: To resolve the tension between providing access and maintaining security, new technologies for managing the way people and information move between corporate networks and the Internet are essential. In the face of a rapidly evolving threat landscape, the firewall - the fundamental tool for managing network security today - is no longer adequate. A better approach is security that is based on policy. With policy-based security, the rules that govern access to networks, resources, and information can be enforced seamlessly across platforms and devices.

The evolution of protection: It is impossible to overstate the importance of providing the right levels of privacy and information protection so that users can trust that their information is secure. To achieve this, we must be able to protect information not only when it is in transit, as we do today through encryption, but also on the server, the desktop, mobile device, and wherever else it may reside. Policy will also play an important role in the evolution of protection. By applying policy when information is created, we can enable information to flow freely and safely across systems and networks while maintaining appropriate control over how it is used, and by whom.

Security, Reliability, and Privacy: Trustworthy Computing at Microsoft

At Microsoft, Trustworthy Computing provides the foundation for the work we do to create trusted computing experiences. Announced five years ago, Trustworthy Computing is a core principle that places security, reliability, and privacy at the center of all of our efforts. One example of the impact of Trustworthy Computing is the Secure Development Lifecycle, a rigorous software development process that makes security a critical focus for every line of code that we write.

Trustworthy Computing is an important reason why Windows Vista is the most secure operating system that Microsoft has ever delivered. Developed from the ground up using the Secure Development Lifecycle process, Windows Vista includes new security features that help computer users protect sensitive information and give IT administrators new ways to protect corporate networks and preserve data integrity and confidentiality.

Windows Vista also offers new controls that enable parents to manage exactly what their children can do on the computer. These controls allow parents to restrict computer use to specific times and determine which games their children can play, which programs they can use, and which Web sites they can visit.

The 2007 Microsoft Office system and Microsoft Exchange Server 2007 were also built using the Secure Development Lifecycle, and they include a wide range of new security features that help protect against phishing scams and other threats to privacy and information security.

Together, Windows Vista, the 2007 Office system, and Exchange Server 2007 represent an important step forward in Microsoft's efforts to deliver tools to help protect information and privacy. And we continue to focus on developing comprehensive security solutions for consumers and businesses that provide more secure, controlled access to information and network resources. Examples include:

Windows Live OneCare: A comprehensive service for consumers, Windows Live OneCare automatically manages important PC maintenance and security tasks.

Microsoft Forefront: Designed for businesses, Microsoft Forefront is a family of security products that provides advanced protection against the latest threats and enables secure access across client operating systems, application servers, and the network edge, with a focus on simplified management and integration with existing IT infrastructure.

Identity Lifecycle Manager 2007: Building on Microsoft Identity Integration Server, Identity Lifecycle Manager 2007 adds new capabilities for managing strong credentials such as smart cards while providing an integrated approach that links certificate and password management and provisioning across Windows and enterprise systems.

Windows CardSpace: An important component of Microsoft's efforts to create an identity metasystem, Windows CardSpace enables any Windows application to provide users with a common way to work with digital identities so that people can use their digital identities on any machine, running any operating system.

Achieving Trust Through Industry Partnership and Collaboration

Before trust can become a reality, systems, processes, programs, and applications must work together reliably and securely. That is one important reason why Microsoft is committed to interoperability: before digital identities and information protected by policy-based security can move seamlessly between platforms and devices, systems must be able to interoperate. Today we are working closely with governments, organizations, and partners to create and implement industry-wide standards that will enable systems and applications to work together so that connectivity can be seamless and pervasive, and people can access digital information more securely no matter where they are or what device they have at hand.

Examples of industry partnerships and initiatives aimed at enhancing interoperability and improving trust and security include:

Interop Vendor Alliance: Launched in November, 2006, this global group of software and hardware vendors is working together to enhance interoperability through scenario-based testing and by sharing information about interoperability solutions with customers.

Microsoft Network Access Protection (NAP): This policy enforcement platform built into Windows Vista and Windows Server "Longhorn" helps ensure that only safe devices can access networks. More than 100 technology partners in the networking and security industry have joined the NAP ecosystem and have products that work with NAP.

