The Editor attended the Lawyers for Civil Justice 2011 Membership Meeting on November 30, 2011 – December 2, 2011. The following report covers a roundtable discussion on regulatory and document preservation challenges, including some proposed solutions. The panelists were Edward P. O’Keefe, General Counsel, Bank of America Corporation; Timothy A. Pratt, Executive Vice President, Chief Administrative Officer, General Counsel and Secretary, Boston Scientific Corporation; Bradley E. Lerman, Senior Vice President and Associate General Counsel, Pfizer Inc.; and Jeffrey W. Jackson, Senior Vice President and General Counsel, State Farm Mutual Automobile Insurance Company. The roundtable was moderated by Jackie Robinson, Partner, Thompson & Knight LLP.
LCJ’s General Counsel’s Roundtable Examines Regulation Post Dodd-Frank
Industry-Specific Regulatory Challenges
With the Dodd-Frank Act taking full effect in July 2012, it is hardly a wonder that corporate counsel from some of the nation’s largest companies are tossing and turning at night. When asked about what keeps them up at night, participants in the Lawyers for Civil Justice General Counsel’s Roundtable spoke of nights spent wrought with concern about the law’s many negative implications.
During the course of the two-hour General Counsel’s Roundtable, which was a highlight of the December LCJ Meeting in New York, GCs of major corporations discussed ways to mitigate the effects of increased regulation. These panelists represent some of the major U.S. companies poised to bear the brunt of Dodd-Frank’s impact, and one particular concern they share is that the regulatory system has become substantially more complex post-Dodd-Frank.
Panelists discussed the current regulatory environment within their respective industries, noting problems with increasing regulatory exuberance, challenges in the civil justice system and the increasing role of consumer protectionism, all of which represent major issues that large corporations are now facing.
Although most think of Dodd Frank as being directed at banking institutions, insurance companies also will become more heavily regulated with up to nine separate agencies overseeing them. Formerly, the insurance industry answered to one primary regulator – the state departments of insurance – with occasional involvement by state attorneys general, the FTC and, to a lesser degree, the National Association of Insurance Commissioners (NAIC).
The regulatory agencies created by the Dodd-Frank Act will act independently, without a single regulator to govern the process. There is no one to coordinate efforts to resolve conflicts and eliminate duplications; furthermore, there is no one to measure the economic impact of this process on corporate America. Interestingly, even at 1,300 pages, the Dodd-Frank Act (the “Act”) lacked specificity on certain issues, and Congress delegated to the new agencies created by the Act the task of filling in the gaps. This has changed the world dramatically, leaving business uncertain about which of the Act’s 400-500 regulations will in fact apply and which business areas will be most affected.
With all this in mind, it is easy to understand why American businesses are increasingly anxious about regulatory uncertainty. Both within its current scope and as a specter of additional regulations, this new system is an unknown factor.
The banking industry reports a similar increase in regulatory complexity post-Dodd-Frank, citing eight U.S. regulators and, as an example on the international side, 60 regulators in Hong Kong. Consider the dynamic of coordinating multiple languages across international business operations. Now consider that the system has become more competitive, making matters even worse, panelists said. Agencies are now competing with each other for authority and funding, which encourages regulators to focus more on proving their own worth and less on protecting the public interest.
In this new competitive environment, regulators are also resorting to “regulation by investigation,” wherein competing agencies conduct duplicative investigations in search of newsworthy information that could garner public attention. The problem, according to panelists, is that such investigations lead to investigation reports, which often trigger litigation.
The pharmaceutical industry faces similar regulatory exuberance and complexity. One panelist noted a growing environment of discontent with the judicial and regulatory systems. This “gotcha” environment and the apparent need to lay blame for the difficult economic and political situation in the U.S. seems to have led to the criminalization of what used to be ordinary business mistakes.
The Park Doctrine, for example, allows for the criminal prosecution of executives – not because they participated in a criminal event – but because they failed to prevent it, even if they were ignorant of it or affirmatively intended to prevent it. Such “prosecution of innocence” prevents people with productive careers from contributing to American business – all because a rogue employee broke the rules.
Despite this dramatic increase in the complexity of regulatory oversight, a recent survey released by the Public Affairs Council, “What Americans Think About Business,” reflects mixed emotions from the public regarding whether or not businesses are regulated enough.
While the panelists certainly would not argue for increased regulation, they do acknowledge the importance of reasonable government regulation and enforcement processes. These processes are part of their industries and ultimately promote order over chaos and rule of law over lawlessness.
The key, panelists said, is to establish standards in advance of investigative action. In the absence of such standards, one panelist said he has seen the rise of “time machine criminality.” Department of Justice investigations are covering multiple years and often retroactively applying current rules to behavior that preceded their promulgation. Because corporations are unable to change the past or predict the future, they are effectively unable to avoid liability. This surely does not represent fair treatment for all, the panel said, calling for improvements.
eDiscovery – A Cross-Industry Issue
The panel discussion soon turned to cross-industry concerns about costs generated by the uncertainty surrounding preservation of electronically stored data and the impact of social media on the eDiscovery process. With plaintiffs’ lawyers advertising for clients on social media and the amounts of discovery-eligible documents skyrocketing, the complexity and cost of litigation have increased exponentially.
Domestically, corporations are struggling with significant regulatory encroachment from government agencies, as discussed above, and, on the private side, individual plaintiffs, such as whistleblowers, are partnering with the U.S. government to initiate qui tam litigation under the False Claims Act. Internationally, the reach of the FCPA, UK Bribery Act and an increasing number of anti-corruption laws in foreign countries create more layers and more discoverable information.