SecureIT Alliance: This Web-based community was created to enable companies across the industry to develop, enhance, and promote applications that interoperate with the Microsoft platform. A central clearinghouse for security technology professionals, the SecureIT Alliance includes more than 100 members from countries around the world.

In addition, during the development of Windows Vista, Microsoft worked closely with leading security companies including Symantec and McAfee to provide technical support resources, access to application testing and compatibility labs, and developer training. Our goal is to ensure that our partners have the information they need to provide consumers with a broad range of security and safety software and services that can help to make computing experiences safer from the moment they begin using Windows Vista.

Today, nearly 1 billion people use digital technology in their day-to-day lives to communicate, connect, and create. As we continue to work together as an industry to create trust, we will be able to deliver incredible new connected experiences that transform the way people explore ideas, exchange goods and services, teach and learn, and share experiences with the people they care about. In the process, we have the opportunity to bring new levels of value and excitement to each of those 1 billion people, and hundreds of millions more.

Bill Gates

October 3, 2007

In the nearly one year since I updated this page, a new industry has sprouted to assist us with e-discovery. Most big firms have an in-house staff of e-discovery personnel to assist with e-discovery, because it can be intrusive, complicated and expensive. The new rules make it, oftentimes, extremely burdensome to produce, for example, every single email in your company which is "relevant" to the litigation in which you find yourself. I found this website which might prove quite helpful:



Create a Positive Outlook for E-Discovery
Use these tips for managing Microsoft Exchange and Outlook files throughout the discovery life cycle.

By D. Douglas Austin, IE Discovery Technical Consultant

Doc # 19273
2007 Issue 3
Length 3 pages
On page 1 of the magazine.

Back to standard article layout

According to studies, the worldwide-installed base of e-mail clients will increase from about 1.9 billion "seats" in 2006, to nearly 3.6 billion "seats" in 2010. Microsoft Exchange currently holds a 52 percent market share (by revenue) of the corporate messaging software market and Outlook commands over 60 percent of the current installed e-mail client base, with an expected increase to 70 percent by 2009.

E-mail has become the predominant mechanism for written business communications, and Exchange and Outlook are the applications most companies use frequently to support those communications. Here are several tips regarding Outlook that are important not only for processing, reviewing, and producing Outlook content to opposing counsel, but also for the entire electronic discovery process, from planning to production.

Outlook considerations

Retention Policies: Before a case is even filed, how you manage Outlook archives can affect your ability to effectively respond to discovery requests. Some organizations have implemented retention policies that incorporate the AutoArchive function of Outlook to automatically archive messages older than a specified time period (e.g., 60 or 90 days). While this approach might reduce the e-mail collection size in Exchange databases (.EDB) on the mail server or in offline storage (.OST) mailboxes, custodians often migrate messages to personal storage (.PST) files or individual message (.MSG) files before they're automatically archived. As a result, the policy may only cause Outlook files to become more de-centralized, complicating the collection process. A better solution might be to evaluate and implement an e-mail archiving solution that can support individual custodians' archive retrieval needs as well as consolidating and streamlining collection for discovery. Outlook 2007 supports saving and archiving of e-mail messages in Windows SharePoint document libraries, optimizing those messages for long-term archival and compliance purposes.

Meet and Confer: When a case is filed, you should address several considerations for the "meet and confer" with opposing counsel. For example, opposing counsel may request production of Outlook files in their native format, perhaps to ensure that produced files have not been altered. However, because responsive messages are generally stored in a container file (EDB, OST or PST) with all of the other non-responsive messages for one or more custodians, it's impossible to produce only responsive messages without repackaging those messages into a new container (typically, a PST file). This new container file will have a "create date" later than the relevant time period, so it's important to establish an understanding with opposing counsel up front regarding production format to avoid spoliation claims. If you're producing Outlook messages natively, you must address how redactions of privileged information will be handled. Typically, you would convert these to images and redact them since it's not practical to redact the native Outlook message.

It's also important to establish an understanding with opposing counsel on how both sides will address and handle various processing issues (mentioned below) via exception reports or other mechanisms to keep efforts to address these anomalies to a minimum. Raising these issues at the beginning of the process will save considerable effort and cost downstream.

Collecting Outlook files

Variety of file types and locations: As noted above, there are several different file types associated with Exchange and Outlook. On the server side, EDB files contain mailboxes for multiple custodians and can often be the first place to look for relevant information. Many custodians also replicate e-mail to an OST file on their local laptop or even to their PDA so they can access their e-mail remotely. Also, custodians often move e-mails into their own personal PST or MSG files and store them in a variety of places, from the workstation to various network locations or removable media. To be complete, the collection process must include each of these file types and locations.

Security mechanisms: You should understand up front the use of security mechanisms, like encryption and password protection, digital signatures, and rights management. The interview and collection process must be comprehensive enough to identify the use of these mechanisms and obtain help from custodians and technical staff to make sure that you can process and use collected files for e-discovery.

Processing issues

There are several issues that could arise when processing Outlook files that cause difficulty in making files available for review and production. These issues include:

Secured and corrupted files: As noted above, it is best to coordinate with custodians of encrypted and password protected Outlook files during collection to remove these security mechanisms from the files and facilitate processing. However, this may not always be possible if some custodians of Outlook files are no longer available. Corrupted files can also be a problem and some files cannot be successfully recovered. Most processing applications can't successfully extract information from secured Outlook files; therefore, the only way to get to that information is to "crack" the security on those files to retrieve the data. There are several utilities available you can use to attempt to recover passwords and also to repair corrupted Outlook files; however, successful recovery of these files is not always possible or cost-effective.

Digital signatures: A digital signature is an electronic, encrypted, authentication stamp on an e-mail or other document, which confirms that it originated from the signer and no one has altered it. Issues can arise with opening of attachments from e-mails with digital signatures because the opening of some files can cause the e-mail to be altered, at least temporarily. If any custodians used digital signatures in messages they created, locate samples and confirm that the processing software can support these messages; otherwise, you should include these messages in exception logs provided to opposing counsel of files that cannot be processed.

Links instead of attachments: Outlook users often attach various work product files to e-mails to transmit them to intended recipients for review. Sometimes, however, they insert a hyperlink to the file on the network instead. They do this to avoid sending large files through the e-mail system or to require the recipient to retrieve the file from a secured network share, minimizing the possibility for unauthorized access to the linked file. File links greatly complicate processing since not only is the file not attached to the e-mail, it may no longer even exist.

Time zone considerations: Because Outlook displays the messages in the time zone of the user's workstation, messages sent from East coast users will display three hours earlier on a West coast workstation. This could mean that a message sent at 1 AM by an East coast sender could actually be received a day earlier (10 PM the night before) by a West coast recipient, potentially affecting relevancy date range searches. Select a single time zone most appropriate for the project (e.g., where processing occurs, where the majority of custodians are located, Greenwich Mean Time, etc.) and document the reasons for using that time zone to satisfy the court that you have addressed the issue.

Deleted information: When you delete messages within an Outlook folder, they move to the Deleted Items folder, where you can then clear those messages each time you exit Outlook or on demand. Even then, those messages could still exist within deleted item space of the Outlook OST or PST file until the file is compacted. For many users, automatic compaction of these files occurs when running Outlook; however, the possibility exists that some deleted messages may not yet have been compacted when the file is collected.

Rights management: Microsoft added Information Rights Management (IRM) to Office 2003 to prevent sensitive information from being accessed by unauthorized users. In Outlook 2003/2007, users can create and send e-mail messages with restricted permission to help prevent recipients from forwarding, printing, or copying messages. You can also apply the same restrictions to Office 2003/2007 files attached to Outlook messages. If your custodians use IRM, it may impact your ability to access certain messages within their mailboxes. Coordinate with the custodian and/or technical resources at the custodian's organization to obtain rights to messages or disable IRM for those files.
Again, an upfront agreement with opposing counsel to establish parameters for handling problem files and incorporating them into exception logs instead will minimize the effort and cost associated with addressing these issues.