One panelist recounted a case that began in 2005, involved thousands of individual-plaintiff suits and led to criminal investigation by the state attorney general. Three days after settling the criminal matter in 2010, the state government’s civil enforcers decided to pursue recovery under the False Claims Act. This demonstrates that the process “never ends.” The complexity of defending a myriad of legal actions, while protecting against the unnecessary dissemination of information from one government entity to the other, is a major challenge that has grown dramatically over the last three years.
There are numerous drivers of litigation costs, according to the panelists. First, there is the Responsible Corporate Officer Doctrine, which looms over every major corporation (not just drug companies); second, there is the fuzziness of the continuum between civil and criminal action, which increases uncertainty; third, there is the role, importance and cost of compliance; and fourth, there is the need to engage experts to manage identified dangers and, hopefully, to proactively avoid potential issues.
One panelist recounted spending $2.1 million on a criminal investigation that resulted in no action by the attorney general, only to spend another $1.6 million to sue the AG and prevent the reopening of that same investigation. The company spent $26.6 million defending itself against a U.S. attorney investigation with no resulting action. Thus the corporation spent $30 million and derived no value whatsoever. On the civil side, $17 million was spent on compliance for civil discovery, and an estimated $20 will be required just to stay current. Certainly, these costs are a common concern for major companies.
Furthermore, the rise of “variated media” – from a three-newspaper world to a complex web of social media and aggressive bloggers – adds yet another layer of complexity and intensity to this dynamic. Companies used to embrace the media but may view today’s dispersed, repetitive and, often, unreliable information sources as liabilities in managing the investigation and litigation landscape.
Desired Changes To Improve The Civil Justice System
Common themes throughout the panel were that the government is becoming more aggressive for a number of reasons. The government openly decries business executives and major corporations because such commentary is good political press and garners votes. Finally, all government agencies care about their public image; they seek publicity as aggressors and watchdogs for corporate America. These trends are troubling and should be mitigated.
The private financing of litigation is one particular issue that needs to be contained. Alternative litigation financing (ALF) adds the element of pure financial incentive into the civil litigation system, which is very dangerous. Already, there are fairly sophisticated private equity firms investing in litigation. Such firms are located in Australia, Europe and now the U.S, and one panelist actually was approached by independent financiers who want to buy his company’s patent litigation – actually invest in it. Adding a profit motive into the outcome of litigation, as opposed to focusing on the settlement of grievances between private parties, is a developing problem that requires proactive reform before it gets out of hand.
Another suggested reform involves jury selection and the need to enable a true cross-section of communities to participate in the judicial process. As it stands, the prospect of taking time from work to settle corporate disputes in lengthy trials deters many potential jurors, resulting in skewed decisions from juries that are not representative of their communities. Courts have tried to shorten trials with varied success, and these efforts must continue.
Improving The Relationship Between Outside Counsel And In-House Clients
Panelists agreed that the nature of the relationship between outside counsel and in-house clients could certainly be improved. One company consolidated its group of outside firms and formed a litigation roundtable to develop a deeper partnership in which the members become intimately acquainted with the company’s specific issues. Such understanding creates efficiency and broad perspective to address both the primary and all derivative issues or claims. A defense counsel may need to be told, for example, that certain regulators require periodic briefings throughout the course of the trial, even in cases involving seemingly unrelated areas of the law, such as patent litigation.
Furthermore, it is important for outside counsel to understand what media attracts attention with a particular client because, while some communications may remain obscure, others may instantaneously be forwarded to as many as 40 blogs. Some companies use a social media system, which must be closely monitored when defending a case. Because of the ubiquity of electronic media in which bloggers are fighting for attention, outside firms need to understand not only the client’s business but also its specific triggers for media attention that may, in turn, inspire a regulator to get involved.
Outside counsel also were encouraged to “get out of the silo” because most clients have a matrix of problems. Even if counsel is called for a specific purpose, such as product liability or white collar defense, he or she must look broadly at that issue and help the client to understand how a current matter may reverberate in a different place, time or manner. Effective representation is not just about taking a good deposition or even winning a trial, though of course these are important tasks. GCs want outside counsel who can see the whole picture, deal with existing risk and identify perceived risk for proactive management.
What Can LCJ Do To Help?
In spite of the economic downturn, the panel expressed faith in the judicial system to remain steadfast through this period. The intense economic downturn of the 1930s worsened in 1938, and tremendous pressure was placed on the courts to change the rules rapidly. Today’s defense counsel must remember this history and also remind the courts that we live in a world of law, of established precedent, and the courts must resist the urge to make reactive changes.
Each of the GCs expressed support for the “LCJ Agenda,” which includes practical rule-based solutions that would alleviate these eDiscovery costs and burdens by narrowing the scope of discovery, clarifying when the duty to preserve information is triggered and permitting spoliation sanctions only when willful conduct was carried out for the purpose of preventing the use of information in litigation. In addition, LCJ has implemented a State E-Discovery Initiative through which it identifies opportunities and initiates rulemaking action to minimize the costs and burdens associated with the preservation, production and discovery of electronic information in the states.
In addition, panelists said, LCJ can help address unbridled prosecutorial discretion that’s driven by amorphous and unstated standards. The current atmosphere must be changed by establishing dialogue between companies and regulators to find common understanding. One specific change LCJ should seek is judicial oversight in the early stages of an investigation because, as it stands, companies have no judicial recourse until something bad happens, like an indictment.
Panelists also agreed that LCJ should continue to work to help improve and support the judicial system because business leaders and citizens need courts in which they can have great confidence – a system that is “fair, fast and final.” Clear rules can help create certainty, and judges should be empowered to convene parties in a dispute early and avoid iterative results that go on for years. LCJ is a critical organization that can help to ensure that even when a country is going through extreme economic stress, the courts will remain sane. LCJ and organizations like it also encourage dialogue, which is essential for progress.