Outlook files review

Native review: To save discovery costs and reduce production timeframes, it may be desirable to review files in native form and then only convert the relevant messages to image format (or produce them natively) instead of converting the entire custodian's mailbox file. Unlike some e-mail products, such as Lotus Notes, that don't provide an individual message file format, you can extract Outlook messages to individual MSG files to easily review in their native form, converting and producing only responsive messages to opposing counsel.

Discovery management software: Review process management is a critical part of effectively reviewing Outlook files and the discovery management software plays a key role. When coordinating multiple reviewers, effective workflow management that provides flexibility in assigning files to reviewers based on a variety of criteria and also provides tracking of review on an individual basis allows each review method to be used fully. If there is a need to extract attachments from the Outlook message and produce the individual components of the message separately instead of the entire contents of any message with responsive information, the software should be flexible enough to support this requirement as well.

Producing content of Outlook files

Production format: You should agree with opposing counsel on the production format during the meet and confer so the production of responsive Outlook messages should then simply conform to that agreement. The most common form of production is TIFF or PDF images (the easiest format to redact and Bates number) along with searchable text and appropriate metadata. When producing Outlook files natively, it's important to determine whether the messages (other than those requiring redaction) will be produced individually as MSG files, or in a repackaged PST container file. In addition to the production of the Outlook messages, an exception log of files that could not be processed should also be provided, along with privilege and production logs that would normally be provided to opposing counsel.

Summing up

There are several considerations when working with Outlook files that affect the entire electronic discovery life cycle, from pre-litigation planning through production. Knowledge of Outlook's features and capabilities help you avoid potential pitfalls and ensure a smooth e-discovery outcome.

November 17, 2006

Government May Track Cell Phone Movements, N.Y. Court Says

By LINDA COADY, ESQ., Andrews Publications Staff Writer

The provisions of two federal laws on electronic communications, when read together, allow the government to track the locations of cell phones without a showing of probable cause, a federal judge in Manhattan has decided.

U.S. District Judge Lewis Kaplan noted that the information sought by the government would reveal the general location of a particular mobile phone and, in some circumstances, allow law enforcement to track the movements of that phone in real time.

Last February the government filed a sealed application asking the court to authorize the use of devices to capture the phone numbers of callers to a specific cell phone and the numbers of those called by the cell phone operator. The public cannot access sealed court documents or learn anything about their contents.

The government requested that the court further authorize the devices to capture and report information that identifies the antenna towers receiving transmissions to and from that cell phone.

The Drug Enforcement Agency and other law enforcement agencies would receive the information, an indication that the suspect under surveillance is most likely a drug dealer or smuggler.

In his ruling Judge Kaplan questioned whether Congress intended the two electronic-communications laws at issue to be combined to allow the result he ordered, but said the language of the statutes, when read together, "clearly authorizes" such disclosure.

Several other judges have addressed applications for orders authorizing the disclosure of cell site information under the two laws. While a majority of them have rejected the government's applications, three have held that the two statutes, when read in conjunction, authorize the disclosure of cell site information.

Law enforcement officials have begun to request cell site information when they apply for permission to install "pen registers" and trap-and-trace devices. Such registers and devices record the numbers dialed from or calling to a particular phone, but not the contents of the communications.

In this case the government asked the U.S. District Court for the Southern District of New York for an order authorizing the use of a pen register and trap-and-trace device to capture information that identifies the antenna tower receiving transmissions from the targeted cell phone. With that information, it is possible to follow the movements of a particular phone and, therefore, the person carrying it.

Judge Kaplan noted first that the federal pen register statute allows law enforcement to install and use pen registers and trap-and-trace devices with a court order when collecting information relevant to an ongoing criminal investigation.

The judge said the USA Patriot Act of 2001 expanded the scope of that "relevant information" so that now law enforcement officials could collect "signaling information" rather than simply telephone numbers.

The other law involved in the case is the Stored Communications Act. The statute says a governmental entity may require a telephone service provider to disclose a subscriber's calling records.

The law also permits a court order for that purpose if the government can show there are reasonable grounds to believe the contents of the subscriber's communications are "relevant and material" to an ongoing criminal investigation, Judge Kaplan explained.

He then determined that the cell site information sought by the government is the kind of "record" covered by the Stored Communications Act. He said the law allows the disclosure of historical cell phone records, but does not explicitly limit the government from getting information about the current location of a phone.

The judge concluded that, because cell site information is a subscriber record, the Stored Communications Act permits a court to order the disclosure of such information upon a proper showing of reasonable grounds by the government.

Finally, Judge Kaplan addressed the question of a Fourth Amendment violation and said he could not resolve it in the abstract.

He acknowledged that while there is no legitimate expectation of privacy in the phone numbers dialed from a particular phone, it is not necessarily true that a cell phone user gives up any legitimate expectation of privacy in his or her location by carrying a phone that signals its presence in the network to the service provider.

Therefore, the issue would have to be litigated on a motion to suppress, he said.

Judge Kaplan's order authorized the government to use a pen register and trap-and-trace device to capture calls made and received by the subject cell phone and information that identifies the antenna tower receiving transmissions at the beginning and end of a particular phone call.

In re Application of the United States for an Order for Prospective Cell Site Location Information on a Certain Cellular Telephone, No. 06 Crim. Misc. 01, 2006 WL 3016316 (S.D.N.Y. Oct. 23, 2006).
Privacy Litigation Reporter
Volume 04, Issue 03

Time for Congress to innovate, reform abused patent system

By Mark Lemley

A key committee in the House of Representatives this week will consider whether we need to reform the patent system. The debate could not come at a better time. The system that has fostered American growth and entrepreneurship is under attack by those who would game the system and stifle innovation for an easy buck.

Today's patent litigation system is tilted in favor of plaintiffs, especially in the information technology industries, where patents are easy to get and their scope hard to define. As a result, a growing number of companies are building business models around exploiting loopholes in the patent system. These plaintiffs threaten companies with multimillion dollar lawsuits knowing that their systemic advantage will induce defendants to settle for large sums out of proportion to the actual value of the invention.

Nationwide, the number of patent cases more than doubled from 1991 to 2001 and has grown about 20 percent since then, based on statistics released by the administrative Office of the United States Courts. More striking than the number of suits is the explosive growth of awards handed down in these cases. Prior to 1990 there had been only one patent damage award in history larger than $100 million, but from 1990 to 1999 there were 13 judgments and settlements greater than $100 million. From 2000 to 2005, there were 21, including one award for $1.35 billion. With awards like that, it is little wonder that companies are increasingly going into the business not of building and selling products, but of suing those that do.

Earlier this year, I offered testimony before the same congressional committee and proposed moderate changes to the current system that would protect inventors but deter abusers:

• Abusive plaintiffs are exploiting jurisdictions that strongly favor plaintiffs even though they have nothing to do with the location of the companies. While seven patent cases were filed in Marshall, Texas, in 2003, 220 infringement actions have been filed since then naming 856 defendants. We should reform the laws governing where suits can be filed, allowing litigation where the plaintiffs or the defendants reside but curtailing `forum shopping'' for plaintiff-friendly jurisdictions.

• Patent owners who win their suits should be entitled to the proportionate share of the value of the product that is attributable to their inventive contribution, and not to capture the full value of the entire product. The current system encourages patent owners in component industries such as information technology to seek and obtain damages or settlements that far exceed the actual contribution of the patent. The patent holder for a windshield wiper should receive damages for the contribution of the windshield wiper, not for the value of an entire car.

• Finally, the standards governing awards of enhanced damages for willfulness are a mess. ``Willfulness'' in patent law means something different than it does in the rest of the world. More than 90 percent of all patent plaintiffs claim willful infringement, even though most of the defendants in those cases did not copy the invention, but developed their products independently and indeed may never even have heard of the plaintiff or its patent. Under current rules, it costs nothing for plaintiffs to allege defendants were willfully infringing on a patent, and they have a strong incentive to make such a charge because a finding of ``willfulness'' triples the award they can collect.

By merely sending a carefully crafted letter telling companies about a patent, plaintiffs can force those companies into an expensive Catch-22. Either they must conduct internal audits and be willing to give up their attorney-client privilege or they risk being declared willful infringers for continuing to sell products they designed in good faith and without knowledge of the patent. Changing the law so that defendants who copy a technology from a patentee have to pay punitive damages, but others do not, would help restore fairness to the patent system.

Momentum is growing for meaningful reforms that bring balance back to the patent litigation system. Just last month, the Senate Judiciary committee held a similar hearing and members of that committee are working on bipartisan legislation to fix the problems outlined above. If the United States is to remain the world leader in innovation and invention, we must not allow the very system that encourages inventors to become their greatest enemy.

MARK LEMLEY is the William H. Neukom Professor of Law at Stanford University. He wrote this article for the Mercury News.

Businesses suing rivals for hiring illegal immigrants

By Peter Prengaman
Associated Press

LOS ANGELES - Frustrated by lax enforcement of immigration law, businesses are taking their fight against illegal immigration to court, accusing competitors of hiring illegal workers to gain an unfair advantage.

Businesses and anti-illegal immigration groups said the legal action was an attempt to create an economic deterrent against hiring illegal employees.

"We see the legal profession bringing to this issue the kind of effect it's had on consumer product safety," said Mike Hethmon of the Immigration Reform Law Institute, a Washington-based group backing the efforts.

A temporary-employment agency that supplies farm workers sued a grower and two competing companies on Monday.

Similar cases alleging violations of federal antiracketeering laws have yielded mixed results. The California lawsuit is believed to be the first based on a state's unfair-competition laws, legal experts said.

Santa Monica-based Global Horizons contended in the lawsuit that Munger Bros., a grower, hired illegal immigrant workers from Ayala Agricultural Services and J&A Contractors. All the defendants are based in California's farm-rich Central Valley.

The suit alleges that Munger Bros. had a contract with Global Horizons to provide more than 600 blueberry pickers this spring, but nixed the agreement so it could hire illegal immigrants.

"Competitors hiring illegal immigrants is hurting our business badly," Global Horizons president Mordechai Orian said. "It's to the point that doing business legally isn't worth it."

Ayala Agricultural Services manager Javier Rodriguez had not seen the suit, but said the company did not hire undocumented immigrants.

"If somebody doesn't have a green card or work documents, we don't hire them," he said.

Messages left with Munger Bros. and J&A Contractors were not immediately returned.

With an estimated 11 million illegal immigrants in the United States, undocumented workers are a large part of the nation's workforce.

But immigration-law enforcement at work sites is limited. In fiscal 1999, authorities arrested 2,849 people at work sites, compared with 1,145 arrests last year, according to the federal Immigration and Customs Enforcement agency.

To prove competitors hire illegal immigrants, businesses could use public records involving prior violations, testimony from former employees who have worked alongside illegal immigrants, and recovered W-2 tax forms that show people working under fake names and Social Security numbers, said David Klehm, the lead lawyer for cases in Southern California.

Companies planning to file additional lawsuits include farms and factories that depend heavily on immigrant labor, Klehm said.

Legal experts said the cases could be difficult to win. Under the California statutes, plaintiffs must prove a competitor directly harmed their business.

"Unless you've got smoking-gun evidence, it's hard to tie economic loss of one business to another's practices," said Niels Frenzen, a law professor at the University of Southern California.

He believes it is the first time the unfair-competition law has been used to target illegal immigration.

The Global Horizons lawsuit came after a settlement was reached in a Washington state class-action suit involving employees of Zirkle Fruit Co., who sued their employer for driving down wages by hiring undocumented workers.

Based on federal antiracketeering laws, the case was settled for $1.3 million in January after the U.S. Court of Appeals for the Ninth Circuit overturned a lower-court decision to dismiss it.